Insurance Companies and "Bad Faith" Practices

Under US law, most insurance companies are bound to practice the covenant of ‘good faith’ and ‘fair dealing’ when it comes to dealing with people on a daily basis. There are circumstances where an insurer denies rights to consumers without giving a good reason. This is called a ‘bad faith.’ The unwritten rule also is that insurers should always look at the financial interests of the insured or its customers in the same manner as they look at their interests. There always are; however, a few cases when insurance companies, whether automobile, homeowners and general, routinely follow ‘bad faith practices,’ This can be classified as:

• Delaying payment or failing to settle a case;
• Unreasonably denying/delaying a payment;
• Refusing to settle a claim or offering less than what is justified;
• Offering untimely settlement of claims;
• Gross misrepresentation of actual coverage in the contract;
• Failure to initiate an investigation towards a claim; and
• Inadequate or complete denial of defense and indemnification.

The number of ‘bad practice’ cases is on the rise through a breach of contract and unethical business practices. A fair judgment must be achieved against dishonest, unscrupulous, deceptive and fraudulent insurance companies. This can be done by awarding significantly higher punitive damages to deter similar conduct by insurers.

Negative exposure of financial institutions through derivatives

Cases of derivatives, such as collateralized debt obligations (CDO), credit default swaps (CDS) and other mortgage-backed securities (MBS), are increasing and a growing market, worth $39 trillion. It has received negative reviews after insurance giants, such as AIG, Bear Sterns, Lehman Brothers, Washington Mutual and others, reportedly collapsed due to a volatile debt market.

These derivatives are financial instrument that is an unregulated/ privately negotiated contract, used to offset risks by creditors. It allows creditors to insure themselves in a situation when a borrower might default. Although initiated for legitimate protection, manipulative practices in this default swap market should be curbed for greater market stability, more transparency in the credit market and to restore ‘good faith practices.’

Filing a case

When you come to know about a bad claim, the defendant and the plaintiff’s, documents and defenses will be presented in court. You will have to bring the entire claim, underwriting file and the company’s handbook that describes what was promised. The insurance company in return will seek answers regarding the claims and damages you are seeking. The process of filing a case can be emotionally stressful, while being also considered part of bad faith practices. If you have ever been affected by a bad faith practice by an insurance company, then legal action should be taken to protect your insurance rights.

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