Insurance companies in California typically have several advantages over policyholders because of their significant resources and negotiating strength. This is why many states have laws requiring insurance providers to act in good faith when dealing with their customers and handling claims. If an insurer acted in “bad faith,” a policyholder might be able to pursue legal action. There are several elements that constitute what’s termed bad faith insurance.

This type of insurance law can vary from one state to another, with some states broadly defining bad faith as being any actions considered unreasonable or without proper cause. Also, some states consider questionable claim-related behavior a breach of contract while others consider it a wrongful civil act (tort). In order to pursue a common law bad faith claim, a policyholder typically has to prove benefits for a valid claim were withheld and that the reason for doing so was unreasonable.

Negligence alone isn’t enough to prove bad faith. Specific actions identified by the courts that could constitute bad faith include purposely misrepresenting policy terms and facts, failing to acknowledge a claim or act promptly and not implementing reasonable claims investigation procedures. Insurance companies may also be held legally accountable if they do not approve or deny a claim within a reasonable period of time, or if they deny a claim without a reasonable explanation for doing so. In addition to a common law bad faith claim, policyholders may file a statutory bad faith claim. This would be based on laws unique to a particular state.

If it’s believed an insurance agency acted in bad faith, an attorney can determine if the policyholder has a valid case. Possible red flags suggesting an insurer is not acting fairly also include advising that a disgruntled claimant not hire a lawyer and threatening to appeal to an arbitration award if the insured party doesn’t accept a lower settlement. Policyholders treated unfairly may be entitled to receive the benefits due plus interest.