What Is Insurance Bad Faith?

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Bad faith is the refusal to timely pay a claim or without a reasonable basis and with knowledge of or disrespect even if the insurer has a reasonable basis for denial, failing to properly investigate the claim. Under Wisconsin law, bad faith claim is a tort claim. The tort cause of action for bad faith arises out of a contractual arrangement but is not a contract action. The tort of bad faith is a separate intentional wrong, which results from a breach of a duty imposed as a consequence of the contractual relationship.

Elements of Bad Faith

To prevail on a claim for bad faith in Wisconsin, the policyholder must show the following:

1) the insurance company absence of a reasonable basis for the insurance company’s denial benefits of the policy; and

2) the insurance company’s knowledge or reckless disregard for the lack of a reasonable basis for denying the claim.

The first element is that there is no reasonable basis for the insurer to deny the insured’s claim for benefits under the policy. This “first prong is objective.” In other words, no reasonable insurance company would have taken the position that the insurance company has taken.

The second element requires that the insurer knew of or recklessly disregarded the lack of a reasonable basis to deny the claim. This second prong is subjective. In other words, the inquiry is on what the insurance company actually knew or should have known and whether the results of the investigation were subjected to reasonable evaluation and review.”

What May Be Recovered As Damages For Bad Faith?

Since bad faith is extra-contractual parties may recover damages in excess of insurance policy including consequential damages and attorneys fees. In particularly egregious cases, punitive damages can be awarded where not only has the insurance company breached its duty of good faith, but has also acted with oppression, fraud, or malice.

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