What Is Insurance Bad Faith and How Does It Affect Policyholders?

Insurance is supposed to give you peace of mind. It’s supposed to be the safety net that catches you when the unexpected happens. What happens when you are faced with an insurance denial? Insurance bad faith happens when a company refuses to honor its contractual obligation without a legitimate reason. You are left to pick up the pieces. Knowing your rights and how insurers are expected to act can make the difference between getting what you’re owed and being left to cover losses on your own.

What Does “Insurance Bad Faith” Mean?

Acting in bad faith is the legal term for conduct that is unfair, dishonest, or deceptive. It’s an intentionally malicious act against another person. In the insurance industry, bad faith occurs when an insurance company violates its duty to its customers. It could an intentional insurance denial or delay of a claim without a legitimate reason. The insurance company could fail to properly investigate claims before denial. When dealing with policyholders, it could be dishonest, deceptive, or unfair.

Alabama’s Unique Standards for Insurance Bad Faith

Alabama has two types of insurance bad faith claims: normal and abnormal. The elements a plaintiff must meet differ, as the court analyzes each type of bad-faith claim differently.

In a normal bad-faith claim, a policyholder must show that the insurance company lacked a debatable reason to deny the claim at the time of denial. To show this, a policyholder must successfully argue that:

• There was a contract between the parties, and the insurance company breached it.
• The insurance company intentionally refused to pay the claim.
• There was no reasonable, legitimate, or arguable reason for the refusal.
• The insurer knew there was no legitimate or arguable reason for its denial.

This type of claim focuses on the reason or lack thereof for the denial of the policyholder’s claim.

Abnormal Bad Faith Insurance Claims

Policyholders can also file an abnormal bad-faith insurance claim. This type of claim focuses on the insurance company’s actions. A policyholder must show that the insurance company intentionally failed to perform its contractual duty. The claim will argue one or more of the following.

The insurance company:

• intentionally or recklessly failed to investigate a claim.
• intentionally or recklessly failed to evaluate or review the claim.
• manufactured a debatable reason for the insurance denial.
• used ambitious contract terms to deny the claim.

Common Bad Faith Practices by Insurers

Several situations are common in insurance bad faith claims. In Alabama, abnormal bad faith claims rise after natural disasters like hurricanes. Insurance companies respond to the sudden influx of claims by issuing insurance denials in mass. This leads to policyholders filing lawsuits.

Claims also arise when insurance companies fail to perform their duties under the coverage contract. They could reject a claim without a legitimate reason. The insurance company could unreasonably delay a claim payment. There could be an inadequate investigation for a claim.

Sometimes bad-faith activity occurs before a claim is filed. An insurance company could misrepresent the policy terms. There could be misleading statements about the policy coverage terms.

The bad-faith action could take place during the negotiation phase. An insurance company could intentionally offer an unreasonably low settlement offer. The insurance company performed an investigation and knows its offer is lower than what the policyholder deserves.

How Bad Faith Affects Policyholders

An insurance company acting in bad faith can have significant and lasting effects on the policyholder. Without the financial help they expected to receive from their insurance company, expenses must be paid out of pocket. This could include everyday living expenses, medical bills, and property repairs.

The effect is compounding, though. In addition to the obvious expenses, there can be further losses as a result of these out-of-pocket costs. For example, an insurance company denies the policyholder's claim for coverage of a rental car. Now, the policyholder doesn’t have a vehicle to drive to work. They could experience income loss as a result. They may choose to rent a car out of their own pocket, but this is an additional expense.

The additional financial pressure creates additional stress. That stress is an ever-growing emotional toll. That stress disrupts sleeping, eating, and relationships. The compounding effect is increased levels of anxiety and depression. In a time when people are already feeling vulnerable, bad faith can make the situation feel insurmountable.

Legal Remedies for Bad Faith Claims

In Alabama, policyholders can pursue a bad-faith claim. However, there is a two-year statute of limitations. This is crucial, as the clock starts clicking from the date of the insurance denial. Waiting too long could limit a policyholder's ability to successfully make a bad-faith claim.

When filing a bad-faith lawsuit, a policyholder can seek recovery of denied claim benefits and additional related damages. This includes consequential damages, which are the damages that are suffered as a result of the original bad faith act. Alabama also allows policyholders to seek mental anguish.

In some situations, a policyholder may be able to seek punitive damages. These are damages intended to punish the defendant. A court may award punitive damages if the insurance company acted maliciously, fraudulently, or recklessly.

Protect Yourself From Bad Faith

Facing a claim denial or delay can feel like an uphill battle, but recognizing bad faith and understanding your rights under Alabama law puts the power back in your hands. Jemison & Mendelsohn works directly with policyholders to investigate claims, challenge improper conduct, and pursue the compensation they deserve.

Schedule a consultation to ensure your claim is handled properly and your rights are fully protected.