It is a poorly kept secret that insurance companies do what they can to avoid paying claims. At what point, however, does a denial or attempt at a denial of a claim violate the rights of the insured?
As with all contracts, there is a duty to act in good faith when performing under an insurance policy. A "bad faith" claim against an insurer can arise in many different ways, but is most common when the insurer denies a claim that it knows is covered by the policy it issued the claimant. Without a legitimate exclusion triggered by policy language and the facts or occurrences giving rise to the insured's claim, the insurer is without a legitimate defense to a claim of bad faith.
What is an insured's recourse when a legitimate claim is denied? The damage caused by the insurer's bad faith refusal to pay a claim can be catastrophic. The repercussions of being refused necessary medical treatment due to that refusal are especially harmful. Contacting your state's insurance department or agency, and the Insurance Information Institute's National Insurance Consumer Hotline are two ways to find help and get information quickly. Another method of redress is filing a direct suit against the insurance company and adjuster for their acts of bad faith.
How does the insured discover what the insurance company has done? The claims procedures of insurance companies is a well-guarded secret. However, in a bad faith lawsuit, the files of the adjuster and insurance company are subject to be turned over for the insured's review. If the insurance company defends the suit by claiming they denied coverage or defense "on the advice of legal counsel," then the files of the attorney whose advice they claim to have relied on may also be subject to inspection.
What is the benefit of pursuing a bad faith claim in court? If an insurer is found to have acted in bad faith against its own insured, the company can be subject to paying for all of the damage that refusal caused, including that of the underlying injury that triggered the initial claim for coverage. (See pp. 11-13 of this article for more information on damages.)