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What’s the Difference Between Insurance Fraud and Acting in Bad Faith?

It can be difficult to get through an insurance claim on your own as a claimant. You may face many unfair or even illegal business practices from the insurance provider during the claims process. While both insurance fraud and acting in bad faith involve deception to achieve financial gain for the insurance company, they are distinct offenses. Here, our insurance claim attorneys in Arizona determine the differences between insurance fraud and acting in bad faith.

What Is Insurance Bad Faith?

Insurance bad faith refers to an insurance company acting outside of its duty to treat a claim and client in good faith and fair dealing. Good faith means an honest effort to resolve the claim according to the applicable laws and policy terms. All insurance providers have a legal obligation to properly and lawfully process insurance claims. Unfortunately, many insurers fall short of this obligation to save their companies money. Insurance companies are for-profit organizations that operate like businesses and wish to protect their profits. Examples of insurance company bad faith include:

  • Ignoring a claim
  • Wrongfully denying a claim
  • Undervaluing a claim
  • Refusing to offer a reasonable settlement
  • Inadequately investigating a claim
  • Misinterpreting the terms of a policy
  • Making requests for excessive evidence
  • Delaying a payout

Insurance bad faith refers to an ongoing failure of an insurance company to fulfill its legal obligations or duties of care to clients. In Arizona, a client can file an insurance bad faith lawsuit against an insurance provider for this tort, or civil wrongdoing. A successful lawsuit against the insurance company can result in financial compensation to make the client whole, including an additional sum to penalize the company for operating in bad faith.

What Is Insurance Fraud?

Insurance fraud, on the other hand, refers to the intentional misrepresentation or concealment of a material fact in an effort to defraud the victim, or to deprive him or her of legal rights or property. Insurance fraud is knowingly committed by an insurance company for its own gain, such as to save money on a payout. Some of the most common examples of insurance fraud are:

  • Fee churning. An insurance company representative advises a client to open or renew a policy, not for the client’s own good, but to make more money on commission or fees.
  • Premium diversion. An insurance representative commits embezzlement by taking premiums paid by clients and not using them to pay out claims.
  • Misrepresentation of terms. An insurance agent makes promises about what a policy covers, only to use different standards when processing a claim.

Prior lawsuits regarding fraud committed by an insurance company have established that a victim can recover punitive damages upon showing proof of malice, fraud or oppression. Punitive damages are an additional financial award given in a civil lawsuit to punish a defendant for wrongdoing. To assert fraud as the reason for punitive damages, a victim does not need to prove that the fraud was motivated by a desire to inflict injury or harm upon the victim. The availability of punitive damages can increase the overall value of an insurance fraud lawsuit.

What Type of Claim Do You Have?

During a lawsuit brought for insurance bad faith, the argument could be made that the breach of the covenant of good faith and fair dealing also constitutes fraud. In this way, a victim of insurance bad faith may also be able to file a lawsuit against the company for fraud. Evidence used to support a bad-faith claim may also double as evidence for fraud. With either type of civil lawsuit, you and your family may be able to obtain the financial compensation that you deserve for injuries or property losses. For more information about lawsuits for insurance company misconduct, contact an attorney today.