What is insurance “bad faith”?

Categories: Insurance Bad Faith

What is insurance “bad faith”?

Insurance bad faith is a tort, or civil wrong, committed by an insurance company.  While the definition of bad faith is different from state to state, it is generally an insurance company intentionally failing to live up to its obligations pursuant to the insurance policy with its insured.

In Arizona, an insurance company owes a duty to act in good faith when handling an insured’s claim.  Noble v. National American Life Insurance Co., 128 Ariz. 188, 624 P.2d 866 (1981).  The purpose of an insurance policy is to give the policyholder peace of mind and that when a loss occurs “the insured expects to have the protection provided by his insurance.”  Id. at 189-90. While Noble held that failure to pay a valid claim breaches the covenant of good faith and fair dealing, the tort of bad faith also exists “when an insurance company intentionally denies, fails to process, or fails to pay a claim without reasonable basis for such action.” Brown v. Superior Court, 137 Ariz. 327, 336, 670 P. 2d 725, 734 (1983). In addition, failure by an insurer to promptly pay undisputed funds constitutes bad faith per se. Borland v. Safeco, 147 Ariz. 195, 709, P. 2d 276 (1985).  An insurance company is required to give as much consideration to its insured’s interests as it does to its own interests.  RAJI (Civil) 4th, Bad Faith 2; Rawlings v. Apodaca, 151 Ariz. 149, 157, 726 P.2d 565, 573 (1986).  Failure to do so can be “bad faith” and entitle the insured to recover not only contract damages, but damages above and beyond what is owed pursuant to the insurance policy for the stress, anxiety, frustration and aggravation an insured has endured because of his or her insurance company’s bad faith conduct.  An insurance company “should not force the insured to go through needless adversarial hoops to achieve its rights under the policy. It cannot lowball claims or delay claims hoping that the insured will settle for less.” Zilisch v. State Farm, 196 Ariz. 234, 995 P.2d 276 (2000).

Claims that have been denied without a reasonable basis, an insurance company delaying the adjustment of a claim, an insurance company delaying the investigation of a claim, an insurance company failing to conduct an adequate or reasonable investigation, an insurance company low-balling estimates of the loss sustained, an insurance company refusing to communicate with its insured or treating its insured unfairly can all be a basis for a bad faith claim.