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What constitutes bad faith when it comes to homeowners insurance?

If you've been following this blog for a while, you're probably aware that an insurance policy is a contract. All the basic issues of contract law apply -- including the duties of good faith and fair dealing that are implied in all contracts.

When your home is damaged and you need to file a homeowners insurance claim, both you and your insurer are expected to act in good faith. For you, that generally just means following the claim procedures laid out in your insurance contract, but you should be aware that insurance consumers have general obligations to:

  • Mitigate the damage as much as reasonably possible.
  • Handle the issue promptly.
  • Tell the truth about what happened.
  • Use any insurance payment to repair the damage and cooperate with the repair process.

Assuming you're paid up and haven't done something to void your contract, your insurance company now has to hold up its end of the deal. Generally, its obligations include:

  • Perform a prompt and thorough investigation.
  • Carefully review any and all reasons the claim should be approved.
  • Pay the claim promptly and in full.

If the insurer fails to live up to these obligations, it might be the result of bad faith -- a breach of the obligation of good faith and fair dealing. Bad faith is more than a mistake; it could be an intentional attempt to limit the company's liability or to delay payment until a more convenient time or the insurer. It could be internal policies that tend to unfairly deny legitimate claims. It might involve personal bias by an insurance adjuster.

If bad faith can be proven, the homeowner is generally entitled not only to payment of the original claim but also to compensatory damages to reimburse the policyholder for losses caused by the unjust delay or denial. In cases where the insurer's actions were particularly egregious, the court may order punitive damages, which are intended to punish the insurer.

Source: FindLaw, "Payment of Home Insurance Claims and 'Good Faith'," accessed Nov. 14, 2014

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