Collaborative Post | Life insurance policies have always been an important facet of financial planning for many Americans. According to the American Council of Life Insurers, the total of life insurance benefits paid out by insurance companies in 2024 was $88.5 billion, reflecting the massive implications and benefits that it provides to the financial security of American families.
Life insurance plans are implemented to secure the finances of the insured person’s family members in case the insured person passes away. Unfortunately, complications often emerge when there are delays in payments by the insurance company, invalid rejection of a claim, or failure to investigate the claim in good faith.
In some cases, this conduct may go beyond an ordinary claim dispute and constitute insurance bad faith. The principle of bad faith in insurance refers to the unjust method of dealing with an insurance claim. Some actions that may constitute bad faith insurance include refusing to pay or unreasonably delaying, mishandling, or obstructing insurance claims. Refusing a fair investigation and process for insurance claims can also be an example of insurance bad-faith cases.
Life insurance lawyer James D. Sill from Fulmer Sill Law Firm advises policyholders to pursue legal advice from an attorney experienced in bad faith insurance claims. They can guide you on the best course of action and help you understand your rights.
Let us discuss when a denied or delayed life insurance claim may constitute bad faith and when legal action may be necessary.
The Duty Behind Every Policy
Implied in every contract of insurance is the obligation of good faith and fair dealing that exists to some degree in all states. The implication behind insurance contracts is that an insurance company must give equal priority to the interests of the insured party as it does its own.
Breaching that duty means the company investigated unfairly, misstated the policy’s terms, or denied a valid claim without a reasonable basis for doing so. Several states treat a bad-faith breach as its own civil claim, separate from the dispute over policy benefits. Through an insurance bad faith claim, a beneficiary is allowed to recover damages beyond what the policy itself would have paid.
In California, for instance, an insurer that denies a claim in conscious disregard of a policyholder’s rights can also be ordered to pay punitive damages, according to a Long Beach insurance bad-faith lawyer at the Kristy & Kananen law firm.
Not every state extends liability. The damages available for a bad-faith breach vary considerably depending on where the policy was issued and where the claim was denied.
Where Delay Turns Into Bad Faith
Insurers are legally entitled to investigate a claim before paying it. However, the trouble starts when that investigation becomes a pretext for avoiding payment altogether.
The Unfair Claims Settlement Practices Act outlines some common warning signs of insurance bad faith. It includes devaluing claims, delaying claims unnecessarily, misrepresenting relevant facts, and failing to provide a written explanation for the denial of a claim.
None of these patterns requires proof that an insurer acted with malice. Most state bad-faith standards only require showing that the denial was unreasonable and that the insurer knew, or should have known through a reasonable investigation, that the claim was valid.
Life Insurance’s Two-Year Problem
Unlike many other forms of insurance, life insurance claims are unique in that they are subject to a period of contestability. Insurers have wide discretion during the first couple of years of an insurance contract if the insured dies during that period.
It is possible that a problem may be found and a medical condition that was not properly disclosed will be uncovered by the insurance company. These inconsistencies can result in the company deciding to rescind the policy and refusing to pay the claim.
An insurer may decide whether a material misrepresentation exists and whether it caused the issuance of a policy. If the investigation is justifiable, the insurer still must not mishandle the claim. They should conduct a rational investigation and explain the decision unequivocally. In any case, it may be considered bad faith for insurance companies to delay the action without sufficient cause. Improper refusal to pay claims based on facts that lack merit can be a violation of state laws or insurance regulations.
Once the contestable period is over, the insurer loses a lot of leeway to question the application. This is the reason why most disputes arise during the early period of the insurance contract.
Act Quickly After a Life Insurance Claim Denial
Beneficiaries who believe their claims have been improperly treated should act quickly, as there are variations in bad faith criteria and damages, along with different time limits for bad faith actions compared to the claim action itself.
The discovery rule in many states means that the period begins when the insured knew or should have known about the bad faith action of the insurance company, but using the discovery rule poses greater risks than following the time limit from the moment of denial.
Industry claim-denial analyses have found that a meaningful share of denied life insurance claims are reversed once beneficiaries appeal, a reminder that an initial denial is a starting point in the process rather than necessarily the final word.
Leave a Reply