What Is It Called When an Insurance Company Refuses to Pay a Claim?

When an insurance company refuses to pay a claim, it can be a frustrating and confusing experience for policyholders. Insurance coverage provides financial protection during unexpected events, and a denial can leave individuals feeling vulnerable. While some claim denials are legitimate, others may stem from questionable practices by the insurer. Understanding the reasons for a denial and the options for recourse is important.

Understanding Bad Faith Insurance

When an insurer unreasonably handles a claim, it is referred to as “bad faith” insurance. Insurance policies include an implied covenant of good faith and fair dealing, meaning both the policyholder and the insurer are expected to interact honestly and fairly. This obligation applies across various types of insurance, including auto, homeowners, and health policies.

Actions that constitute bad faith include unreasonable delays in investigating or paying a valid claim. Failing to properly investigate a claim or misrepresenting policy provisions to avoid payment are also considered bad faith. Demanding excessive documentation, making lowball settlement offers, or refusing to defend a policyholder in a covered lawsuit can indicate bad faith conduct. Simple mistakes do not constitute bad faith; it involves unreasonable or dishonest conduct.

Common Reasons for Claim Denials

Insurance companies may deny claims for various reasons. Legitimate denials occur when a claim falls outside the policy’s coverage, such as flood damage excluded from a standard homeowner’s policy. Misrepresentation or omission of information on the policy application, failure to pay premiums, or not reporting the claim within the specified timeframe can also lead to valid denials.

Other reasons for denial include missing or incomplete information in the claim submission, or issues related to coordination of benefits with other insurance. Claims may also be denied if the insurer deems the service or treatment medically unnecessary, or if there are coding or billing errors. However, some denials, while presented as legitimate, might cross into bad faith territory if the insurer’s conduct is unreasonable. This includes unreasonable interpretations of policy language, offering settlements significantly below actual value without justification, or denying a claim without providing a clear reason. An insurer looking for evidence to support a denial while ignoring facts that support the policyholder’s claim is also considered bad faith.

Navigating a Denied Claim

Receiving a claim denial requires careful action from the policyholder. The first step involves thoroughly reviewing the denial letter to understand the reasons cited by the insurer. This letter should explain why the claim was denied and outline the steps for disputing the decision. Gather all relevant documentation, including the policy, medical records, invoices, and any correspondence with the insurer. Keeping detailed records, including dates and names from phone conversations, is advisable.

Policyholders have the right to file an internal appeal with the insurance company. This involves submitting a formal appeal letter and supporting documents within a specified timeframe. The insurer is then required to review the appeal and issue a decision within a certain period. If the internal appeal is unsuccessful, policyholders can file a complaint with their state’s insurance department. State insurance departments act as consumer advocates, mediating disputes, investigating complaints, and enforcing insurance laws. They investigate whether the insurer followed regulations and acted fairly.

Pursuing a Legal Claim

If internal appeals and state regulatory complaints do not resolve the issue, policyholders may consider pursuing legal action. Consulting an attorney specializing in insurance law is advisable, particularly for complex or significant denials. Legal professionals can assess the claim, review policy terms, and determine the most appropriate course of action.

Two main types of legal actions can be pursued. A breach of contract claim alleges that the insurer failed to uphold the policy terms, such as wrongfully denying a covered loss. In such cases, the policyholder seeks compensatory damages, aiming to cover the amount the insurer should have paid under the policy.

A bad faith lawsuit goes beyond a simple breach of contract, asserting that the insurer engaged in dishonest or unreasonable conduct in handling the claim. This implies intentional or reckless misconduct, such as unjustified delays or a failure to investigate properly. In successful bad faith cases, policyholders may recover the original claim amount, damages for emotional distress, and sometimes punitive damages to penalize the insurer. The legal process involves investigation, discovery (exchange of information), negotiation, and potentially a trial.