When an insurance company fails to honor the obligations in your insurance contract, or fails to perform some other responsibility it owes to you, you may have a case against the insurance company for "bad faith." It is important to note that bad faith cases arise from disputes between you and your own insurance company – if another driver's insurance company is refusing to pay money to you, that does not constitute bad faith since there is no insurance contract between you and another person's insurance company.
Bad faith cases usually arise when an insurance company is defending you against the claim being brought by someone else and refuses to reasonably settle the claim. The insurance company is willing to risk a judgment against you and your assets in its effort to save its own money. In New York, in order to establish a bad faith case against an insurance company in failing to settle a claim that is brought against its insured, the insured must show that a) a judgment above the insurance coverage was obtained against the insured and b) the judgment against the insured resulted from "the insurer's conduct [which] constituted a 'gross disregard' of the insured's interests– that is, a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer." Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445 (1993). In such cases, the insurance company may be held responsible to pay the full amount of the judgment (even if it is higher than the original insurance coverage), punitive (punishment) damages and attorneys fees.
In New York, when an insurance company unreasonably refuses to pay its own insured, for example, in the context of health, dental or fire insurance, then the case is no longer called a bad faith case, it is simply a breach of contract case where only contract damages are available. When an insurance company improperly denies No-fault automobile insurance benefits, a small amount of legal fees, and interest can be recovered (11 N.Y. C.R.R. § 65.17(b)(6)(v)). A breach of contract case against the insurance company would also include those cases where the insurance company refuses to defend you as required in the event you are sued, or fails to follow contractual procedures in the event of a dispute as to the amount of compensation to be provided to you under your own coverage after an accident.
Insurance companies have years of legal experience litigating the terms of their contracts – contracts written by skilled lawyers that have been carefully upgraded as new decisions are handed down by appellate courts. Insurance company attorneys regularly incorporate new case law into the terms of their insurance policies. Therefore, terms that may appear to a consumer to be simple English may have their origin in a legal opinion and may have been given a special interpretation with which consumers are not familiar. Because companies make it their business to know how standard terms have been defined by judges, insurance carriers have the upper hand in drafting policies and selecting the language they find most advantageous for making a profit.
In New York, the courts have devised rules for the interpretation of insurance contracts which provide that ambiguities or confusion in an insurance policy are to be resolved in favor of the policyholder and against the insurance company. In the absence of a misrepresentation regarding coverage or exclusions, if the language of the policy is clear and explicit, the clear meaning will be enforced.
Insurance contracts are interpreted by the courts to effectuate only the objectively reasonable expectations of the insured. Any personal, or subjective expectation of a policyholder that cannot be reasonably supported by the language of the contract is unenforceable. It matters not what the policyholder/customer truly and honestly believes the contract says. That subjective opinion is never in issue in a court of law. The real contest is to decide what the words of the policy mean to an objective person or a disinterested, common reader. So, when reading an insurance policy, the words selected by the insurance company are to be interpreted by judges according to their plain meaning. A plain meaning is one which an ordinary person would attach to such words, not the meaning which might be utilized by an insurance company executive or an attorney.
Exclusions and limitations in a policy, because they often result in a denial of coverage when there is a loss, must be in clear language. It is for this reason that exclusions and limitations are always narrowly, or strictly, interpreted. If there is more than one meaning to be given to an exclusion or a limitation, the narrowest interpretation will be adopted by the court. Any exclusionary clause that is not clear and conspicuous will be interpreted in favor of the insured.
Every insurance contract contains an unwritten, invisible, or implied term referred to as the "covenant of good faith and fair dealing." This is a promise imposed by law upon an insurance company to always act fairly towards its insureds in handling their claims. Whether or not such a clause is included in the policy, judges will read the policy as if it were there. Insurance companies must meet the reasonable expectations of the policyholder and an insurer must always give as much consideration to the financial interests of its insureds as it does to its own financial interests.
In a "bad faith" action an insurance company's business practices or common course of conduct is routinely admissible to show motive, opportunity, intent, plan, knowledge or the absence of a mistake in the manner in which it dealt with its insured. It is not necessary to show that the insurer intended to cause harm in a breach of the covenant of good faith and fair dealing. The policyholder need only show that the insurer failed to honor the agreement and had no cause not to pay what was due under the contract. When a person buys an insurance policy, the very risks that are insured against make it clear that, if a claim is not satisfied, the policyholder will suffer financial pressure and emotional distress. Policyholders obviously will be vulnerable to oppressive tactics by a carrier, and insurance companies are presumed to know that a denial of benefits will very well result in emotional distress to their insureds.
Where a policyholder successfully shows that an insurer breached the covenant of good faith and fair dealing, the insured can recover all damages caused by the breach. This includes all consequential losses, loss of use of the insurance proceeds, general damages, attorneys' fees and in cases of egregious and outrageous misconduct, punitive damages.