What is Bad Faith Insurance?

Is your insurance company uncooperative or unreasonable? Rather than a mere inconvenience, it may be a sign that your insurer is acting in bad faith to try to evade their contractual obligations. Read our blog to learn how to recognize bad faith and how you can protect yourself from it.

The way insurance works is (in theory) relatively simple. You commit yourself to paying your insurance company regular payments called premiums in accordance with the terms of your policy. In exchange, the company commits to providing insurance coverage–or in other terms, it promises to pay for certain expenses and losses that you may sustain as a result of an accident covered by the policy. 

When the insurer and the insured enter into a contract together, it is expected that both will act in good faith. For the latter, it means that they will only file valid and truthful claims for the losses covered under the policy. For the former, that is, the insurer, they must uphold the policy and pay any valid claims to the insured.

On the other hand, if you have ever been in a situation where you filed an insurance claim and expected a swift and effective payment of compensation, you may be aware that the reality is rarely that simple. Unfortunately, every compensation payout directly affects an insurance company’s bottom line. In other words, the more an insurer pays for claims, the less profit they are able to turn.

That’s why before securing the payout of a claim, you have to go through a complex insurance claim payment process. This process involves a lot of paperwork, a good deal of back-and-forth with the insurer, and a fair amount of negotiations with the insurance adjuster. 

Unfortunately, to save their bottom lines, some insurance companies may resort to dishonesty and unfair practices at any stage of the process. The legal term to describe such dishonest conduct is insurance “bad faith.” In this article, we will explain what this term exactly conveys, how you can recognize it, and what steps you can take to protect yourself from it.

Recognizing Insurance Bad Faith in Kentucky and Tennessee

To understand the concept, it is first important to recognize that not every situation in which the insurer denies a seemingly valid claim will qualify as bad faith. In fact, what constitutes an insurer’s bad faith is often strictly defined by the laws of the state in question. 

Kentucky

In Kentucky, state law stipulates three basic conditions that must be met for a bad-faith lawsuit to prevail. These conditions are:

• “The insurer must be obligated to pay the claim under the terms of the policy”
• “The insurer must lack a reasonable basis in law or fact for denying the claim”
• “It must be shown that the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed”

In addition, Kentucky statutes exemplify circumstances and actions that would constitute “unfair claims settlement practice.” If an insurance company engages in this, you may have valid reason to file a lawsuit against them. 

Examples of unfair claim settlement practice include: 

• Misrepresentation of how the provisions of insurance policy relate to the insured person’s losses and his or her right to coverage
• Being uncooperative–For example, by failing to acknowledge and promptly respond to the communications from the insured person and his or her claim
• Refusing to pay claims without conducting a thorough investigation
• Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed
• Attempting to settle claims on the basis of an application which was altered without notice to, or the knowledge or consent of, the insured
• Denying a claim without a reasonable explanation or without providing a legal basis for the denial based on the insurance policy or applicable laws

Tennessee

Similarly, Tennessee state laws contain appropriate statutes regarding bad faith practices. The Tennessee Code defines acting in bad faith as a “failure to pay promptly.” Specifically, this means that if an insurance company refuses “to pay the loss within sixty (60) days after a demand has been made,” it may be liable for up to 25 percent of the loss amount on top of the actual loss. 

The Tennessee Code also includes the Unfair Trade Practices and Unfair Claims Settlement Act of 2009 that provides certain guidelines for how insurance companies should process and handle claims. However, it is important to note that this act alone doesn’t allow for a private right to action–in other words, it doesn’t provide a legal basis for individuals to introduce lawsuits against insurance companies.

What to Do if You Suspect Bad Faith in Kentucky or Tennessee

If you suspect that your insurer is acting in bad faith, you must act decisively:

1. First, document all your communications with the insurance company and their representatives–especially the insurance adjuster. 
2. Second, make sure you yourself are in compliance with all the provisions of your insurance policy when making a claim. Both actions will give you a solid basis for making bad faith claims and may also serve as evidence in case of a potential lawsuit.
3. The next step would be to inform the insurer that you are suspecting bad faith. You may try to first do it orally in a conversation with the insurance adjuster. If that strategy doesn’t produce any results in terms of a change in the insurance company’s treatment of your claim, you should also send your insurer a letter containing a formal, written accusation of bad faith. 

In your letter, you should provide the most pertinent details of your claim, including its number and the date of the accident. You may also provide a short description of your losses and a summary of the negotiations with the insurance adjuster up to this point, along with an explanation of why you are accusing the insurer of acting in bad faith.

Such a letter may prompt the insurer to reconsider their current strategy and behavior towards your claim and may result in a favorable outcome. If it doesn’t, you should weigh your options carefully. 

How much is a bad faith claim worth?

You must bear in mind that bad faith lawsuits are legally complex and difficult to win, so it may be disadvantageous for you to proceed with legal action on your own. Instead, it may be wise to contact a personal injury lawyer experienced in handling bad faith claims to inquire about your options.