Institutional bad faith practices in insurance claims processing

Sometimes an insurer may act not only in bad faith against an individual claimant, but also broadly and systemically across the company against all, many or a group of claimants.

When an insurance company adopts business practices that result in widespread, unreasonable, even reckless handling of mostly legitimate claims, this phenomenon is sometimes called "institutional bad faith." While in any individual insurance contract, both parties have the duty of good faith and fair dealing, the insurance company is held to a high standard as the obviously more powerful party to the deal.

Widespread bad faith

Institutional bad faith means an insurer is breaching its duty of good faith collectively across numerous claimants and policyholders. It encompasses business practices focused on improving profits and lowering costs at the expense of paying claims fully and fairly. Bad faith practices may be shown by financial incentive programs, performance expectations, rewards, senior review "roundtable" committees, company policies laid out in manuals or even software that contributes to increasing claim denials regardless of their merit, lowballing claim valuation or unreasonably delaying claim administration.

Smart business practices or systemic unfairness

Insurance companies may try to defend their practices as legitimate cost-cutting business practices, which of course can be legitimate in some circumstances. But determining the difference between an above-board business strategy and an unreasonable practice or procedure designed to prevent the payout of legitimate claims at all or at the appropriate levels can be a complex question requiring careful analysis and evidence gathering.

Widespread bad faith in disability and workers' compensation insurance

Insurance claims under disability or workers' compensation policies are usually for monthly benefits based on physical or mental injury, illness or a combination of impairments. Examples of institutional bad faith practices in this type of claim can include:

  • Routinely denying claims by focusing narrowly on certain weaker evidence in the record such as medical tests that were negative, while ignoring other strong medical evidence of disability
  • Regularly using doctors on the insurer's payroll or otherwise being paid by the insurance company to conduct "independent" medical exams or do paper reviews of medical evidence while being financially incentivized by the insurance company to deny disability
  • Improperly discrediting subjective complaints of pain, fatigue, weakness, numbness, depression and other symptoms that do not show up on objective medical tests
  • Failing to properly develop the evidence when it is clearly called for such as by ordering additional medical assessments
  • Using video, photo or Internet surveillance of claimants engaged in the activities of daily life to unreasonably assert that claimants are not disabled when the exertion or strength required is unclear from the observation or the claimants have been advised by doctors to be active for therapeutic reasons
  • And more

Laws affecting institutional bad faith depend usually on the state involved

The value of proving institutional bad faith varies from jurisdiction to jurisdiction. It may be controlled by case law, statute or regulation.

Usually, the claimant must show that the insurer's institutional bad faith practices directly impacted the bad faith behavior alleged in his or her own denied claim. Sometimes institutional bad faith can be the basis of an award of punitive damages, a monetary award not based on actual financial losses of the plaintiff, but rather on the extent of bad or malicious behavior on the part of the defending insurance company. Punitive damages are meant to punish a wrongdoer and hold it out as a deterring example for other insurance companies.

In appropriate circumstances, institutional bad faith could potentially be the basis for a class action suit against an insurer.

The lawyers at Dawson & Rosenthal, P.C., represent clients in bad faith insurance lawsuits, including those based on disability or workers' compensation insurance claims, from offices in Sedona, Arizona, and San Diego, California. They have broad experience in identifying institutional bad faith and using it to help their clients' claims.