Skilled Litigation

Built On Efficiency And Technology
Skilled Litigation
Built On Efficiency And Technology
  1. Home
  2.  » 
  3. Insurance Law
  4.  » The fine line between a money-saving settlement and bad faith

The fine line between a money-saving settlement and bad faith

On Behalf of | Jan 29, 2024 | Insurance Law

Businesses in the insurance sector engage in very difficult tasks. Professionals must evaluate applications from individuals and businesses to determine the level of risk for a policy. Insurance companies largely determine what to charge for coverage based on the likelihood of a significant claim.

If the policyholder eventually makes a claim, the company may need to negotiate a settlement. That process is often one fraught with risk. Those pursuing a claim are often eager to obtain as much financial compensation as possible. There is usually tension between the insurance company providing coverage and the individual or business making the claim. An attempt to settle a large claim can sometimes put a company at risk of bad faith insurance allegations.

Settlements can end liability or generate risk

There are many reasons for insurance professionals to settle potentially large claims whenever possible. Settlements represent a set loss for the company instead of ongoing and unknown future liability. The company makes one payment for expenses related to a single precipitating incident and has no future liability. The policyholder benefits from receiving a quick response and resources to cover immediate expenses.

Oftentimes, the insurance professional proposing the settlement specifically suggests an amount noticeably lower than the policy limits. The goal is to compromise by saving the company some money while also reasonably meeting the needs of the party filing the claim. Settlements can sometimes lead to bad faith insurance claims against businesses.

If the settlement seems inappropriately low, the party who previously accepted the settlement might attempt to take legal action against the insurance company. A bad faith claim linked to a settlement might include allegations that a company intentionally underpaid based on the likely costs and the coverage that applied to an incident.

Proposing a settlement can be a quick and effective way of limiting company liability, but insurance professionals must be cautious when negotiating settlements. Preserving statements from claimants and financial records could help a company justify the amount offered in a settlement if there are any questions about the business’s practices in the future.

Setting a settlement amount based in reality while still minimizing the company’s losses can help reduce the chances of bad faith insurance accusations after a settled claim.