When Lowball Becomes Illegal: Understanding Insurance Bad Faith Claims

Imagine you’ve been injured in a car accident due to another driver’s negligence. You file a claim with their insurance company, expecting them to cover your medical expenses and lost wages. Instead, the insurer offers you a settlement that barely covers your medical bills, ignoring the full extent of your damages. This scenario is not uncommon. Insurers may act in bad faith by undervaluing claims or failing to investigate adequately.

In another case, a policyholder makes a claim against their own insurer for underinsured motorist (UM) coverage after a serious accident. The insurer delays the claim process without justification, leaving the policyholder to struggle with mounting medical bills while waiting for a resolution. Such actions may constitute bad faith, allowing the policyholder to pursue additional damages beyond their policy limits.

Table of Contents

• 1. Insurance Bad Faith: The Basics
• 2. First-Party vs. Third-Party Bad Faith
• 3. Common Bad Faith Conduct
• 4. Duty to Settle: Key Doctrines
• 5. Damages Available in Bad Faith Claims
• 6. Setting Up a Bad Faith Claim
• 7. Next Steps and Common Mistakes

“Bad faith” generally refers to an insurer’s unreasonable or dishonest handling of a claim. This can manifest in various ways, particularly in personal injury cases, where it often arises in two main contexts: first-party claims and third-party claims.

In first-party claims, you are filing a claim against your own insurer, which has a contractual obligation to handle your claim fairly. For instance, if your insurer denies a valid claim for medical payments without a reasonable basis, this could be considered bad faith.

Conversely, third-party claims involve the insurer of the at-fault driver. Here, bad faith typically concerns the insurer’s duty to settle or defend the insured driver. If the insurer fails to accept a reasonable settlement offer and the case goes to trial, resulting in a judgment that exceeds policy limits, the insurer may be liable for bad faith.

First-Party Bad Faith

This category is more straightforward. Insurers owe a duty to their policyholders to evaluate and pay covered benefits fairly and promptly. Examples of first-party bad faith include:

• Denying a covered claim without a reasonable basis.
• Delaying payment without proper investigation.
• Undervaluing medical bills or lost wages.
• Requiring excessive documentation to stall payment.
• Misrepresenting policy language or exclusions.

Third-Party Bad Faith

Third-party bad faith claims often arise when the insurer of the at-fault driver fails to settle a claim within policy limits. The classic scenario involves:

• The injured party makes a policy-limits demand.
• The insurer rejects or ignores the demand.
• The case proceeds to trial, resulting in a judgment exceeding the policy limits.

In many jurisdictions, the injured claimant can only pursue a bad faith claim against the liability insurer through assignment from the insured or after obtaining an excess judgment.

While the specifics can vary by state, certain behaviors commonly indicate bad faith:

• Unreasonable Delay: Prolonging the investigation or payment process without justification.
• Lowball Offers: Making settlement offers far below the claim value without a rational basis.
• Failure to Investigate: Ignoring crucial evidence or documentation that supports the claim.
• Failure to Settle within Policy Limits: Not accepting reasonable settlement offers when liability is clear.
• Misrepresentation of Policy Terms: Incorrectly stating exclusions or deadlines.
• Failure to Defend: Not providing a defense in liability cases when required.

These actions can lead to claims for breach of contract or statutory violations, depending on the jurisdiction.

Texas - The Stowers Doctrine

In Texas, the Stowers doctrine establishes that when a claim against an insured is within policy limits and liability is reasonably clear, the insurer may be liable for bad faith if it refuses a reasonable settlement opportunity, exposing the insured to excess judgment. This principle stems from the landmark case G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex. Comm’n App. 1929).

California - The Communale Case

In California, the case Comunale v. Traders & General Ins. Co., 50 Cal. 2d 654 (1958), established that insurers acting in bad faith by refusing reasonable settlement offers within policy limits can be liable for excess judgments. California courts have reinforced this doctrine through subsequent cases, including Crisci v. Security Ins. Co., 66 Cal. 2d 425 (1967).

Similar Doctrines in Other States

Many states recognize some form of the insurer's duty to act in good faith and accept reasonable settlement opportunities. Key cases include:

• Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783 (Fla. 1980) - Florida’s duty to protect the insured’s interests.
• Anderson v. Cont’l Ins. Co., 85 Wis. 2d 675, 271 N.W.2d 368 (1978) - Wisconsin’s fair-debatable standard.
• Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986) - Arizona’s covenant-based bad faith framework.

A. Contract Damages

At a minimum, plaintiffs typically seek the amount due under the policy. This can include:

• Unpaid medical bills.
• UM/UIM benefits.
• Defense costs.
• Indemnity up to policy limits.

B. Consequential Damages

Many states allow recovery of foreseeable losses caused by the insurer's bad faith actions, such as:

• Additional medical expenses.
• Lost wages due to delayed payments.
• Damage to credit.
• Economic losses from inability to obtain treatment.

C. Attorney Fees

Availability of attorney fees varies by state. Some states allow fees in bad faith actions, while others permit them only under specific contract provisions or statutes. For instance, Florida’s statute includes attorney-fee shifting in bad faith claims if the insured prevails.

D. Punitive Damages

Punitive damages are not automatic and usually require proof of fraud, malice, or willful disregard. States like California allow punitive damages in bad faith cases that meet certain standards under Cal. Civ. Code § 3294.

E. Mental Anguish / Emotional Distress

Emotional distress damages may be available in some jurisdictions, particularly in California, where they are recognized in bad faith contexts. Other states may allow such damages depending on the circumstances.

A. Time-Limit Demand Letter

In third-party claims, a policy-limits demand can establish a reasonable opportunity to settle. A strong demand letter should include:

• Facts establishing liability.
• Documentation of injuries and damages.
• Policy limits information.
• A clear demand to settle within limits.
• A response deadline.
• Proof of delivery.

B. Documentation

Preserve all relevant documents, including emails, claim notes, settlement offers, medical records, and proof of policy limits. This documentation is crucial for supporting your bad faith claim.

C. Clear Refusal or Silence

Bad faith cases often hinge on the insurer's knowledge and response. A clear refusal or silence in the face of a reasonable demand can serve as powerful evidence.

What is insurance bad faith?

Insurance bad faith occurs when an insurer fails to act honestly or reasonably in handling a claim, leading to damages for the policyholder.

How can I prove bad faith?

To prove bad faith, you must show that the insurer acted unreasonably, delayed payment without justification, or failed to investigate your claim.

What damages can I recover in a bad faith claim?

Damages can include unpaid benefits, consequential damages, attorney fees, punitive damages, and emotional distress damages.

Can I sue my insurer for bad faith?

Yes, if you can demonstrate that they acted in bad faith, you may have grounds for a lawsuit against your insurer.

What should I do if my claim is denied?

Document all communications with your insurer, seek legal advice, and consider sending a demand letter to prompt a review of your claim.