Bad faith insurance laws protect the public from unfair or fraudulent practices by insurance companies. These are state laws, and each state’s definition of bad faith and associated regulations varies.
With regards to disability benefits, bad faith law generally applies only to individual disability insurance policies that you personally buy through an insurance company agent or rep. [Link to article: Individual vs. Group Disability Claims]
Policies are usually underwritten for each individual as an own occupation policy, along with various disability insurance riders for additional, specific coverage. [Link to article: Disability Insurance Riders]
In a profit-driven disability insurance industry, bad faith insurance laws are in place to stop insurers from taking advantage of consumers. Insurers have the upper hand as far as resources and station. Bad faith laws gives consumers the means to fight unfair insurance companies on a level playing field.
Basically, an insurer acts in bad faith if it refuses to pay a claim without a reasonable basis or without proper cause. If the insurer does have reasonable basis to deny a claim but failed to fully and promptly investigate the claim, they have still acted in bad faith.
Good Faith and Fair Dealing
Most states acknowledge the duty of “good faith and fair dealing” that is inherent with disability insurance policies. The good faith obligation compels the insurance company to go further than the actual words on the policy and act fairly and reasonably in handling, investigating, deciding and paying a claim.
When insurers resort to denial tactics that enable them to delay, underpay and deny payment of claims, they are acting in bad faith. As a consumer of insurance, bad faith insurance laws preserve your ability to hold the unethical insurer accountable for failing to pay the benefits it legally and financially owes to you.
Bad Faith Insurance Laws Allow for Economic Loss and Damages in Some States
As noted earlier, states differ in their bad faith insurance laws and remedies. In some states, disability insurance bad faith is grounds for a breach of contract action.
In many states, if you can prove the insurance provider denied your claim in bad faith, you may also recover economic loss, as well as damages for emotional distress, attorneys’ fees, interest on past-due benefits, and lost profits. Punitive damages may also be awarded against the insurance company. These aspects can mean significant recovery in bad faith claims.
Other states apply Deceptive Trade Practices Acts or similar unfair claim practices legislation as well, asserting and regulating various forms of unlawful and dishonest conduct by insurance companies.
In any case, if the insurance company who sold the plan denies your lawful and essential disability benefits, it is imperative that you speak to an experienced bad faith insurance claim lawyer right away.