What Rights Do I Have If My Maryland Insurance Company Wrongfully Refuses to Pay My Valid Insurance Claim?
Insurance companies refuse to pay thousands upon thousands of claims each and every year. The larger the insurance company, the larger the number of claims that are not paid. There are two principal methods available to the insurance company to avoid payment of a claim: denial and disclaimer. An insurance company can deny a claim for any of a very large number of reasons:
- the insurance company contends the loss is not covered by the terms of the policy
- the insurance company contends the loss is excluded by the terms of the policy
- the insurance company contends the loss never occurred
An insurance company can disclaim coverage under a policy for an equally large number of reasons:
- the insurance company contends the insured committed fraud
- the insurance company contends the insured failed to cooperate, or give them timely notice of the claim.
It should be clear that these reasons for non-payment of a claim are dependent on what the insurance company says. How can that determination be challenged if you disagree with the insurance company’s conclusions? Are you obligated to accept the position an insurance company takes regarding your loss? If you mount a legal challenge to an insurance company denial, will you incur substantial legal costs and attorney's fees?
Insurance Company Bad Faith v. Breach Of Contract.
In Maryland, an insurance policy is a contract between the insurance company and the insured. The payment of premiums in exchange for coverage in the event of a loss are the core terms of the contract. If the insured has done everything they contracted to do, e.g. paid their premiums, submitted a proof of loss, cooperated with the claim investigation, traditional contract principles apply. The insured has complied with their obligation under the contract, and, by denying the claim, the insurance company has not. The insured may sue their insurer for their damages, and, if the insured proves the insurance company wrongfully withheld payment, collect what they lost- which would typically be the claim that was supposed to have been paid, but was not. The problem in many of these situations is that the insured must incur legal fees and costs to get to the conclusion of a successful trial. Particularly in relatively small claims, it might not make economic sense to sue your insurance company- whose resources typically prohibitively outweigh the resources of a consumer.
Maryland has enacted a statutory scheme to, in part, address this disparity in economic wherewithal, and provide a remedy in addition to those created by contract law. Under Maryland’s Insurance Bad Faith Law, an insured who successfully sues their insurance company, and is able to prove the company acted in bad faith in addressing their claim, is entitled to collect all of their litigation costs, including attorney’s fees, from their insurance company. This is a key exception to the typical rule that each party in civil litigation bears its own costs.
What is Insurance Company Bad Faith In Maryland?
The Maryland legislature has chosen to employ a reverse definition to the concept of insurance company bad faith actions. Rather than defining what bad faith is – a concededly difficult exercise- the lawmakers instead chose to define bad faith as the absence of good faith, of course, begging the question, what is good faith?
"Good faith" means an informed judgment based on honesty and diligence supported by evidence the insurer knew or should have known at the time the insurer made a decision on a claim."
-Md. Insurance Code 27-1001.
This method, then, also fixes the burden of proof on the insured to prove the insurance company has acted in the “absence of good faith”.
Maryland law, generally, prohibits an insurance company from acting in “bad faith”, among other things, and long considered such conduct to be an unfair claim settlement practice, Indeed, the Maryland Insurance Code laid out specific standards for Maryland insurers in their claim handling practices. Section 27-303 of the Insurance Article provides:
“It is an unfair claim settlement practice and a violation of this subtitle for an insurer, nonprofit health service plan, or health maintenance organization to:
(1) misrepresent pertinent facts or policy provisions that relate to the claim or coverage at issue;
(2) refuse to pay a claim for an arbitrary or capricious reason based on all available information;
(5) fail to settle a claim promptly whenever liability is reasonably clear under one part of a policy, in order to influence settlements under other parts of the policy;
(6) fail to provide promptly on request a reasonable explanation of the basis for a denial of a claim;
(9) fail to act in good faith, as defined under § 27-1001 of this title, in settling a first-party claim under a policy of property and casualty insurance”
The unfair settlement practice provisions, alone, however, do not provide any direct redress for the insured. In 2007 Maryland created a statutory cause of action for insureds who feel their insurance company wrongly denied their claim, and in so doing, operated in bad faith.
So with a statutory definition of good faith provided, the open question of what is necessary to show an absence of it remains decided on a case by case basis. One federal court, applying the Maryland bad faith provisions, has held that a multipart analysis is required in determining if an action was taken in an absence of good faith:
“An evaluation of whether an insurer made an "informed judgment based on honesty and diligence supported by evidence the insurer knew or should have known at the time" of its coverage decision requires, for example, an evaluation of the insurer's efforts to obtain information related to the loss, accurately and honestly assess this information, and support its conclusion regarding coverage with evidence obtained or reasonably available.”
