Bad Faith Insurance Claims

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Insurance companies have many duties to their policyholders, and claims against them vary if the claim is considered to be “first party” or “third party.”  A common first party claim is filed when an insurance company writes insurance on a property that becomes damaged, such as a house or an automobile.  In that case, the company is required to investigate the damage, determine whether the damage is covered and pay the proper value for the damaged property.  Bad faith in first party contexts often involves the insurance carrier’s improper investigation and valuation of the damaged property (or its refusal to even acknowledge the claim at all).  Bad faith can also arise in the context of first party coverage for personal injury, such as health insurance or life insurance.

Third party claims fall into at least two distinct duties, both of which must be fulfilled in good faith.  First, the insurance carrier usually has a duty to defend a claim (or lawsuit) even if some or most of the lawsuit is not covered by the insurance policy.  Unless the policy is expressly structured so that defense costs “eat away” at the policy limits (a so-called “self-consuming” or “burning limits” policy), the default rule is that the insurer must cover all defense costs regardless of the actual limit of coverage.

Next, the insurer has the duty to pay a judgment entered against the policyholder, up to the limit of coverage.  However, unlike the duty to defend, the duty to indemnify exists only to the extent that the final judgment is for a covered act or omission; by that point, there should be a clear factual record from trial or summary judgment in the plaintiff’s favor revealing what portions of the plaintiff’s claims are actually covered by the policy (as distinguished from potentially covered).

Bad faith can occur in either situation—by improperly refusing to defend a lawsuit or by improperly refusing to pay a judgment or settlement of a covered lawsuit.

The Wallman Law Firm is very experienced in bad faith insurance claims and understands both the financial and emotional stress that they can cause for our clients.