Addressing The Insurance Claim Bad Faith Loophole

Policyholders pay A LOT in insurance premiums each year. In fact, if you own a home, have kids, or if your employer does not provide health insurance, your annual premiums can be well over $1,000 per month just for basic auto, home and health coverage. With that level of financial commitment, most people expect any claim they file will be covered with minimal hoops to jump through. Unfortunately, that’s not always the case. 

Insurance carriers have been known to use a variety of tactics to control costs and reduce payments made on justified claims, including denying coverage for valid claims, delaying payments and using an army of lawyers to defend their bad decisions in court. Even worse, most policyholders don’t know enough about the insurance claim process to spot these situations and take steps to protect themselves early on. This unfair balance of power creates a climate ripe for bad faith and unfair claim practices. 

What Is The Bad Faith Loophole?

Insurance companies are incentivized to underpay and deny valid claims to increase profits, especially when they are publicly traded entities. A lack of regulations combined with trial-only consequences for carriers prevents the fair treatment of policyholders. Most policyholders can’t foot the bill for expensive legal assistance, experts and other consequential damages which allows insurance companies to continue to operate in bad faith with minimal penalties. 

But wait… isn’t insurance one of the most regulated industries in America? 

Yes, but existing laws are not broad enough to actually punish insurance carriers for bad behavior. In fact, 3 US states don’t have any laws or consequences for insurance companies that wrongfully deny or delay claim payments. Out of the 47 states that do have some laws regulating bad faith, 14 don’t have attorney fees listed as a recoverable option for policyholders. This means it actually costs policyholders to get what they are fairly owned for valid claims. Only 8 states have interest penalties above and beyond damage costs. 

Government regulators have failed policyholders by not making consequences of bad faith claim practices strong enough. 

Why Is The Bad Faith Loophole Allowed?

It’s unsettling to think that after paying years of premiums, your next claim could leave you in financial ruin even if the damage is a covered peril under your policy. With so many stories, legal precedents and even books on this topic, you might be asking how this is allowed to continue to happen. The answer lies in who is regulating who. 

Insurance companies are not regulated on a federal level. Each state is left to decide how and when to deploy rules and laws that govern how insurance carriers are allowed to operate. Despite many insurers operating in multiple states which should open the industry to some federal regulation, the McCarran-Ferguson Act passed in 1945 prevents that for the insurance industry and gives each state the right to govern individual insurance carriers. 

Most states do have “Department of Insurance” type bodies that will work with policyholders but only to take complaints against carriers. Typically the only course of action for a bad faith claim is to file suit against the carrier – if you can afford to. 

Due to variations in state laws and regulations for carriers, what is considered to be legal also varies. In addition, patterns of systemic abuse across state lines aren’t tracked by a group powerful enough to change laws or enact new ones. This leaves policyholders with a single option to get claims paid fairly: file a lawsuit. 

Why Suing Isn’t Enough 

If you happen to live in a state that covers consequential damages, attorney fees and even interest on bad faith insurance claims, consider yourself lucky. In most states, if you file a bad faith claim lawsuit you will have to foot the bill for the court costs, experts needed and other fees even if the verdict is in your favor. Having to pay above and beyond normal insurance premiums to get a claim paid fairly is the exact opposite of what insurance is designed to do – make you whole again after an unforeseen event. 

Possible Solutions?

Progress could be made if all states were required to adopt a minimal set of standards when it comes to how insurance carriers handle and pay claims. This would include covering attorney and court fees, cost of experts and other documentation to prove bad faith occurred. Even without federal oversight, this would help protect policyholders across the US. In addition, state regulators and lawmakers need the ability to enforce stricter penalties for bad faith claim practices – not just taking and recording complaints.

 

Our goal at the American Adjuster Association is to make insured’s whole again. We will move lawmakers to adopt the principles of indemnity and consequential damages into state law. Show your support by becoming a member or follow us on Facebook and join the conversation.