Insurance companies profit when their policyholders file minimal claims. The more claims filed and the larger the damages, the smaller the profit margin for the company.
While your business model likely requires that you try to minimize payouts, you do still cover your policyholders in good faith and reimburse them for compensable losses and valid claims. If a policyholder or a third party with a claim against the policyholder alleges you have engaged in bad faith insurance practices, what happens next?
Your company has an opportunity to respond to the allegations
Allegations of bad faith insurance practices can have financial implications for the company involved as well as reputation implications. No one wants to buy a policy from a company that defrauds policyholders by denying them necessary benefits.
When someone claims to have experienced bad faith insurance practices while dealing with your company, you have 60 days in which to respond. Sometimes, a review of the claim may find that the employee handling the situation made the wrong decision. Your company has the option to reverse its previous decision and pay the compensation due to the claimant under the policy.
If you still believe the denial was the right decision after careful review, you can go to court to try to prove there was a valid reason to deny the claim or limit the benefits paid. In the event that the claimant is successful, they could ask for punitive damages in addition to the value of the claim itself.
Understanding what happens during a bad faith insurance claim can help your company respond when an unhappy claimant makes an allegation against your company.