/ Blog/ Insurance Bad Faith Claims in Indiana
When an Indiana insurer fails to pay a claim on a policy, the policy holder has two possible legal remedies: a contract claim and a tort claim. The principle distinction between the two is that, as a matter of public policy, punitive damages are only available in tort claims. Therefore, if an insurer wrongly denies coverage and violates an insurance contract, a breach of contract claim will only allow recovery up to the face value of the policy. However, an Indiana plaintiff can also sue under an insurance bad faith claim and recover, through both compensatory and punitive damages, an amount larger than the original face value of the policy (depending on the egregiousness of the insurer’s conduct).
The concept of the insurance tort claim arises out of the implied duty of good faith and fair dealing that is recognized in all insurance policies in almost every US jurisdiction. Indiana first recognized an insurer’s duty to act in good faith in the 1993 Indiana Supreme Court ruling in Erie Insurance Co. V. Hickman by Smith. Since this ruling, Indiana has been in a constant state of defining and redefining the limits of the bad faith tort claim.
Typically, when an insurer breaches the covenant of good faith and fair dealing (by behavior discussed below), the insured can sue on both a tort claim and the standard contract claim.
For example: A business owner buys insurance for his building which later suffers severe roof damage from pooling rain. The insurance company wrongfully denies liability without specifying why they were not liable for the claim which then causes the business owner to suffer far greater damages (lost profits, damaged equipment, etc.) than just a collapsed roof. The business owner can sue on breach of contract and in a tort bad faith claim. This is exactly what happened in Magwerks Corporation v. Monroe Guaranty Insurance Company in which the Indiana Supreme Court upheld a jury’s finding of bad faith and an awarding of punitive damages.
An insurance policy holder has a right to question their insurance company’s denial of a claim; however, for a bad faith claim to exist the insurance company has to have made significant errors in handling the insurance claim. There are several possible bad faith violations in which would provide the policy holder with a common law remedy. These include attempting to settle a claim without giving notice, compelling an insured to sue, delaying or outright failing to investigate a claim, failing to defend a suit, and failing to process or settle a claim in a timely fashion, among others.
The Indiana Legislature has also enacted into law regulations governing the behavior of insurance companies. The Unfair or Deceptive Acts and Practices Chapter of the Indiana code sets forth a long list of prohibited behavior of insurance companies. The act provides for civil penalties of up to twenty-five thousand dollars ($25,000) for each act or violation committed by an insurance agency. These sanctions, however, can only be brought by the commissioner appointed by the state and are not available to individual policy holders. Remedies for individual policy holders are limited to those recognized at common law.
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