Insurance policies serve as a safety net, providing individuals and businesses with financial protection against unforeseen events. Policyholders trust that their insurance companies will uphold their end of the bargain by handling claims fairly and promptly. However, when an insurance company acts in bad faith, policyholders may file an insurance bad faith claim.
Understanding the legal landscape surrounding these claims is crucial for policyholders, as state-specific laws and court rulings significantly influence how insurance disputes are resolved.
Understanding Insurance Bad Faith
Insurance bad faith occurs when an insurer breaches its duty to act in good faith and fair dealing with its policyholders. This duty is inherent in every insurance contract, obligating the insurer to properly investigate and promptly settle claims. If an insurer breaches this obligation and unfairly denies or delays a valid claim, it constitutes a bad faith breach of contract. Courts assess all the circumstances to determine whether an insurance company fails to uphold its obligations.
Examples of Bad Faith Practices:
Unreasonable Denial of Claims: The defendant insurer refuses to pay the entire amount owed under the policy without justification.
Delayed Payments: The insurer deliberately delays making claims payments, creating financial hardship for the insured person.
Inadequate Investigation: The insurer ignores evidence or fails to conduct a thorough investigation before denying a claim.
Misrepresentation of Policy Language: The insurer distorts policy language to avoid paying benefits.
Lowballing Settlements: The insurer offers far below policy limits to influence settlements unfairly.
Legal Framework in California: Laws Defining Bad Faith Insurance Practices
California law holds insurers accountable when they fail to act in good faith. Under common law bad faith, an insurer’s duty extends beyond written contracts, requiring fair treatment of policyholders. Courts allow civil action when an insurer fails to uphold this duty.
Key Laws Governing Bad Faith Insurance in California
California Insurance Code § 790.03 (Unfair Claims Settlement Practices Act)
This statute explicitly outlines what constitutes bad-faith insurance practices. Insurers are prohibited from engaging in unfair claim settlement practices, including:Misrepresenting policy terms: Providing false or misleading information about coverage or benefits.
Delaying responses: Failing to acknowledge or act on claims promptly.
Denying valid claims unfairly: Refusing payment without a proper investigation.
Lowballing settlements: Offering significantly less than the fair claim amount.
Unjustified payment delays: Stalling claim payments without a valid reason.
Failing to explain denials: Withholding clear, written reasons for claim denials or reductions.
California Civil Code § 3294 (Punitive Damages for Bad Faith)
If an insurance company acts with fraud, oppression, or malice, courts can award punitive damages.
Punitive damages serve as a penalty to deter insurance companies from engaging in dishonest or unfair practices.
Courts penalize insurers for deliberate deception or reckless disregard for policyholder rights by awarding punitive damages.
California Code of Regulations, Title 10, Section 2695 (Fair Claims Settlement Practices Regulations)
Establishes strict guidelines for how insurance carriers must handle claims.
Requires insurers to properly investigate claims before issuing denials.
Mandates prompt and fair claims processing, ensuring that insurance companies act in the best interest of policyholders.
Notable Court Cases That Define Bad Faith in California
Egan v. Mutual of Omaha Ins. Co. (1979): The court held that an insurance company’s conduct must be assessed based on whether it acted fairly and considered all the circumstances.
Gruenberg v. Aetna Ins. Co. (1973): The court ruled that a general business practice of unfair claim denials could establish a bad faith breach even without a direct contract violation.
Legal Framework in Colorado: Laws Defining Bad Faith Insurance Practices
Colorado law recognizes bad faith insurance claims as separate from breach of contract. If an insurer’s obligation includes handling claims fairly, but it unreasonably denies or delays payment, it may face compensatory damages and punitive damages.
Key Laws Governing Bad Faith Insurance in Colorado
Colorado Revised Statutes (C.R.S.) § 10-3-1115 & § 10-3-1116 (Unreasonable Delay or Denial of Benefits)
C.R.S. § 10-3-1115 prohibits insurers from unreasonably delaying or denying payment of a valid claim to a first-party claimant.
C.R.S. § 10-3-1116 allows first-party claimants to file a civil action for bad faith and recover:
Two times the covered benefit (double damages).
