Under the legal doctrine of insurance bad faith, insurance companies, by law, owe their policyholders a duty to act fairly with them and in good faith, irrespective of whether or not the insurance policy expressly states so. The duty of good faith is central to how insurance companies under the law must conduct themselves with their insured. What insurance companies often do in practice however is another matter.
First Party Claims – Insurance Bad Faith
Most fire and smoke damage claims are considered first-party claims which means that the insurance company is dealing directly with their own insured - the homeowner. It also means that the homeowners insurance carrier is legally required to promptly investigate the damage to the insured’s home, determine whether the damage is covered, and pay the fair value of the claim. Evidence of insurance bad faith usually surfaces in the damage investigation and evaluation stages of the claims process.
The well-known and recognized conflict of interest that exists between the insurance company and their own insured is the primary reason why states have enacted insurance bad faith legislation intended to protect the insured from their own insurance company. In reality, bad faith laws are not unlike consumer rights and protection legislation, Lets take a closer look at this conflict.
Inherent Conflict of Interest
Insurance companies are corporations. As such, their loyalty rests with their company’s shareholders – and sometimes at the expense of their own insureds financial and often emotional wellbeing. The corporate goal of any insurance company is to advance the pecuniary interests of the corporation. The need to meet quarterly profit estimates is a huge driver for insurance companies and it often shapes the way they treat their insured relative to paying out claims promptly and fairly.
When the insurance companies corporate goals conflict with their statutory duty to put their insured’s interests first, the insurance company walks a tight line between two masters – and that’s where the conflict exists. When the insured suffers at the expense of corporate profits, insurance companies can be liable to their insured under their respective states bad faith laws. Exposure to being sued however, includes the right of the insured to bring a bad faith action against the insurance company and allows them to allege and prove punitive damage.
Punitive damages awards against insurance companies are designed to punish the insurance company for acting in bad faith with their insured. The goal is to deter the insurance company from behaving badly in the future, which is why the award is not based on making the insured whole, but rather from dissuading insurance companies from acting unfairly with their insured. Punitive damages awards are determined, at least partially, by the wealth of the insurance company and the wrongfulness of their conduct.
Bad faith can come in many forms and includes unreasonable delay in adjusting claims, inadequate investigation, implied or express threats against the insured, refusing to make a reasonable and fair settlement offer, fraudulent practices or making unreasonable and unfair interpretations of the homeowners insurance policy. Many states have drafted laws specifically identifying practices, which it considers unfair, and illegal claims practices.
Under most state bad faith laws, the homeowner must have sustained some form of actual damage to present a bad faith claim, even if the conduct of the insurer was egregious.
Homeowners Duties Under The Policy
Homeowners have important duties in first party claims as well. Usually the homeowners’ duties are clearly stated within the terms of the policy and require that the insured cooperate fully with the insurance companies investigation.
In fire and smoke damage claims, the homeowner may be asked to produce receipts and records and present the insurance company with a formal proof of loss within a specific time period. Keep in mind however, that under all homeowner insurance policies, with respect to fire, smoke and ash claims, the burden of proving the exact measure of the claim, to the extent of the damage, is the insured’s legal responsibility under the policy. This means homeowners are forced to represent themselves in proving the nature and extent of damage and what it will cost to get the property back to the condition it was in just prior to the occurrence of the loss. This is the primary reason why homeowners need the assistance and advice of an experienced casualty lawyer to assist in the process.
Insurers have been found guilty of deliberately delaying smoke and damage investigations as a way of grinding down the insured to accept a policy settlement that can be far less then what the claim is actually worth. As a result of this pattern of deceit, many states have unfair claims practices laws that now require the insurance company to complete their investigation within 30 days of their receiving notice of the claim.
For more on insurance law, bad faith lawsuits, fire, smoke and ash, residential insurance claims, property and casualty lawyers, tenants rights, adjusters and discount legal services go to GotTrouble.com