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What does ‘bad faith’ mean?

When it comes to insurance, there are two basic definitions of “bad faith” depending on whether you are speaking of the first party insurance or the third party insurance. For the first party insurance, bad faith is defined as the refusal to pay a claim without properly investigating the claim in a timely manner or without providing a reasonable basis for the denial.

For third party insurance, bad faith is defined as failing to indemnify, defend or settle a claim in the limits of the policy without a reasonable basis or failing to investigate the claim in a timely and proper manner.

Some examples of conduct that may be considered bad faith include:

— Deliberate misrepresentations or practices to avoid paying a claim

— Deliberate misinterpretation of policy language or records to avoid coverage

— Use of an improper standard to deny a claim

— Abusive or coercive tactics to settle a claim

— An unreasonable delay in resolving a claim or failing to investigate

— Failing to explain applicable policy exclusions or provisions

— Failing to maintain adequate procedures for investigating a claim.

An example of federal legislation governing insurance policies is the Employee Retirement Security Act of 1974. This governs group employee benefit plans. In most cases, ERISA preempts state law claims that have anything to do with an employee benefit plan. There has also been talk that insurance companies that operate in bad faith might actually fall within the Racketeer Influenced and Corrupt Organizations Act, which is commonly known as RICO.

California has the Unfair Claims Practices Act, which defines exactly which kinds of conduct are considered unfair. That act was passed back in 1972. Common law is also recognized in California in many bad faith lawsuits and claims.

To learn more about bad faith when it involves your insurance company, contact your attorney. You may have a case for seeking damages.

Source: mvplaw.com, “The Basics of Bad Faith,” accessed Dec. 16, 2015

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