Bad faith claim handling by life insurers

Bad faith claim handling means an insurer unreasonably delays, underpays or denies a valid claim, or handles it without a fair investigation, in breach of its duty to deal fairly with its policyholder. Whether you can sue for it, and for what, depends on your state's law and on whether the policy is an individual policy or an employer plan governed by ERISA. A disagreement or a slow review is not bad faith by itself; the question is whether the insurer's conduct was unreasonable.

Bad faith versus an ordinary dispute

Insurers are allowed to investigate, ask for documents and deny claims that are not covered. A denial based on a reasonable reading of the policy, even if a court later disagrees, is generally not bad faith. Many states ask whether the insurer had a reasonable basis for its position, and some treat a "fairly debatable" or genuine dispute about coverage as a defense. Bad faith usually involves something more:

• Denying a claim without investigating, or ignoring evidence that supports it.
• Relying on a misstatement that was not material, or that the insurer knew about when it issued the policy.
• Delaying payment for months with no reason, or repeatedly requesting documents already provided.
• Offering far less than is owed, or conditioning payment on a release of unrelated claims.
• Misrepresenting what the policy says or the claimant's rights.
• Failing to explain a denial in writing or to say how to challenge it.

Our guides on why life insurance claims get denied and how long life insurance takes to pay out explain the legitimate reasons for denials and delays, so that you can tell them apart from improper ones.

Two layers: contract duties and fair-claims rules

The contract. An insurer that wrongly refuses to pay a death benefit has breached the contract. The usual remedy is the benefit itself plus interest on delayed claims; see interest on late life insurance claims. Several states set the interest rule by statute, for example California Insurance Code §10172.5, Florida Statutes §627.4615 and New York Insurance Law §3214(c).

Fair-claims rules. State insurance codes require prompt and fair handling. The NAIC's Unfair Life, Accident and Health Claims Settlement Practices Model Regulation (#903), which states have adopted in various forms, sets benchmarks: an insurer should provide claim forms within 15 days of notice, begin investigating within 15 days of proof of loss, send written status updates if the claim is unresolved 30 days after proof of loss and then every 45 days, pay within 30 days of affirming liability, and put any denial in writing citing the policy provision, with notice of the right to ask the state insurance department to review. Violations are enforced by the state insurance commissioner, and in most states they do not give you a lawsuit of their own.

When you can sue for bad faith

Whether an insurer's bad faith is also a tort, with damages beyond the policy, varies.

The sources: Gruenberg, Moradi-Shalal, Florida Statutes §624.155, Pilot Life. The rules above are a summary of the main points. Courts, time limits and available damages differ by state and change, so a local insurance attorney is the right source for specifics.

ERISA: employer coverage plays by different rules

If your life insurance came through your employer's benefit plan, the federal Employee Retirement Income Security Act (ERISA) probably applies. The Supreme Court held in Pilot Life Insurance Co. v. Dedeaux (1987) that ERISA preempts state common-law claims for improper processing of benefit claims, including bad faith claims. In practice, a beneficiary's remedies under ERISA are mostly limited to recovering the benefit, potentially with interest, and a court can award attorney's fees, but not the extra-contractual and punitive damages a state tort can bring.

ERISA also sets a claims procedure that you must follow. Under the Department of Labor regulation at 29 CFR 2560.503-1, a plan generally decides a claim within 90 days (one 90-day extension is possible), gives at least 60 days to appeal a denial, and decides the appeal within 60 days, subject to one extension. Missing the appeal can end your case. Our guide to Employer life insurance, ERISA and beneficiary disputes covers the details, including conflicts between beneficiaries.

Individual policies bought on your own are generally not ERISA plans, and state law applies. Group coverage that an employer merely offers under a very limited arrangement can fall outside ERISA; an attorney can tell you which side your plan is on.

What to do if you suspect bad faith

1. Keep a log. Record every call with the date, time, name of the representative and what was said. Keep every letter, email and envelope.
2. Send documents in writing and keep proof of delivery. Request written confirmation that your claim is complete.
3. Ask in writing what is missing and when a decision will come. Use the life insurance claim checklist to confirm that you have sent everything.
4. Request the denial in writing, with the specific policy provisions relied upon, and the claim file if your state or plan allows.
5. Appeal within the stated deadline. See how to appeal a denied life insurance claim. For an ERISA plan, the appeal is mandatory and the record you build there is usually the record the court sees.
6. File a complaint with your state insurance department. It is free, and the insurer must respond. The department can investigate violations of the fair-claims rules, though it generally cannot award you damages.
7. Talk to a lawyer before the deadline. Time limits can be short, some policies set contractual suit deadlines, and Florida requires notice before suit. Many insurance attorneys take claim cases on contingency, so ask about fees; see when to hire a life insurance lawyer.

If more than one person claims the money, a delay may be legitimate; the insurer can deposit the funds in court through interpleader and let a judge decide. That is not bad faith by itself.

What damages can look like

In states that allow a bad-faith tort, damages may include the unpaid benefit, interest, consequential losses caused by the delay, emotional distress, attorney's fees in some states or situations, and punitive damages where conduct is egregious. The U.S. Supreme Court held in State Farm v. Campbell (2003) that punitive awards are limited by due process, so large awards are often reduced on appeal. Do not assume any particular outcome; these are possibilities, not typical results.

Key takeaways

• Bad faith is unreasonable claim handling, not a disagreement over coverage; a slow or contested claim is not necessarily bad faith.
• State law decides whether you can sue for more than the benefit; California, Florida and Texas each work differently.
• Employer-provided group life is usually governed by ERISA, which generally preempts state bad-faith claims and requires you to exhaust the plan's appeal process.
• Keep a written record, respect appeal and suit deadlines and file a complaint with your state insurance department.
• Consult an insurance attorney early, especially if a deadline or a required pre-suit notice may apply.