How to spot insurance bad faith and what to do if you’re a victim
... but that’s why I have insurance!
Yes, your insurance is supposed to protect you from paying out of pocket for costs related to an accident. But even insurance companies don’t always play by the rules, and sometimes a claimant doesn’t get the coverage they’re entitled to receive.
As an Alabamian, you might be familiar with Alabama state motto: Audemus jura nostra defendere, which is Latin for “We Dare Defend Our Rights.” While this slogan originated in 1923, was adopted in 1939, and has nothing to do with insurance, it’s a good thing to remember as you navigate the insurance industry—especially if you believe you’re not being treated fairly.
Most insurance companies do exactly what they are supposed to, but there are bad actors in every industry. In general, insurance works like this: You purchase an insurance policy, whether it’s for your home, car, business or something else. You pay a premium (monthly, annually, etc.) in exchange for coverage if and when you need it. If you’re in an accident, you make a claim against your insurance policy and the insurer pays for the value of any losses that are covered under the policy.
It sounds straightforward, but sometimes the process can get messy.
If you believe that you’re the victim of insurance bad faith in Alabama, you may file a civil lawsuit against the insurance company to recover damages.
Alabama recognizes insurance bad faith as a personal injury tort. This is important because it means that in addition to recovering the specific amount of money you’re owed by the insurer for the claim, a lawsuit could also include damage awards for things like mental anguish or even punitive damages.
A plaintiff in a bad faith insurance lawsuit can sue their insurer for economic damages, which are the actual costs for the denied claim (which can include losses that happened as a result of the denial). It could also include non-economic damages, which could be inconvenience, stress, illness or suffering that was caused by the claim being denied.
What is bad faith insurance?
Below are the most common types of bad faith insurance claims in Alabama.
Normal bad faith (refusal to pay)
This is when the insurance company rejects your claim and offers no reason for their decision.
Abnormal bad faith (refusal to investigate)
Abnormal bad faith is when the insurer does not make an adequate settlement offer because it would not properly investigate the claim.
This can happen if the plaintiff believes the insurance company intentionally failed to decide if there was an arguable basis for denial or if the company denied the claim without considering whether they had a legal right to do so.
Alabama recognizes 4 types of abnormal bad faith insurance claims. A claim denial could be in bad faith if the insurer:
- Intentionally or recklessly failed to investigate the plaintiff’s claim
- Intentionally or recklessly failed to evaluate the plaintiff’s claim
- Had an illegitimate or arguable reason why the claim was denied
- Denied a claim based on ambiguous policy language
Elements of bad faith insurance under Alabama law
The Alabama Supreme Court set forth a list of elements that a plaintiff would need to prove to have a successful bad faith insurance claim.
- The insurance company breached its contract with the plaintiff (policyholder).
- The insurer intentionally rejected the plaintiff’s claim without a legitimate reason.
- The insurer knew the denial was not supported by facts and/or law.
- If the claim is for failure to investigate, the plaintiff must prove that there was no legitimate or arguable reason to deny the claim.
How does an insurance claim work?
It’s important to remember that an insurance company is a business whose objective is to make a profit. Every insurance company advertises that it cares about its customers and will protect them from loss after an accident.
That’s true when everything goes smoothly, but it’s not always easy. The insurer makes a profit when it pays out less in claims than it takes in from premiums. When the insurer sells you a policy, it’s taking a gamble that you will use less coverage than you’ve paid for. Your gamble is that you hope whatever you need is covered if and when you’re involved in an accident.
But the insurance company isn’t your advocate after an accident. If the insurance company doesn’t offer a settlement that is reasonable and covers the entirety of your losses, you need to find a personal injury lawyer who is actually on your side. Most personal injury lawyers work on a contingency fee basis, which means they don’t get paid until you do. The lawyer will earn a percentage of the damages you recover, whether it’s a court judgment or an insurance settlement. The lawyer is motivated to help you recover the highest amount of compensation, while the insurance company wants to provide you with the lowest amount of damages that you are willing to accept.
Types of insurance claims
How a plaintiff proves bad faith can depend on the type of insurance claim.
- A 1st-party insurance claim is made by the person who owns the insurance policy. Alabama is an at-fault state, which means the person who caused an accident is financially responsible for the damages. (In a no-fault state, each driver would file a claim with their own insurance company, regardless of who is at fault.)
