Commercial insurance plays a pivotal role in safeguarding businesses from financial risks arising from unforeseen events. However, the relationship between insurers and policyholders can become strained when bad faith issues come into play. It’s important to note that bad faith liability is distinct from the failure to defend. If the insurer is required to provide a defense but neglects to do so, the insured can pursue a breach of contract claim. Similarly, when the insurer has the opportunity to settle a claim within the policy limits but chooses not to, the insured may pursue legal action for the insurer’s “bad faith” refusal to settle. In this legal blog post, we delve into the common bad faith issues in commercial insurance, providing insights into the legal nuances that define this complex landscape.
Understanding Bad Faith in Commercial Insurance
Although Missouri law does not provide for a conventional bad faith claim, one of the primary legal actions available to the insured against the insurer is a claim for vexatious refusal to pay. The term “vexatious” is defined as acting “without reasonable or probable cause or excuse.” This claim is outlined in Sections 375.296 and 375.420 of the Missouri Revised Statutes, which authorize the award of additional damages in cases involving insurance contracts.
Section 375.296, titled “Additional Damages for Vexatious Refusal to Pay,” specifies that in any legal action against an insurance company on a contract issued in Missouri, if the insurer fails to make payment within thirty days after a due demand, and it is shown that the refusal was vexatious and without reasonable cause, the court or jury may grant damages for vexatious refusal to pay and attorney’s fees in addition to the contract amount and interest.
Section 375.420, titled “Vexatious Refusal to Pay Claim, Damages for, Exception,” elaborates that if the evidence indicates that the company unreasonably refused to pay the loss, the court or jury may, in addition to the amount and interest, award damages. These damages include an amount not exceeding twenty percent of the first fifteen hundred dollars of the loss, ten percent of the excess over fifteen hundred dollars, and a reasonable attorney’s fee. The court is then directed to enter judgment for the total sum determined by the verdict. While Section 375.296 outlines the criteria for identifying a vexatious refusal by the insurer without a reasonable cause or excuse, Section 375.420 underscores the available remedies for the insured.
Common Bad Faith Issues
Unreasonable Delay in Claim Processing
One of the most prevalent bad faith issues is the unreasonable delay in processing insurance claims. Insurers are expected to handle claims in a timely manner, and any unjustified delay can be indicative of bad faith. This issue often arises when an insurer intentionally prolongs the claims process, causing financial hardship to the policyholder.
Inadequate Investigation of Claims
Insurers are obligated to conduct thorough and unbiased investigations when evaluating claims. In cases where an insurer fails to investigate a claim adequately or intentionally overlooks crucial information, it may constitute bad faith. This issue can significantly impact a policyholder’s ability to receive a fair settlement.
Wrongful Denial of Claims
Wrongful denial of a valid claim is a serious bad faith issue. Insurers must provide valid reasons for denying a claim, and a denial without proper justification may lead to legal consequences. Whether based on a misinterpretation of policy terms or a failure to conduct a proper investigation, wrongful denials are a common source of legal disputes.
Failure to Communicate Effectively
Clear communication is essential in the insurance relationship. Insurers must inform policyholders of their rights, obligations, and the status of their claims. Failure to communicate effectively, including withholding important information or providing misleading statements, can contribute to bad faith claims.
Legal Considerations
Statutory Requirements: Commercial insurance is subject to various state laws and regulations. Understanding the statutory requirements related to insurance practices is crucial for both policyholders and insurers. Failure to comply with these regulations can expose insurers to bad faith claims.
Policy Interpretation: Many bad faith issues stem from disputes over policy interpretation. Courts often look at the language of the insurance policy to determine the intent of the parties involved. Ambiguous terms or unclear language in the policy can lead to disagreements, emphasizing the importance of precise drafting. In such situations, individuals may seek legal representation from bad faith insurance attorneys to protect their rights and pursue rightful compensation.
Preventing Bad Faith Claims: Proactive measures can help insurers avoid bad faith claims. This includes maintaining clear communication with policyholders, conducting prompt and thorough investigations, and adhering to ethical business practices. Developing and implementing effective claims handling procedures can mitigate the risk of bad faith issues.
Strategies for Addressing Bad Faith Claims
Prompt Investigation and Communication: Timely and transparent communication is key when addressing potential bad-faith claims. Insurers should promptly investigate claims, communicate their findings to policyholders, and clearly explain the basis for claim decisions.
Mediation and Alternative Dispute Resolution (ADR): Mediation and ADR can provide a more efficient and cost-effective means of resolving bad faith disputes. These methods allow parties to negotiate and reach a mutually agreeable resolution outside of the courtroom.
Litigation Defense: When litigation becomes inevitable, insurers must prepare a robust defense. This involves presenting evidence to demonstrate that the insurer acted reasonably and in good faith throughout the claims process.
In a typical liability agreement, the insurer has both a duty to defend and a duty to indemnify the insured. Violating either duty can lead to a legal claim for bad faith by the insured. The basis for bad faith liability is rooted in a contractual principle known as the implied covenant of good faith and fair dealing. This covenant is inherent in insurance policies, overseeing nearly every obligation the insurer has toward the insured. It mandates that the insurer acts in good faith when assessing settlement offers during the defense of the insured. By addressing common pitfalls and adopting proactive measures, insurers can foster a relationship of trust with policyholders and minimize the risk of legal disputes. In the complex landscape of commercial insurance, diligence and adherence to legal standards are essential to maintaining the integrity of the insurance industry.
