When a insurer denies a claim from a policyholder, it is a natural reaction to question why the insurers is rejecting the claim and why they are allowed to do so. The claims process that all claims follow is both complicated and lengthy, in some cases insurers make mistakes and reject claims in error, in other instances an insurer reject a claim with less then altruistic purpose and does not pay a claim without legitimate reasons, this is called bad faith.
A new trend has begun to emerge in several states that would change how bad faith is determined and subject claims handling to increasing scrutiny under litigation. The new bad faith legislation being proposed in several states, including Florida, Georgia, Colorado, New York and Pennsylvania amongst others would expand the liability of insurance companies of bad faith in claims handling and processing.
While bad faith laws are designed to level the playing field for consumers alleging bad faith, the new laws could have a strong negative effect on insurance markets in the states they are enacted in, making insurance more expensive for consumers. While the goals of bad faith legislation may seem appropriate, legislators should be wary of passing legislation that will inevitably increase the cost of providing insurance.
Critics like the American Legislative Exchange Council argue that the new policies would both weaken filing and recovery standards and lead to an influx of new lawsuits, both frivolous and otherwise, claiming bad faith on the part of insurers even when poor behavior did not occur.
The Heartland Institute will soon release a new Research & Commentary examining bad faith insurance legislation.