One of the biggest risks that all insurance companies face is an accusation of bad faith from a policyholder. Whether it is an individual or business facing property damage or a property liability lawsuit, policyholders might claim that insurance companies denied their claim in bad faith.

Insurers might not be able to avoid this risk completely, but what can insurance companies do to reduce the risk of these claims leading to litigation?

Carefully review policies – and the law

Bad-faith claims often arise because policyholders do not believe they received the benefits they were due. Or, they believe that insurers denied their claim unreasonably.

To avoid such accusations, insurance companies should:

Ambiguous language often works against both the policyholder and the insurance companies. It is often better to ensure the contract and policy language are clear. This is critical because most legal precedents uphold the terms of the contract, and state that it is not a valid bad-faith claim if policyholders are simply unaware of what their policy contains.

Record how you handle claims

Maintaining a detailed record of how you document claims can also provide clear evidence against bad-faith claims. Insurance companies should review their policies on documentation and employees should consider:

  • Taking notes regarding actions of policyholders or any contact with them;
  • Keeping track of dates and times of conversations; and
  • Organizing relevant information with policy information.

Handling records efficiently, yet carefully, is critical to help avoid the risk of bad-faith claims.

Consider practices from an outside perspective

Thinking like the policyholder – or potential plaintiff – can help insurance companies immensely. For example, they should consider if any incentives or quotas required for employees could be misconstrued as a reason for denying a claim.

As a rule, insurers have a duty to act in good faith with their insureds. They must uphold that duty and be consciously aware of demonstrating that good faith to reduce the risk of litigation.