Reasonable attorney fees and court costs.
These statutes apply only to first-party bad insurance claims, not third-party claims.
Colorado Consumer Protection Act (C.R.S. § 6-1-105)
This law prohibits insurance fraud and deceptive business practices, including:
Misrepresenting policy terms or coverage.
Engaging in deceptive trade practices.
Making false or misleading statements.
Using unfair or fraudulent business practices.
Knowingly omitting material facts.
If an insurance company violates this statute, the policyholder may be entitled to enhanced damages under the Colorado Consumer Protection Act.
Notable Court Cases on Bad Faith in Colorado
Goodson v. American Standard Ins. Co. (2000)
Clarified that bad faith insurance claims are separate from breach of contract claims, allowing for compensatory and punitive damages.Baker v. Allied Prop. & Cas. Ins. Co. (2013)
Reinforced that an insurer’s duty includes handling claims fairly and in due regard to the insured’s interests.
Key Laws Governing Bad Faith Insurance in Nevada
Nevada courts treat bad faith insurance claims as a separate tort from breach of contract. To prove bad faith, the insured must show the insurer unreasonably denied benefits and knowingly or recklessly acted unfairly. Simple mistakes or poor judgment do not qualify—there must be intentional or reckless misconduct.
1. Nevada Revised Statutes (NRS) § 686A.310 – Unfair Insurance Practices Act
This law prohibits unfair practices by insurance carriers, including:
Ignoring or delaying responses to policyholders’ claims.
Denying claims without a reasonable investigation.
Misrepresenting policy terms to avoid paying claims.
Delaying payments by requiring redundant claim documents.
Offering unreasonably low settlements to force litigation.
Using deceptive tactics to manipulate claim outcomes.
Violations of NRS § 686A.310 make insurers liable for:
Full compensation for financial losses caused by unfair practices.
Additional damages if courts find intentional misconduct.
2. Punitive Damages for Bad Faith (Nevada Revised Statutes § 42.005)
If an insurer breaches its contractual obligations with fraud, malice, or oppression, the policyholder may receive punitive damages.
Courts also review whether insurers acted unfairly with such frequency that it justifies additional penalties.
Notable Court Cases on Bad Faith in Nevada
Pemberton v. Farmers Ins. Exchange (1995)
Established that a defendant insurer can be held liable for bad faith breach if it fails to provide a reasonable basis for denying coverage.Hart v. Prudential Property & Casualty Ins. Co. (1994)
Reinforced that insurance bad faith claims require proof of intentional misconduct or reckless disregard.
Official Insurance Regulation Resources
Understanding state-specific insurance laws is crucial when dealing with bad faith insurance claims. Each state has regulatory bodies that oversee insurance companies’ conduct, enforce laws, and provide consumer protection resources. Below are official links to insurance regulation authorities in California, Colorado, and Nevada:
These resources can help you understand your rights, review relevant insurance laws, and take action against insurance fraud or bad faith insurance practices.
Steps to Take if You Suspect Bad Faith
If you believe your insurer is acting in bad faith, consider the following steps:
Document Everything: Keep detailed records of all communications, including dates, times, and the substance of conversations with your insurer.
Review Your Policy: Understand the terms, conditions, and coverage limits of your insurance policy to assess the validity of your claim.
File a Complaint: Contact your state’s insurance regulatory agency to file a formal complaint against the insurer.
Consult a Bad Faith Insurance Lawyer: Seek legal counsel experienced in handling bad faith insurance claims to evaluate your case and guide you through the legal process.
Protect Your Rights Against Insurance Bad Faith
Insurance bad faith undermines the trust policyholders place in their insurance companies, often resulting in severe financial losses and emotional distress. When an insurer fails to uphold its obligation to handle claims fairly, it can leave policyholders struggling to recover what they are rightfully owed. Understanding the laws in your state is crucial to recognizing when an insurance company’s conduct crosses the line and how to take legal action.
If you believe your insurance company has acted in bad faith, you don’t have to fight alone. Bourassa Law Group has a proven track record of holding insurers accountable and securing the compensation policyholders deserve.
Contact us today for a free consultation and take the first step toward justice.
1-800-870-8910