When would you file a 1st-party insurance claim?
- If you are liable for the accident and you need to make a claim for your own damages
- If you were in an accident with an uninsured or underinsured motorist and can’t receive damages from the other driver’s insurance
- If you can’t receive the amount of compensation you need from the other party’s insurance
If the insurance company denies or delays a claim for no legitimate reason, it could be acting in bad faith. It would then be liable for punitive damages in addition to the claimant’s actual losses.
- A 3rd-party insurance claim is filed by a person whose injuries were the fault of the insured. Since Alabama is an at-fault state, this might be an instance where you’re injured because of the negligence of another driver. You can file a claim directly to their insurance policy or you can sometimes make a claim to your own insurance, and it will subrogate the claim, meaning the insurance company will file a claim to the other insurer on your behalf.
A bad faith claim would be based on the insurer having delayed or denied a claim unreasonably after evaluating the circumstances.
For both a 1st- or 3rd-party claim, there could be a possibility of recovering punitive damages.
Punitive damages are awarded to a plaintiff when the court decides that the defendant’s actions were especially egregious and the defendant needs to be punished. They are also a way to set an example and discourage others from taking that particular action.
Alabama law says that a plaintiff may receive punitive damages in an amount up to 3 times the amount of the total compensatory damages, up to a maximum of $1.5 million.
Normally, an insurance company would not be required to pay out an amount higher than the policy limit, but if the insurer acts in bad faith, it could be liable for the full amount of a verdict and punitive damages.
What’s expected of an insurer acting in good faith
You might not always be satisfied with or happy about the amount your insurance company offers as a settlement, but that doesn’t mean it’s acting in bad faith. Sometimes, we overestimate what we think we should be compensated for after an accident.
For example, if you were in an accident where your 2002 mid-range model sedan was totaled, you would be owed the replacement amount for that vehicle. Insurers have software that can determine costs based on the make and model of the vehicle. You wouldn’t receive the same amount of compensation for a 2002 sedan as you would for a 2022 luxury SUV.
The insurer would look at the market value of the vehicle or what you could realistically have sold it for at the time of the accident if the accident hadn’t happened.
Here’s what an insurance company should be doing when acting in good faith:
- Investigating the facts of the claim adequately
- Considering all of the evidence involved in the claim
- Making an honest evaluation and assessment of the claim
- Interpreting the terms of the policy accurately and without misrepresentation
- Settling a claim within the limits of the policy where possible
- Evaluating the entire range of a verdict when the claimant wins a lawsuit
- Considering the individual’s financial interests when evaluating a claim
Examples of insurance company tactics that are in bad faith:
- Refusing to negotiate a fair settlement when liability is shown
- Denying coverage without investigating a claim
- Delaying insurance payments for valid claims
- Intentionally misinterpreting the terms of a policy in order to pay out a smaller amount or deny a claim
- Transferring an insurance claim several times in order to delay a payout
- Threatening the policyholder
- Offering less compensation than the value of the claim
- Refusing to provide information or documentation when asked
- Refusing to provide a written explanation for why the insurance company denied the claim without explanation
Put differently, there are 5 signs that you can look for to determine whether your insurance company is acting in bad faith:
- The insurer fails or refuses to inspect or evaluate your property, medical records or other relevant evidence for your claim.
- Your adjuster avoids your calls and doesn’t respond to your requests.
- There is no investigation (or not a thorough enough investigation) of your claim.
- The insurer will not provide a written explanation of its decision when asked.
- The justification for the decision contradicts the terms of your policy.
If you believe that your insurer is acting in bad faith, you need a lawyer to advocate for your interests. Keep written records of any communications you have with the insurance company, and share those details with your lawyer. You should also locate a copy of your insurance policy for your lawyer’s review. (You can usually download this from your online payment portal if you don’t have a hard copy.)
An Alabama bad faith insurance lawyer can help you through this process and make sure you receive the compensation that you need and are entitled to—after all, you paid for your insurance policy for a reason. You wouldn’t throw your money out the window, so don’t let the insurance company keep it from you when you need it most.
A personal injury lawyer helps individuals who have sustained injuries in accidents to recover financial compensation. These funds are often needed to pay for medical treatment, make up for lost wages and provide compensation for injuries suffered. Sometimes a case that seems simple at first may become more complicated. In these cases, consider hiring an experienced personal injury lawyer. Read more