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When Your Insurance Company Won't Cover You: Fraud and Bad Faith

When Your Insurance Company Won't Cover You: Fraud and Bad Faith

Posted by-Lawerslog
Member Since-29 Dec 2015

Insurance fraud is often associated with people who defraud insurance companies. However, the companies may also commit it. Fraudulent activities by insurers are also known as "bad faith" insurance practices. For example, they may deny valid insurance claims, deny coverage to certain individuals due to specific conditions, and fail to investigate allegations and underpay claims properly. In some states, legislators have passed statutes prohibiting these types of practices by insurers. However, court-made laws generally govern lousy faith insurance practices in other states.

The court-made and statutory laws against bad faith insurance practices were based on the idea that every insurance contract contains an implied promise to each party to act reasonably and in good faith. Contacts have the binding power to the law, so any bad faith action by an insurance company to deny a policyholder access to the contract benefits is illegal.

These actions are often pursued by many states, which aggressively punish those responsibly. In New York, for example, a $500,000 fine was imposed on an insurance company in 2000 for deliberately underpaying certain types and deleting thousands of valid claims. In addition, an Oregon woman reported to the state in 2008 that her insurance company had wrongly denied her claims. This led to an investigation that revealed that over 5,000 shares were similar to hers. As a result, the insurer was severely fined.

State insurance departments will not investigate some cases. In other instances, they may not pursue legal action against the insurer even if they explore. Individuals who feel they were victims of bad faith or fraudulent practices should file lawsuits to protect their rights under their insurance contracts.

Bad faith insurance practices are prohibited by law.

Insurance companies can be penalized for fraud or bad faith.

  • Inadequate delay in processing claims. Insurance companies must respond to claims within certain time limits. California law, for example, requires insurance companies to respond within 40 days of receiving proof of loss. If they don't, they must give written notice to the claimant. Some states have regulations that require claims to be processed within a shorter timeframe, such as 15 or 30, depending on the form.
  • They are intentionally undervaluing losses or claims. 
  • Failure to meet minimum standards for investigating claims. Many states have minimum standards for investigating allegations. Oregon, for example, requires insurance companies to conduct thorough investigations of every claim. Insurance companies could be penalized if they fail to investigate a claim by contacting claimants or providers properly.
  • Inability to adequately defend or indemnify third-party claims. Insurers are required by most state laws to protect their policyholders from lawsuits brought against them by third parties. In addition, the duty is on insurers to compensate their policyholders if third-party claims are made against them.
  • Incorrect denial of claims. Insurers cannot refuse to pay a share "without just reason or action" under state laws. In many states, the insurance company must explain the reason for denial within a specified time frame.
  • Intentionally misleading claimants about specific facts or provisions of an insurance policy regarding coverage.
  • They are incorrectly canceling coverage or denying coverage for specific conditions. In some states, insurers are prohibited from denying coverage to certain conditions covered by insurance policies. Some states, for example, require that policies be held for a specified amount of time to cover pre-existing conditions that were previously excluded.

Insurers who break state laws and regulations may have to pay compensation to claimants for denied claims. They could also be required to pay damages to claimants, in addition to the amount of the denied claims.

Law Claims Based on Insurers' Bad Faith

People who feel they were victims of fraudulent or illegal treatment by an insurer file a lawsuit to demand payment and other damages. There are laws in some states that define the legal basis for bad faith insurance claims. These are called "statutory causes of actions." These are long-recognized legal theories like the breach of contract and personal injury.

Insurance bad faith: Statutory causes

Some states have laws that create statutory causes for action in the event of bad faith or fraud by insurance companies. These laws establish the criteria for judges to follow when deciding these cases and the penalties they should give to the winning claimants. Some of these laws allow prevailing claimants to receive punitive damages (damages that punish the offending party's bad behavior) as well as attorney fees from the insurance companies.

Common law remedies in bad faith insurance

Even if there are no specific laws or regulations that penalize bad faith, insurers may be held liable under common law or court-made law if they engage in bad faith or fraud with their customers. Policyholders may sue their insurers if they are the victims of bad faith practice.

Breach of contract claims can be based on the implied covenants of good faith, fair dealing, and good faith between the parties to an insurance contract. In other words, both the insured and the insurer have an implied promise that they will not intentionally deny any party the benefits of their insurance contracts. An insurance company that engages in bad faith could be found liable if it breaches its contract with the insured. These insurance companies may also be held responsible for tort or personal injury claims that they caused injury to claimants by their bad faith actions.

Provided by the employer

Bad faith claims against insurance companies are subject to special rules if an insured's employer issued the policy (disability or health insurance). These claims are generally prohibited by the Employee Retirement Income Safety Act (ERISA), which governs employer-provided healthcare plans. Federal preemption is a doctrine that courts have interpreted to mean that Congress did not intend to prevent these types of claims. ERISA does, however, not provide a cause for action for bad faith claims. This means that no such claims can be filed in any state or federal court.

Contact the Department of Insurance

You may contact your state insurance department if you feel you were the victim of harmful or fraudulent practice by an insurer. Every state has an insurance department that investigates insurance fraud and bad faith. The National Association of Insurance Commissioners' website provides a list of all the state departments of insurance.

Legal Assistance for Your Claim

To discuss your options, you might consider speaking to an attorney specializing in insurance law if you are interested in using your insurance company to make them pay your claim. A seasoned attorney can help you determine whether ERISA preempts claims that involve employer-provided insurance plans.