An insurance company acts in “bad faith” when it attempts to avoid its legal obligations to clients. Insurance companies engage in bad faith when they deliberately misconstrue or fail to disclose details of exclusions, fail to investigate or respond to claims in a timely manner, or unreasonably deny claims.
When a life insurance claim is denied, life insurance attorneys often argue that the company acted in bad faith. If a beneficiary can prove that his or her claim was denied unreasonably, juries may award punitive damages in addition to the face value of the insurance policy in question.
States each define bad faith differently and provide slightly different legal causes of action. The vast majority of states allow for claims of first-party bad faith, but state law is divided on whether to allow for third-party bad faith claims. Within the context of insurance policies, claims of first-party bad faith are brought against an insurance company by a party included in the insurance contract (e.g. a beneficiary, a policyholder, or the insured). When beneficiaries have been unlawfully denied the death benefit from a life insurance policy, they may sue the insurance company on grounds of first-party bad faith.
Third-party bad faith generally does not apply to life insurance policies since third-party claims are filed by a party absent from the insurance contract, (i.e. not a beneficiary, a policyholder, or the insured). However, claims of third-party bad faith are common with other types of insurance such as car insurance, homeowners’ insurance, and liability insurance. For instance, injured parties in automobile accidents will often sue the insurance company of the driver who caused the accident under allegations of third-party bad faith.
Life insurance policies are typically written in very broad and general terms. While many of these terms are defined in the policy, some important terms are not. Every insurer owes a duty of good faith to those it insures. The obligation of good faith includes an obligation to interpret undefined terms reasonably. This also means that insurance companies have an obligation to their policyholders to maximize the benefits a policy provides, and that they may not injure the other party’s ability to obtain the benefits they are entitled to. If you believe that your loved one’s insurance company has acted in bad faith by unlawfully delaying or denying your claim, don’t hesitate to have an experienced life insurance lawyer evaluate your case.