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How courts determine if an insurance company acted in bad faith

When a homeowner’s insurance claim gets denied or lowballed, it can be difficult for the homeowner to tell if the insurance company reached its decision in good faith. A bad faith insurance denial may entitle the victim to compensation in court, but the line between that and a valid decision the insured party simply does not like can seem blurry.

There is no universal definition of bad faith conduct by an insurance company, but courts will weigh the evidence against several factors. Perhaps the most common test comes from a 1958 case, in which the appellate court came up with eight factors to consider. They are:

1. How strong the claimant’s case is in terms of liability and damages

2. Whether the insurer tried to induce the insured to contributed to a settlement

3. Whether the insurer failed to property investigate when gathering evidence against the insured

4. Whether the insurer rejected the advice of its own attorney or agent

5. Whether the insurer failed to inform the claimant of a compromise offer

6. How much financial risk each party is exposed to due to a refusal to settle

7. Whether the insured caused the insurer to reject the compromise offer by misleading the company on the facts

8. Anything else “tending to establish or negate bad faith on the part of the insurer”

As readers have likely guessed, the fact that there are so many factors in play shows how difficult and technical proving bad faith in court can be. Consulting with an attorney experienced in homeowners’ insurance disputes can help make clear your individual options.

Source: Douglas R. Richmond, An Overview of Insurance Bad Faith Law and Litigation, 25 Seton Hall L. Rev. 74, 97 (1994)

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