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Bad Faith Disability Denial and Lawsuits



Attorneys Dell & Schaefer always conducts a bad-faith analysis of a disability insurance company’s conduct prior to filing a lawsuit. The law of insurance bad faith essentially requires an insurance company to act fairly and in good faith towards its policyholders and to consider the interests of its policyholders equal to its own interests. It also prohibits an insurance company from denying or delaying a claim unreasonably or without proper cause. The term “bad faith” has been described by courts as “an imprecise label for what is essentially some kind of unreasonable insurer conduct.”

If a disability insurance company engages in bad-faith conduct, some states allow a claimant to file a lawsuit seeking more than what is contractually owed under the policy. In addition to the monthly disability benefit, the claimant can collect all damages caused by the unreasonable denial of benefits or unreasonable delay in processing the claim, including such damages as emotional distress, economic losses and attorney fees. If the insurance company acts in an outrageous or malicious manner, then punitive damages can also be awarded by a jury. It is important to realize that not every wrongful denial of disability benefits amounts to bad faith. A simple erroneous denial of benefits, without more, is merely a breach of the insurance contract and does not constitute insurance bad faith. It is only where the delay or denial of benefits is unreasonable, without proper cause, outrageous or malicious that damages beyond the policy benefits themselves can be recovered in court. The basic principle is that the more reprehensible the insurers conduct, the greater damages can be awarded to an injured policyholder.

It is important to note that there are only certain states which allow claimants to file lawsuits for bad faith damages. In many states a written complaint must be filed with the state’s department of insurance or department of financial services as a condition precedent to filing a bad faith lawsuit. There are several states that have statutes which define conduct which would be considered bad faith. For example, the Florida bad-faith statute is Fla. Stat, Section 624.155 and the California bad faith statute is Cal. Ins. Code Section 790.03(h); which states:

The following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance:

(h) Knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices:

  1. Misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverages at issue.
  2. Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.
  3. Failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies.
  4. Failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured.
  5. Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.
  6. Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by the insureds, when the insureds have made claims for amounts reasonably similar to the amounts ultimately recovered.
  7. Attempting to settle a claim by an insured for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application.
  8. Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of, the insured, his or her representative, agent, or broker.
  9. Failing, after payment of a claim, to inform insureds or beneficiaries, upon request by them, of the coverage under which payment has been made.
  10. Making known to insureds or claimants a practice of the insurer of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration.
  11. Delaying the investigation or payment of claims by requiring an insured, claimant, or the physician of either, to submit a preliminary claim report, and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information.
  12. Failing to settle claims promptly, where liability has become apparent, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.
  13. Failing to provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the offer of a compromise settlement.
  14. Directly advising a claimant not to obtain the services of an attorney.
  15. Misleading a claimant as to the applicable statute of limitations.