-Schwaber Trust Two v. Hartford Accident and Indemnity, Co., 636 F.Supp.2d 481 (D. Md. 2009).
One facet of the analysis-the speed with which an insurance company acted or failed to act- has been made reasonably clear by the text of the statutory scheme itself, as well as subsequent cases interpreting these provisions. 3-1701 of The Courts Article provides:” (f) Insurer's action within prescribed time period is not failure to act in good faith. -- An insurer may not be found to have failed to act in good faith under this section solely on the basis of delay in determining coverage or the extent of payment to which the insured is entitled if the insurer acted within the time period specified by statute or regulation for investigation of a claim by an insurer.” At least one court, in construing and applying this provision, has pointed out the two different scenarios: one in which the insurance company acted within prescribed time periods, and one in which they do not. “Delay in handling a claim generally cannot serve as the sole basis for a lack of good faith claim. See Md. Code Ann. Cts. & Jud. Proc. § 3–1701(f). However, delay in handling a claim can serve as the sole basis for such a claim when the insurer does not act "within the time period specified by statute or regulation for investigation of a claim." Id. To be clear, delay beyond a statutory or regulatory time period is not per se lack of good faith under the statute. The statute simply proscribes finding a lack of good faith on the sole basis of delay when that delay does not extend beyond a statutory or regulatory timeline.”
-Barry v. Nationwide Mut. Ins. Co., 298 F.Supp.3d 826 (D. Md. 2018).
How Is A Bad Faith Claim Initiated in Maryland?
The legislature has created a tired protocol for initiating a bad faith action in Maryland. Unlike a breach of contract court action, which can be pursued by an insured directly against an insurance company any time within 3 years from the date of breach, an action against that same insurance company alleging bad faith must first be filed with the Maryland Insurance Administration. The Administration will then grant, or deny, this administrative action. From this point, the insured has some options set out in more detail below. Such requirements-that the claims first be determined by a state or administrative agency- are seen in other areas of the law, and are often referred to as conditions precedent or requirements that all administrative remedies be "exhausted" before a claimant is entitled to present their case in court. The process begins with the filing of a complaint that must:
“(i) be accompanied by each document that the insured has submitted to the insurer for proof of loss;
(ii) specify the applicable insurance coverage and the amount of the claim under the applicable coverage; and
(iii) state the amount of actual damages, and the claim for expenses and litigation costs described under subsection (e)(2) of this section."
-Insurance Article, section 27- 1001[d]
The insurance company must then respond to the complaint, and additionally is required to provide:
"(i) ….written response together with a copy of each document from the insurer's claim file that enables reconstruction of the insurer's activities relative to the insured's claim, including documentation of each pertinent communication, transaction, note, work paper, claim form, bill, and explanation of benefits form relative to the claim; and
(ii) mail to the insured a copy of the response and, except for good cause shown, each document from the insurer's claim file that enables reconstruction of the insurer's activities relative to the insured's claim, including documentation of each pertinent communication, transaction, note, work paper, claim form, bill, and explanation of benefits form relative to the claim.”
-Insurance Article, section 27- 1001[d]
The Maryland Insurance Administration then has 90 days to issue a finding that contain the following determinations:
“1. whether the insurer is obligated under the applicable policy to cover the underlying first-party claim;
2. the amount the insured was entitled to receive from the insurer under the applicable policy on the underlying covered first-party claim;
3. whether the insurer breached its obligation under the applicable policy to cover and pay the underlying covered first-party claim, as determined by the Administration;
4. whether an insurer that breached its obligation failed to act in good faith; and
5. the amount of damages, expenses, litigation costs, and interest, as applicable”
-Insurance Article, section 27- 1001[e]
If either side, insurance company or insured, received an adverse decision, they have 30 days to request a hearing within the Office of Administrative Hearings. If neither side requests such a hearing, the determination by the Insurance Administration constitutes final agency action, and an insured may file an action in the Circuit Court. If a hearing is requested, and the insured loses at the administrative hearing level, they may file a de novo appeal in the circuit court. "De novo" in this context means that is it the equivalent of filing a new claim alleging bad faith at the Circuit Court level, and that claim will be heard and determined on the merits. This claim can also be combined with other claims against the insurance company - the obvious one here would be for breach of contract. But, if in the Circuit Court action, the fact finder concludes there was only a breach of contract, but not one occurring in the setting of bad faith- the availability of prevailing party fees and costs would not be available. If the Court, or the administrative agency- whether the MIA of OAH, concludes the insurer acted in bad faith, the insured is entitled to an award of reasonable litigation costs, including attorney's fees to be paid by the losing insurance company.