Bad faith damages refer to the financial compensation awarded when one party, often an insurance company, acts unfairly or dishonestly in fulfilling their obligations under a contract, particularly an insurance policy. These damages go beyond typical contractual breaches because they address the harm caused by a party's malicious or unreasonable conduct.
Understanding Bad Faith
In the context of insurance, "bad faith" occurs when an insurer fails to deal with a policyholder fairly and honestly. This breach of the implied covenant of good faith and fair dealing can manifest in various ways, such as unreasonable delays, outright denial of a legitimate claim without proper investigation, or offering a settlement far below what is owed. It's not just a simple mistake; it implies an intentional disregard for the policyholder's rights.
Types of Bad Faith Damages
When an insurance company acts in bad faith, the policyholder may be entitled to recover several categories of damages:
- Contract Damages: These are the amounts that should have been paid under the original insurance policy. This includes the direct benefits the policyholder was owed if the claim had been handled properly.
- Extra-Contractual Compensation: This type of compensation covers losses that are not directly stated in the insurance policy but arise from the insurer's bad faith conduct. It can include financial losses beyond the policy limits, such as lost income due to an inability to rebuild, or the cost of having to hire an attorney to force the insurer to pay.
- Punitive Damages: In egregious cases where the insurer's conduct is particularly malicious, oppressive, or fraudulent, courts may award punitive damages. These are not meant to compensate the victim but rather to punish the wrongdoer and deter similar behavior by others.
Common Scenarios of Insurance Bad Faith
Insurance companies are legally obligated to act in good faith when handling claims. However, they sometimes employ tactics that constitute bad faith.
| Bad Faith Tactic | Description |
|---|---|
| Unreasonable Delay | Intentionally delaying payment of a valid claim, even if the payment is eventually made. The timing of payment is crucial, and undue delay can still be a breach. |
| Improper Investigation | Failing to conduct a thorough and unbiased investigation into a claim, leading to an unfair denial or undervaluation. |
| Denial Without Basis | Denying a legitimate claim without providing a reasonable explanation or citing policy provisions that do not apply. |
| Lowball Offers | Offering a settlement amount significantly less than the actual value of the claim, knowing the policyholder is in a vulnerable position. |
| Misinterpretation | Deliberately misinterpreting policy language to deny coverage that should be provided. |
| Failure to Defend | Refusing to defend a policyholder against a lawsuit, even when the policy requires them to do so. |
| Coercion | Using intimidating tactics or pressuring policyholders to accept a low settlement or drop a claim. |
For example, an insurer might cause significant hardship by delaying payment for a destroyed home, even if they eventually pay, because the policyholder incurs additional living expenses or loses the opportunity to quickly rebuild. This delay, often a "runaround," is considered a breach of their duty.
Seeking Recourse for Bad Faith
If an individual suspects an insurance company is acting in bad faith, it is crucial to understand their rights. Many states have specific laws that protect policyholders from such practices. Seeking legal counsel from an attorney specializing in insurance law can help evaluate the situation, gather necessary evidence, and pursue a claim to recover the full extent of damages incurred due to the insurer's wrongful conduct.
