The insurance sector can be complicated. Businesses in the industry pride themselves, in theory, on protecting policyholders against certain risks, but this is not always the case in practice. Your insurance company may fail to act as promised by denying your claim despite what your policy says you’re entitled to receive.
Unfortunately, how insurance companies work may contribute to some acting in bad faith. Here is how this can happen:
1. They want to keep profits
Insurance companies charge policyholders premiums in exchange for coverage and then use those premiums to purchase income-generating assets. This is how they primarily generate revenue – the more money that comes in, the more profits they have.
With such a system, a company can be hesitant to give payouts. It may want to keep as much profit as it can. Nonetheless, an insurance company should have a reliable plan to generate more income while keeping its promises.
2. They made a poor calculation of exposure
Insurance companies always calculate exposure (their level of risk) to determine premiums. If a company makes a mistake in its calculation, it may go out of business.
For instance, frequent drivers are highly exposed to car accidents. Accordingly, they should pay higher premiums than drivers who barely use their vehicles. If an auto insurance company fails to consider this factor and calculate the exposure correctly, it may incur losses if such policyholders request payouts.
That’s a small example, but insurance companies make all kinds of mistakes. Some insurers, for example, didn’t anticipate the weather shifts involved with climate change, and that has led to massive losses in certain areas due to hurricanes, floods and other natural disasters.
An insurance company may act in bad faith by denying claims to stay in business. If your insurance company has unfairly declined your claim, it will be best to get legal guidance to protect your rights.