Insurance is a concept that has been with us for hundreds of years. The theory behind insurance is that when many people pool the risk of a loss, that loss becomes statistically predictable. Once the risk is predictable, a charge to each of the individuals in the pool permits a risk-sharing arrangement. The larger the pool of individuals sharing the risk, the lower the price that can be charged by the insurer, based on statistical reliability.
An insurance company has a fiduciary relationship to the insured. Because of the fiduciary relationship, the insurance company has a duty of honesty and fair dealing. “Bad faith" occurs when the insurance company does not abide by its obligation. Because many people do not understand what bad faith means, we use the term, “insurance company malpractice.” If your insurance company engages in conduct which would amount to malpractice, you probably have rights against the insurance company.
The obligation of honesty and fair dealing has been defined by the Courts to mean that the insurance company cannot place its own financial interests above the financial interests of the insured. Bad faith can been defined as an indifference to the rights of the insured. Although malice is not required in most instances, the appearance of a malicious attitude or the perception of evil intent on the part of the insurer goes a long way to establishing bad faith or insurance company malpractice.
In addition, most states have rules and regulations imposed by the insurance department concerning how claims should be handled. If those rules are violated, it can be evidence of bad faith.
Some states, like Pennsylvania, have a statute that provides for punishment of insurance companies that engage in bad faith conduct. Those damages can include interest, attorney fees and/or punitive damages. Any or all of the sanctions could apply to an insurance company depending on the level of its misconduct. In other states such as New Jersey, the courts have established the right to compensation for bad faith or insurance company malpractice.
There is another situation that can lead to bad faith on the part of an insurer. If you get sued, your insurance company has a duty to defend you. It also has a duty to use its best judgment in deciding to settle the case against you or to proceed to trial. If the insurance company was negligent in deciding to try your case and risk your assets, then it can be held responsible for the full amount of the verdict. Negligence can be demonstrated by inadequate investigation of the claim, inadequate trial preparation, failure to obtain expert witnesses to testify on critical issues, failing to appropriately assess liability or damages, or any number of other reasons. If the conduct goes beyond negligence, the company can be held responsible for the same type of damages discussed above, including interest, attorney fees and punitive damages. See Refusal to Defend or Pay for more information.
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