Bad faith insurance is a claim brought against insurance companies that wrongly deny insurance coverage to a policyholder. If a bad faith claim is successful, it can give rise to additional damages, including punitive. Bad faith insurance claims are powerful tools that policyholders can use against their insurance companies.
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The Basics of Bad Faith Insurance
Insurance companies give policies to clients. The policy defines the nature of the relationship between the insurer and the insured. For example, car insurance policies define what types of accidents and injuries are covered. If an accident or injury is covered by the policy, then the insurance company is required to provide coverage up to the limits of the policy. For example, car insurance will cover the damage to repair or replace a car, pay medical costs for other injured parties, and even hire an attorney to defend their policyholder.
However, insurance is a business – not a nonprofit. Therefore, companies are incentivized to maximize profits (i.e. the number of policyholders and policies) and minimize costs (i.e. money paid to customers who file for coverage). These competing incentives, to honor the policy and maximize profits, can lead companies to deny lawful claims. Companies that deny lawful claims are liable for bad faith insurance and accompanying damages, including punitive damages.
Punitive Damages: Punishment as Compensation
Punitive damages are a form of compensation given to successful plaintiffs. However, unlike traditional damages, punitive damages are not given to compensate the victim but to punish the offender. The purpose of punitive damages is to discourage future bad behavior that gave rise to the injury. Numerous studies are split on the efficacy of punitive damages, however, they continue to be allowed by all 50 states.
Punitive damages are reserved for extremely bad actions, such as intentional torts or reckless torts. For example, an insurance company that purposefully denies insurance coverage to a policyholder is an intentional action that injures the victim because they lose medical coverage and legal representation.
Punitive damages are reserved for tort (i.e. injuries) violations, not contract violations. However, bad faith insurance, while technically a contract violation, is treated as a tort claim. Therefore, bad faith insurance claims are one of the few contract-based claims that qualify for punitive damages. In fact, bad faith insurance is one of the most common litigation types against insurance companies that give rise to punitive damages.