Insurance Bad Faith Laws in Car Accident Cases

Victims who have been injured in a car accident usually have the right to bring a claim against one or more insurers. This can be a first-party claim against the victim’s own insurer, such as when the accident was caused by an uninsured motorist, or it can be a third-party claim against the insurer of an at-fault driver. Insurance companies generally need to act in good faith toward anyone making a claim against a policy, regardless of whether the claimant is a policyholder. Some states provide that only a policyholder can bring a bad-faith claim against an insurer, however.

A state may provide specific laws that govern the actions of insurers, or accident victims can rely on court decisions that support the duty of good faith and fair dealing. Failing to comply with this duty is bad faith, which can support a separate claim for damages against the insurer. These claims tend to be very complex, so you should retain an attorney rather than handling the case on your own. Bad-faith cases may take a long time to resolve, since liability is usually based on the resolution of the underlying car accident case.

Recognizing Bad Faith

An insurance company acts in bad faith when it violates the law or the terms of its insurance policy. While those terms may be technical and confusing, it is important to be aware that any real ambiguities will be construed in favor of the policyholder because the insurer drafted the policy.

Generally, an insurer must pay out on valid claims within a reasonable time, or it must provide a reason why a claim is denied. If the policyholder is being sued, the insurer has an obligation to settle claims on their behalf when appropriate. The insurer also needs to competently defend the policyholder against a lawsuit. Insurance companies are not allowed to swamp a claimant in unnecessary paperwork to discourage them from filing a claim. These are just some potential examples of bad faith, and the range of conduct that it covers will vary from state to state.

Damages for Bad Faith

In many states, a plaintiff bringing an insurance bad-faith claim may be able to recover both compensatory damages and punitive damages. Compensatory damages are meant to make up for the victim’s losses resulting from the bad faith, while punitive damages are meant to punish the insurer for its wrongful conduct. Awards of punitive damages can be massive, greatly exceeding compensatory damages in either the bad-faith claim or the underlying car accident case. However, there are certain constitutional limits on these awards. State laws also may provide for statutory damages, which are also usually an amount larger than the actual losses suffered by the plaintiff.

Last reviewed October 2023