We all buy insurance thinking it will protect us when the worst happens. Most of us have insurance policies that cover our property—such as a house or car—and ourselves—such as life and health insurance. However, having that insurance is only beneficial if the company actually pays your claim.
In some instances, insurance companies refuse to pay a claim even if you have a policy that covers that incident. Sometimes those refusals are valid, and sometimes they’re not. Invalid denials are called insurance bad faith and it’s important to be able to recognize when this might be happening.
Below we will discuss a few reasons why insurance companies deny claims, for both valid reasons that you wouldn’t expect and invalid reasons you should fight with the help of an experienced attorney.
Valid Insurance Denials
Just because your insurance company denies your claim doesn’t automatically make it a bad faith case. While you may be entitled to compensation, the insurance company may have denied your claim for a fair reason.
Underinsured
A common reason for a denial of your claim is that you were underinsured. Either you insured property for far less than its actual value, making it impossible to repair the damage within your limits, or you thought you had enough insurance but simply didn’t. Insurance is designed to prevent a catastrophic loss, but it can be hard to conceptualize and plan for catastrophes—they are not everyday or expected occurrences.
When you purchase insurance, you are planning for common issues, such as a pipe bursting and flooding your building. You know that a certain limit would cover the damage if a pipe burst, but you aren’t necessarily prepared for a worst-case scenario. For example, if the building burns down and people die in the fire as a result of your negligence, your limits might not cover that much loss. It could cost hundreds of thousands of dollars to rebuild your property and fight a wrongful death lawsuit, which is a far cry from the cost of a burst pipe. Being underinsured and suffering extreme losses could lead to a portion of your claim being denied, even though you thought you had enough insurance.
Exclusions
Another reason your claim may get denied is due to an exclusion in the policy. Exclusions are the fine print, or caveats, in a policy—they limit or remove coverage for certain events. For example, some property policies have a flood exclusion. This means that if your building were to burn down, it would be covered, but your claim would be denied if it was flooded. In these instances, you would need a specific flood policy that would cover that type of loss.
Invalid Insurance Denials
While there are plenty of instances of proper claim denials, there are also instances when an insurance company denies a claim even though you are entitled to compensation. Insurance companies need to make a profit and they know most people and lawyers aren't knowledgeable or motivated enough to take them to the mat.
When an insurance company denies a valid claim solely to benefit themselves and make a greater profit, it is called insurance bad faith. This includes when insurance companies outright deny claims, as well as when they refuse to provide a sufficient amount of coverage.
For example, let’s say you are in a car accident and the damage to your vehicle costs $15,000 to fix. Your policy includes a limit of $20,000 for damages, but your insurance provider insists it will only give you $5,000. Unless there is a valid reason for refusing to provide the amount necessary to fix the damage, it would be an insurance bad faith case.
How do I know if my insurance company is acting out of bad faith?
It can be hard to determine when an insurance company is acting out of bad faith and when the denial is appropriate. The first step is to take a look at the policy and determine if your claim falls into one of the exclusions. This is where an experienced attorney can help you. Insurance policies are complicated contracts and require specialized knowledge to read and interpret.
Another way to determine if your insurance provider is acting out of bad faith is to ask them to provide a reason for the claim denial. They should tell you what exclusion they are referencing or their basis for undervaluing the damage. This can help you analyze the issue and determine whether they are being truthful or acting in bad faith.
When can I expect an insurance company to act in bad faith?
This question can be hard to answer and depends on both the company you are dealing with and the individual insurance adjuster. Just like everything else in life, you tend to get what you pay for, and insurance is no exception. Insurance companies want to make a profit like any other company. If you pay very little in insurance every month, the company is more likely to try and deny claims to make up the shortfall.
If you purchase a more deluxe insurance policy, the provider tends to make their profit from the monthly premiums and is less likely to deny your claim.
The kind of damage you are seeking can also play a role. It’s difficult for an insurance company to deny claims with well defined costs like replacing a bumper. However, if you receive a concussion and seek compensation for pain and suffering and other noneconomic losses, those costs are subjective and much more susceptible to bad faith.
The Bottom Line
Insurance companies are businesses designed to make a profit, and sometimes they will make that profit by denying your claim. If you believe an insurance company has denied a claim for compensation you are rightfully entitled to, it’s important that you hire an attorney to handle your case. Contact us for a free consultation about your case.