Insurance Failure to Pay Law & Legal Definition

A bad faith failure to pay a claim under an insurance policy is a breach of a the obligation inherent in alll contracts to deal with the other parties in good faith and with fair dealing, such as in paying claims, or issuing a cancellation under an insurance policy. In many states across the country, a body of law has evolved which revolves around insurance coverage disputes. This area of law is commonly known in the insurance and legal professions as “Bad Faith” law.

The term “Bad Faith,” commonly found in court pleadings filed against insurance companies, is derived from the legal concept known as the “breach of the covenant of good faith and fair dealing.” It is implied in every agreement, and especially insurance agreements, that each party will act in good faith. An insurance company, by failing to pay the benefits due to you under your policy, breaches the implied covenant of good faith and fair dealing.

Two of the most common situations which arise are the failure of the insurance company to pay you benefits under your “First Party” insurance policy, and the failure of the insurance company to pay a judgment against you under your “Liability Policy.” 

Failure to pay occurs when the insurance company refuses to pay you benefits when a covered contingency occurs under your policy. The most common scenarios include the failure to pay money to fix damages to your house, the failure to pay money when you become disabled, and the failure to pay you money for damages to your business.

The other area involves insurance companies acting in bad faith by failing to pay judgment proceeds under a liability policy. In many instances, an insurance company will accept the defense of a case with “a reservation of rights.” This means that an insurance company will abide by its duty to defend an insured under the policy, but if the insured is found by a judge or jury to have acted in a way which excludes coverage under the policy then the insurance company reserves its right not to pay the judgment. For example, if you are sued for both negligence and battery arising out of an incident, the insurance company would have a duty to cover you if you are found to be negligent, but the insurance company would have no duty to cover you if you are found to have intentionally injured someone.