How Washington law punishes insurers for unreasonable claim denials

This article looks at what legal remedies claimants have if their insurance claims have been unreasonably denied.

Insurers have a duty to act in good faith when handling claims made by those they insure. In some cases, an insurer may have a legitimate reason for denying a claim. However, for the insured, the process by which the insurer comes to that decision can seem opaque. Indeed, even when an insurer claims to have a valid reason for denying a claim, it may still be acting in bad faith. For the average person, discerning whether a claim was denied in bad faith can be difficult, which is a good reason to involve an experienced attorney to investigate the surrounding circumstances for the insured party. Legal counsel can advise the client about legal remedies for holding bad faith insurers accountable.

What counts as bad faith?

As a public policy, Washington state law establishes fairness as the overarching touchstone of the insurance business. State law requires all parties involved to act in "good faith, abstain from deception, and practice honesty and equity in all insurance matters ... preserving inviolate the integrity of insurance."

Accordingly, insurers are legally obligated to treat both their rights and the rights of those they insure equally when processing claims. In Washington, the golden rule of insurance - called the "equal consideration" test - says that the insurance company should never put its own interest ahead of those of the insured party. That means that an insurer cannot unreasonably deny a claim. Instead, each claim must be investigated and, if a claim is denied, then the insurer needs to have a valid reason for the denial.

Of course, while insurers are supposed to treat the interests of those they insure as equal to their own interests, the fact of the matter is that many insurers have financial incentive to deny claims. After all, the fewer claims an insurer pays out on, the more money it can keep for itself. Some "red flags" that a claim may have been unreasonably denied are claims that are denied seemingly automatically, claims that are denied without proper investigation, and claims that are denied after long and unreasonable delays

Unreasonable denial

Because there is financial incentive for insurers to deny claims, the law imposes penalties on insurers that act in bad faith. Those penalties are designed to discourage bad faith claim denials.

Under Washington's Insurance Fair Conduct Act, referred to as the IFCA, which became law in 2007, for example, a claimant or a direct beneficiary of a policy can sue the insurer for unreasonable denial of a claim. The law allows a plaintiff to pursue damages, attorney's fees and litigation costs. Furthermore, if the court does find that the insurer unreasonably denied the claim, the court can award damages up to three times what the actual damages were.

Making a claim

It is important to note that the IFCA does not apply to health insurance claims. As the Office of the Insurance Commissioner of Washington State notes, bad faith claims related to unreasonable denials of health insurance claims are covered by the Patient Bill of Rights. Furthermore, the IFCA only applies to a first party claimant under a policy (or a direct beneficiary of the policy), meaning only a party with a claim against his or her own insurer and not against somebody else's insurance company.

Anyone who believes that an insurance company may have denied a claim in bad faith may be able to file suit and pursue damages. The process for filing a lawsuit can be complicated, however, which is why a person involved in such a dispute with an insurer should contact an attorney who is experienced in such claims. The lawyer can help the client determine what legal avenues may be available and how best to resolve the disputes with the insurance company.