The laws in most states imply a duty of good faith and fair dealing on behalf of the insurance company. This duty requires the disability insurer to act reasonably in the handling of claims submitted to them by insureds and claimants. Even though disability polices do not contain specific language in the insurance policy concerning the duty of good faith and fair dealing, it will be enforced by the courts as if it were.
In general, in order to prove an insurance company has violated their duty with respect to good faith and fair dealing, the insured (plaintiff) must show: 1) the disability insurer acted intentionally; 2) the disability insurer either denied the claim, failed to pay the claim, or delayed payment on the claim without a reasonable basis; and 3) the insurance company was aware it had no reasonable basis to act, or it failed to conduct a fair and objective investigation to determine if its’ actions were in fact reasonable.
Basically, disability insurers may not ignore the duty to investigate fully all of the facts of a claim before making a liability determination. If a claim is not fully and objectively investigated, the disability insurer may later be prevented from saying it had a good reason to act in ‘good faith’. Additionally, a disability insurer may not conduct an investigation favoring its’ own interests above those of the insured. Instead, the disability insurer is required to consider the interests of the insured at least equal to its own, particularly for ERISA Plans. (Fiduciary duty)
In order to prove an insurer has committed “bad faith” the insured must prove: 1) the insurer is guilty of violating the duty of “good faith”, and therefore has committed “bad faith”; and 2) the insurer’s acts of “bad faith” were the cause of any damages suffered by the insured. When the insured is successful in winning a “bad faith” lawsuit, he/she is generally entitled to recover: 1) actual damages; 2) general compensatory damages; and 3) punitive damages.
In order to win compensatory damages, the insured must prove to a jury that the facts of the claim are more probably true than not. This is very different from beyond a reasonable doubt, which is a much higher standard used in criminal cases. The concept of “more probably true” means that the insured’s facts and evidence need only “outweigh” the defendant’s evidence by even the slightest margin.
In contrast, in order to win punitive damages, the insured must provide proof of clear and convincing evidence, which is more than “mere probability”, but less than “reasonable doubt.” The insured is required to show the insurance company acted with an “evil state of mind” which is defined as: an intent to cause harm; or conduct motivated by intentional ill will; or willfully ignoring the substantial risk of harming the insured or others.
Awarding punitive damages is left entirely to the jury. Members of the jury may choose to consider: the character and motive of the disability insurer’s motives, the degree of harm it caused, and the standard of reported wealth of the company.
Disability insurers may also be sued for breach of contract, which arises when the administering insurer does not abide by the express written provisions of the policy issued. On occasion, one can prove a breach of contract where there is no express written provision, but when the insured has a reasonable expectation of coverage based on information communicated at the time of sale, or produced in marketing brochures or advertisements. In addition, some practices may also be considered consumer fraud in some states.
While the phrase “bad faith” may slip off the insured’s tongue a bit to easily, it is actually very hard to prove in a court of law. From 2000 – 2008 “bad faith” was popularized by the UnumProvident NBC Dateline and 60 Minutes TV programs exposing Unum’s unfair claims practices. “Bad faith” may not have been as successful as it was without the public exposure of many cases of supposed “intent” and “harmful” activities exposed by the claims handlers.
The most known successful “bad faith” litigation was the Hangartner case involving a chiropractor in California. The jury awarded 40 million dollars, and Dr. Hangartner went on a lengthy vacation to Italy. And, so it goes.
Still, “bad faith”, and the award of punitive damages is a difficult sell these days since “intent” is a hard thing to prove without all the media hype.
The above discussion should not be construed to be legal advice. I strongly encourage you to seek competent guidance in all matters relating to laws in your state, and issues already in litigation.
