What it means
Paying claims is the whole point of insurance, so how an insurer behaves when a claim arrives is closely regulated. Unfair claims practices include failing to acknowledge a claim in reasonable time, refusing to pay without a proper investigation, and offering much less than a fair settlement in the hope that the customer will give up.
Others include misrepresenting policy terms, requiring unnecessary paperwork, and making a policyholder start legal action to recover amounts that are plainly owed. In many places the rules take the form of model laws and regulations that set specific standards.
These may require insurers to respond to communications within set periods, to explain denials in writing, and to settle undisputed amounts promptly. Regulators can investigate complaints, fine insurers and require changes in procedure.
Policyholders also have legal routes. If an insurer acts in bad faith, which means it has no reasonable basis for its position and knows or ignores that fact, a court may award more than the unpaid claim, including interest, legal costs and sometimes punitive damages.
The exact remedies depend on the jurisdiction. For businesses, the issue arises on both sides.
A company buying insurance should keep records of all communication, deliver documents promptly and escalate if delays occur. A company that is an insurer or a claims administrator needs training, audit and complaint monitoring to avoid systematic problems.
It is important to separate unfair practice from legitimate disagreement. An insurer is entitled to dispute a claim that falls outside the policy, to investigate suspected fraud and to negotiate on the value of a loss.
The line is crossed when the position is unreasonable, unsupported or used as a tactic to avoid paying what is owed.
In practice
Real-world examples.
Example
A restaurant suffers a kitchen fire and submits a claim with full documents. The insurer does not respond for three months and then asks for the same documents again, leaving the restaurant unable to reopen and the owner borrowing money to cover wages. The delay ends up costing the owner far more than the repair bill itself.
Example
A homeowner receives a settlement offer less than half the contractor's quote, and the adjuster says the offer is the final amount without explaining how it was calculated. After the homeowner complains to the regulator, the insurer reviews the claim and increases the payment. The regulator's review shows that the adjuster had never visited the property.
Example
A trucking firm's claim is denied on the basis of a policy exclusion that does not actually apply to the loss. The firm's broker points to the wording, and the insurer reverses its decision before any legal action. The episode shows how a broker's knowledge of policy wording can protect a client.
Case study
Seen in the real world.
Beacon Hill Mutual is an illustrative, fictional insurer that set an internal target to reduce average claim payments by 8% in a year. Adjusters were rewarded for closing files under their reserve value, and a few began issuing low first offers to claimants who seemed unlikely to push back.
A regulator reviewing a sample of fictional files found that many offers were well below documented repair costs and that complaint letters were left unanswered for weeks. The regulator required the insurer to re-open hundreds of claims, pay additional amounts with interest and change its incentive structure.
The company's board concluded that savings from underpayment were small compared with the cost of fines, litigation and damaged trust. The illustrative story shows why claim handling is a conduct issue as much as a financial one. Within a year complaints against the company fell by more than half, and claims staff now receive bonuses based on accuracy and customer feedback as well as speed.
Watch out
Common mistakes.
- Assuming every denied or reduced claim is an unfair practice, when insurers can lawfully reject claims that fall outside the policy.
- Failing to keep written records of dates, documents and conversations, which makes it hard to prove delay.
- Accepting a first offer without checking it against the policy terms and independent estimates.
Questions
People also ask.
What is bad faith in insurance?
It means an insurer acts without a reasonable basis in handling or denying a claim, and knows or recklessly ignores that there is no basis.
What should I do if I think my claim is being handled unfairly?
Put your concerns in writing, ask for a written explanation, escalate within the company and, if needed, complain to the insurance regulator.
Can insurers be punished for unfair claims practices?
Yes, through regulatory fines, orders to change procedures and, in some places, court awards that exceed the claim itself. Keep a dated list of every call, letter and email, because a clear timeline is the most useful evidence in any complaint.
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