Merritt Personal Lines Manual: Bad Faith -- Often Claimed, Not Often Successfully
Lawsuits or regulatory complaints relating to delays or denials usually allege bad faith on the part of the insurance company. This is one of the heaviest clubs a policyholder can wield to strike back at an insurance company.
One way in which an insurance company can act in bad faith is by not investigating a claim with an eye toward providing coverage.
"The investigation should be geared toward paying the claim, not denial. Nine out of 10 times, however, that investigation is designed to turn something up that justifies denying the claim. Their eye should be toward protecting their policyholder, but it's not," said William Shernoff of Shernoff, Bidart & Darras, a California-based risk management consulting group.
In 1993, California Insurance Commissioner John Garamendi put in place a number of regulations to simplify the claims process. The California regulations were loosely patterned after model standards adopted in 1991 by the National Association of Insurance Commissioners. Insurance industry analysts predicted their use in California may influence other states' treatment of similar standards.
Among Garamendi's regulations:
- Within 15 days of any notice of claim, an insurance company must acknowledge receiving the notice. The company must also start its investigation within 15 days of receiving a notice of claim.
- Within 40 days of receiving a notice of claim, an insurance company must affirm or deny the claim and affirm or deny liability.
- If 40 days isn't sufficient time, the company must write to the claimant and specify why more time is needed and what further information it needs.
- A denial of a claim, in whole or part, must be accompanied by a letter that spells out the policy provisions and factors on which the company is relying. All denials must include a notice that the company's decision can be reviewed by the Insurance Department.
- Insurance companies must disclose to their policyholders all benefits, coverage, time limits or other relevant provisions of any policy they have issued that may apply to a claim.
- Any other communication that "reasonably suggests that a response is expected," and that regards a claim not in litigation, must be responded to within 15 days of receipt.
