Insurance settlements are meant to resolve disputes efficiently and provide financial relief after a loss. Policyholders often rely on insurers to evaluate claims fairly, communicate clearly, and make settlement decisions that reflect the terms of the policy.
Problems arise when this process breaks down. Delays, unreasonable refusals to settle, or poor judgment during negotiations can leave insured parties exposed to serious financial consequences.
In the healthcare insurance industry, for example, a lot of claims are denied. A Kaiser Family Foundation study found that every one in five in-network claims for HealthCare.gov insureds were denied in 2023.
However, access to the reasons for denial is limited to the public. In such a scenario, the policyholder has the right to raise an appeal with the insurer. If things aren’t sorted out, they can go to the ombudsman, and finally, a lawsuit.
Understanding the remedies available in these situations helps policyholders respond with clarity and purpose.
How Insurance Settlement Obligations Work
Insurance companies carry a legal duty to handle claims with reasonable care and good faith. This responsibility extends beyond simply reviewing paperwork or issuing payments. Insurers must assess risk realistically, consider settlement offers carefully, and avoid placing their own financial interests ahead of the policyholder’s protection.
A case in California between Bartel and Chicago Title Insurance Company gives a better understanding of this. The court confirmed that an insurer’s duty to defend a policyholder arises whenever there is any potential for coverage, not just when it is clearly established.
In that case, although the underlying complaint seemed to involve excluded easement claims, attached deeds raised a possibility of covered title issues. The court held that refusing to look beyond the pleadings and failing to assess extrinsic evidence meant the insurer breached its duty and acted in bad faith.
An insurer may ignore clear liability, undervalue damages, or fail to respond to time-sensitive settlement demands. These actions can expose the insured to excess judgments and long-term financial harm, even though the policy was meant to shield them from that risk.
Are insurance adjusters personally responsible for settlement decisions?
Adjusters typically act on behalf of the insurance company rather than in a personal capacity. While their recommendations influence settlement decisions, legal responsibility usually rests with the insurer itself. However, internal errors or misjudgments by adjusters can still be relevant when evaluating whether the insurer acted reasonably overall.
The Role of Settlement Demands in Liability Claims
Settlement demands serve as a turning point in many liability cases. They outline the terms under which a claimant is willing to resolve the dispute and often include deadlines that require prompt evaluation. Insurers are expected to analyze these demands using reasonable standards, weighing the likelihood of an adverse verdict against the available coverage.
The possible actions that can be taken if a settlement is not made can vary from location to location and industry to industry. Loewy Law Firm highlights one such example of accident cases in Texas. Texas courts established a legal doctrine aimed at addressing unfair settlement practices.
Known as the Stowers demand in Texas, this doctrine gives insured individuals and injured accident victims another way to pursue compensation. It can arise when an insurer unreasonably refuses to settle a personal injury claim. Insurers that fail to handle such demands with appropriate care may face consequences beyond the original policy amount.
When this type of demand is mishandled, the focus often shifts from the underlying accident to the insurer’s conduct. The insured may no longer be defending only against the original claim but may also have grounds to pursue legal action against the insurer.
Can a settlement demand be withdrawn or modified after it is made?
Yes, a claimant can withdraw or revise a settlement demand, especially if new information emerges or deadlines expire without response. This can complicate later disputes because courts focus on whether a valid opportunity to settle existed anytime and whether the insurer responded appropriately.
Bad Faith Claims Against Insurers
One of the primary remedies available to policyholders is a bad faith claim against the insurance company. Bad faith occurs when an insurer acts unreasonably or dishonestly in handling a claim or settlement. This can include ignoring clear evidence, failing to investigate properly, or placing unnecessary obstacles in the settlement process.
A successful bad faith claim can allow the insured to recover damages that go beyond the policy limits. These damages may reflect the financial losses caused by the insurer’s conduct, including amounts paid to satisfy an excess judgment. In some cases, courts also consider additional damages meant to address the insurer’s behavior and deter similar conduct in the future.
There’s also a statute of limitations on bad faith claims, though. It can vary from location to location, but it is usually around two years from the time the policyholder knew about bad faith. The Ninth Circuit Court of Appeals clarified this in a bad-faith claim tied to an uninsured/underinsured motorist (UM/UIM) insurance dispute.
In Marinelarena v. Allstate Northbrook Indemnity Co., the court first ruled in favor of the former in 2018 after an accident in 2016. However, Marinelarena filed another claim in 2018 for bad faith. This time, the court ruled that her bad-faith suit was time-barred. Allstate said that she knew about the bad faith when she filed her first case in 2016, but didn’t file it then.
In many cases, the financial harm caused by unfair insurance practices can extend beyond a single claim and affect a policyholder’s long-term stability.
Is proof of financial loss required to bring a bad faith claim?
Financial loss is often a key element, but it is not the only consideration. Courts also look at whether the insurer’s conduct caused unnecessary delay, emotional strain, or legal exposure. Documentation showing unreasonable behavior can be just as important as proof of direct monetary harm.
Breach of Contract and Related Legal Actions
Another potential remedy involves a breach of contract claim. Insurance policies are binding agreements, and insurers are required to follow the terms outlined in the policy. If a settlement is mishandled in a way that violates these terms, the insured may seek compensation based on that breach.
Breach of contract claims focus on what the policy promised and how the insurer failed to deliver. These claims may not always allow recovery beyond policy limits on their own. However, they often form the foundation for broader legal action when combined with evidence of unreasonable conduct.
The policyholders also need to read the contracts carefully to determine breach of contract. A Delaware homeowners’ lawsuit against State Farm Fire and Casualty Company reflects this. As noted by Insurance Business, a neighbor’s fire damaged the plaintiff’s property. The plaintiff alleged that the insurer didn’t explain to them the deductible amount, and they didn’t read it.
The court ruled the insurer did not breach the implied covenant of fair dealing by failing to explain how large the deductible was. The policy clearly stated the amount, and policyholders are expected to understand their contracts. The court also found that State Farm’s choice not to pursue subrogation against the neighbor’s insurer was not a breach. The insurance policy did not require the company to do so.
When an insurance settlement is mishandled, the consequences can extend far beyond a single claim. Policyholders may face financial exposure that the policy was meant to prevent, along with uncertainty about how to respond.
Legal remedies such as bad faith claims and breach of contract actions provide a way to hold insurers accountable for unreasonable settlement practices. Understanding these options allows insured parties to move forward with confidence and pursue relief when an insurer’s decisions lead to avoidable harm.
Insurance policies are legally binding insurance contracts, and failure to follow their terms can expose insurers to breach of contract claims.
