Insurance Claims and Bad Faith
Overview
Most insurers are professional and ethical, interested in handling your claim with a minimum of friction and providing you with the coverage for which you have paid. But you should be aware that, once a claim is made, you and the insurer have different interests. You want to receive the largest indemnity check possible. It wants to write the smallest check possible. Of course, it will investigate the situation to see that you have held up your contractual obligations. It is entitled to do that. Save yourself and your insurer a lot of trouble and keep good records of your communications with the insurer. Put as much in writing as you can.
Problems arise when some carriers decide that the economic cost of a claim is so high that they will take almost any route to avoid paying it. An insurer wrongfully denying a legitimate claim is guilty of bad-faith failure to indemnify. You can recover extra damages if you prove bad faith on the insurer's part. The purpose of this rule is to change the calculus that makes it worthwhile for the insurer to stonewall you and dare you to sue. Certainly if you are involved in a dispute involving unfair claims practices, communicate with your state's insurance commissioner and other consumer agencies.
The Insurer's Lawyer
Another area to watch is the behavior of the insurer's lawyer. Remember that liability insurance is litigation insurance—you are entitled to a full defense of claims against you. The insurer is not allowed to deny you a defense because, for example, it says that the claim against you would probably not be covered under its policy—:for example, if intentional conduct by you is part of the claim. In most states, as long as the claim against you could be covered under a reasonable reading of the policy, you are entitled to a defense. Thus if the complaint against you includes both intentional and negligent conduct, they must defend you as long as the negligence claim remains in the case. But take note: If the claim is successful, and the insurer was right in saying that you were not covered (i.e., in the case of intentional behavior), you have to reimburse the insurer for its legal expenses.
Since the insurer is paying for the lawyer, it has the prerogative of directing the actions of the lawyer. But the insurer's lawyer has a legal obligation of loyalty both to you and to the insurer. Any time you have reason to believe that the lawyer is not looking out for you, or that the lawyer is favoring the insurer's interests over yours, you should have an attorney look into it.
For example, if a claim is made against you, but you have a legitimate defense, the lawyer should not be eager to settle for some amount above its policy limit that leaves you holding the bag for the remainder. A legitimate settlement is one thing, but if you suspect the insurance company wants to cut its losses and avoid legal fees, sound the alarm. In the event that such behavior can be demonstrated to the court, the judge may order the insurer to pay for your separate counsel—someone of your own choice—as well. In such a case the company has forfeited its right to choose your lawyer by not acting in accordance with its fiduciary duty to you.
Fraudulent Claims
Just as lying on your insurance application is a prescription for trouble, so is the filing of false, inflated or otherwise fraudulent claims. The fact that insurers are big companies does not make it right or legal to steal from them. Such activity raises everyone's premiums. It also stands to land you in jail. More and more attorneys general, insurance commissioners and insurance companies are coming down hard on insurance fraud. The upshot can be more than a denial of your claim. It can be a conviction for the felony of criminal fraud or similar charges, leading to stiff fines or perhaps jail time—for you and for everyone involved in the fraud, including your spouse or other family members if they "helped out." It's not worth it.