Denial of Claims
An insurer may deny a claim for a loss made by an insured in certain circumstances. However, the insurer must follow certain standards and guidelines when making such a denial.
An insurer must have a reasonable basis for its denial of an insured's claim. This requirement is based on the principle that parties to a contract must exercise good faith and fair dealing with respect to each other so as not to injure the right of the other to receive the benefits of the contract. If the insurer denies the claim without proper cause, a court may find that it acted in bad faith. The consequences of such a finding may include breach of contract or tort damages to the insured. Some courts, however, find that an insurer does not act in bad faith unless it acts intentionally.
The insurer may show that it had a reasonable basis for its denial if it completed a thorough and impartial investigation of the claim and determined all the grounds for denial. Some courts also require the insurer to make a showing that it reconsidered its decision to deny a claim. Additionally, the insurer's consideration of all information that would be reasonable to consider may indicate that it acted reasonably. An example of a reasonable basis for denial may be that the insured failed to comply with many of the insurer's requirements for filing a claim and proof of loss.
In addition to having a reasonable basis for its denial of an insured's claim, an insurer must make the actual denial properly. It must follow its own procedures as outlined in the policy for giving notice of the denial. Such procedures will include sending a denial letter to the insured. The letter should be factual, respectful of the insured, and fully explanatory of the reasons for the denial. In addition, the letter should invite the insured to present further proof if he disagrees with the denial.
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