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How the insurance companies beat your bad faith claim

Defenses Against Bad Faith Claims

Insurance bad faith is the term used to describe a claim that an insured person may have against its insurance company for the insurer’s immoral acts of mishandling of a claim. There are many ways that an insurance company can act in “bad faith” toward a policyholder. For example, the insurer can refuse to settle a case, unreasonably delay payment of benefits, wrongfully deny a claim, along with a myriad of other bad faith practices. In similarly unfaithful behavior, policyholders can falsely sue their insurers for bad faith in hopes of getting the coverage they want or acquiring damages from the insurance company.

In order for an insurer to successfully defend against a bad faith claim, they must focus on confirming three things: coverage, investigation that has lead to evaluation of a claim, and initiation of settlement. There is a number of defenses that an insurance company that is being sued for bad faith can use. Listed below are the more common defenses:

• Statue of Limitations: The length of the applicable statute of limitations depends on whether the state characterizes a bad faith claim as one based in contract (with consent) or based in tort (inflicted without consent). If the insurance policy includes a limitations period, some states will hold that the policy’s limitations period applies.
• Insured’s Breach of Contract: An insured’s noncompliance with a contract with their insurer they cannot use it as a defense to a bad faith action.
• Insured’s Bad Faith (not available in all jurisdictions): An affirmative defense that seeks to apportion fault and damages based on comparative bad faith.
• Lack of Coverage or Policy Defense: In third-party bad faith actions, without coverage there can be no bad faith. Even with an insurer’s improper handling of a case, if there was no coverage the insured did not suffer harm.
• Advice of Counsel (available in some states): The insurer relied on advice provided by counsel.
• Insured’s Failure to Mitigate: If a plaintiff has failed to make an effort to mitigate damages after a breach of contract, this can be used as a defense, although this defense is difficult to use because the insurer will have to prove that the insured was able to avoid any harm they suffered.
• Release: If an insurance company rejects a settlement offer, the insured may assign their bad faith claim to a third party in exchange for the third party’s release or agreement not to execute a judgment against any assets of the insured except for the insurance policy. In some cases, courts rule that a release removes the cause of action against the insurer.

Two defenses that are often used, but rarely permissible in court:
• Election of Remedies: Insurers argue that in cases in which the insured includes breach of contract in their bad faith claim should not be considered because the insured has elected their remedy and thus waived a tort claim. Courts that have addressed this issue, however, have held that a tort claim for bad faith is separate from breach of contract therefore the plaintiff can proceed with both.
• Conformity to Industry Standards: Insurance companies argue that they complied with the standards of the industry, however courts do not generally excuse the insurer’s treatment of the insured for this reason.

Bad faith cases are difficult and expensive to defend against, and if handled without precision can lead to an insurer retaining the image of an untrustworthy practice.