Merritt Personal Lines Manual: Who Resolves Disputes
If getting your claim paid is an inherently conflicted proposition, shouldn't some disinterested third party be available to resolve disputes? Yes. This party is usually your state's Insurance Commissioner -- who doesn't always satisfy everyone.
One of the goals of insurance market regulation is to protect consumers from unfair practices in insurance claims settlement. Insurance contracts are complex legal documents which are often difficult for consumers to understand and it is not uncommon that disputes over the existence or amounts of coverage arise during the claims settlement process.
Unlike most financial industries, insurance is regulated on a state-by-state level rather a national one. (This is a vestige of government policies of a hundred years ago. There was talk during the 1990s of changing the regulatory structure...but various interested parties objected.)
As a result, state Insurance Departments combine responsibility for industry regulation and consumer advocacy. It's a tough mix; and most Insurance Commissioners tend to focus on one part or the other.
If consumer advocates don't like a commissioner, they will complain that the fox -- beholden to big-money insurance companies -- is guarding the henhouse. If the insurance industry doesn't like a commissioner, its spokespeople will complain that an opportunistic politician is destroying the marketplace.
Insurance is a necessary part of a stable economy -- but insurance consumers are usually at a disadvantage in understanding their policies, negotiating and defending their own interests. The resulting disputes arise at the very time that policyholders need coverage most -- after the loss. So, the law generally recognizes that insurance claims disputes are unique in the disparate power of the opposing parties. This still doesn't make claims litigation easy. It's far better to avoid legal action entirely.
The main legal claim that people can make when they feel their insurance claim has been wrongly denied is breach of contract. An insurance policy is a contract and the insurance company promises to pay valid claims in that contract.
After a breach of contract claim, the next most common legal claim is bad faith.
In most cases, the law assumes that both parties to a contract are held to an implied standard of good faith and fair dealing. However, in insurance disputes, that standard is usually applied only to the insurance company.
In bad faith cases, the courts determine the standards for proper claims handling procedures. Bad faith suits can seek actual and punitive damages -- and they can be filed by either policyholders or third parties who've suffered an insured loss.
The caveat: Bad faith claims can be tough to prove. You usually have to show fraud, deceit, malicious or willful behavior or intent on the part of the insurance company. Most courts require you to prove that the insurance company knew of or recklessly disregarded, the lack of a reasonable basis for denying a claim.
The third common legal tool is a charge that the insurance company has violated state unfair claims settlement laws. These laws define prohibited acts in the claims process. They allow administrative penalties (usually state-sanctioned fines) and private lawsuits to recover damages against insurance companies that violate the statutes.
The standards of proof for recovery under the unfair claims practices statutes are generally lower than those for bad faith claims because you don't usually have to show intent or malice.
Booming Lawsuits and an Industry Response
A growing number of people are suing. Litigation between policyholders and insurance companies increased steadily during the 1990s. One 1993 study estimated that property and liability insurance companies alone spend more than one billion dollars yearly in coverage litigation.
