An Example of an Unfair Claim Settlement Practice
When a policyholder files a claim, they expect a fair and transparent process that respects the terms of the insurance contract. Unfair claim settlement practices undermine that trust, often leaving victims financially strained and emotionally exhausted. Among the many ways insurers can violate good‑faith obligations, one of the most pervasive and damaging is the “delayed or denied payment after an unreasonable investigation” tactic. This article dissects how this practice works, why it is illegal in most jurisdictions, the impact on claimants, and what steps policyholders can take to protect themselves Simple as that..
Introduction: Why Fair Claim Settlement Matters
Insurance exists to transfer risk from an individual or business to a financially stable entity. The moment a loss occurs, the insured turns to the insurer for the promised compensation. If the settlement process is unfair, the whole risk‑transfer mechanism collapses, leading to:
- Loss of confidence in the insurance industry.
- Financial hardship for policyholders who rely on timely payouts for medical bills, repairs, or business continuity.
- Legal repercussions for insurers, including fines, penalties, and reputational damage.
Regulators worldwide have codified unfair claims settlement practices (UCSPs) into law. Plus, in the United States, for example, the National Association of Insurance Commissioners (NAIC) lists 14 UCSPs, and many states have adopted the Unfair Claims Settlement Practices Act (UCSPA). Among these, the practice of “unreasonable delay or denial after an excessive investigation” stands out for its frequency and the subtle ways it can be executed And that's really what it comes down to..
What the Practice Looks Like
1. Initiating an Overly Aggressive Investigation
After a claim is filed, the insurer may:
- Request excessive documentation far beyond what the policy requires (e.g., multiple independent appraisals, repeated medical records, detailed receipts for every minor expense).
- Send adjusters to the claimant’s home or business multiple times, each visit extending the timeline.
- Hire third‑party investigators to interview witnesses, examine surveillance footage, or even conduct background checks on the claimant.
These actions are framed as “due diligence,” but they often serve to intimidate the claimant and slow down the process.
2. Using Technicalities to Stall Payment
Even after the claimant provides the requested information, insurers may:
- Cite minor policy language ambiguities as reasons for further clarification.
- Claim that certain documents are “missing” or “incomplete,” even when the information is already on file.
- Invoke “pending litigation” or “ongoing investigations” as a blanket excuse for postponement, despite no actual legal action being taken.
3. Offering Lowball Settlements After the Delay
Once the insurer finally decides to settle, they may present a significantly reduced offer compared to the actual loss. The delay tactic is purposeful: the claimant, now under financial pressure, may feel forced to accept the inadequate payout rather than continue a costly, drawn‑out battle.
Legal Foundations: Why This Practice Is Unfair
1. Violation of Good‑Faith and Fair Dealing
Insurance contracts are contracts of adhesion—the insurer drafts the terms, and the insured has little bargaining power. Courts have consistently held that insurers must act in good faith and fair dealing when handling claims. An unreasonable investigation that delays payment breaches this duty.
This is the bit that actually matters in practice.
2. Statutory Prohibitions
- NAIC Model Unfair Claims Settlement Practices Act (Section 6): “The insurer shall not: (a) fail to promptly acknowledge receipt of a claim; (b) unreasonably delay the investigation or settlement of a claim.”
- State statutes often prescribe specific time frames (e.g., 30 days to acknowledge a claim, 45 days to settle a non‑complex claim). Exceeding these limits without a valid reason is illegal.
3. Consumer Protection Laws
Many jurisdictions treat unfair claim settlement as a consumer fraud issue. Penalties can include civil damages, punitive damages, and attorney’s fees for the policyholder.
Real‑World Example: The “Delayed Medical Claim”
Consider a homeowner who suffered water damage due to a burst pipe. The policy covers “sudden and accidental water damage.” The claimant files a claim and provides:
- A copy of the insurance policy.
- Photographs of the damage.
- A contractor’s estimate for repairs.
- Receipts for emergency water extraction.
Unfair practice unfolds as follows:
- Initial Contact – The insurer acknowledges receipt within 24 hours (as required).
- Excessive Requests – Two weeks later, the adjuster asks for original receipts for every single item removed from the home, a detailed plumbing diagram, and three independent contractor bids.
- Repeated Follow‑Ups – After the claimant submits the requested items, the insurer replies that the plumbing diagram is “unacceptable” and asks for a licensed plumber’s certification, even though the loss was clearly from a pipe burst, not a design flaw.
- Delay Tactics – The insurer cites an “ongoing investigation” and informs the claimant that payment will be made “once the investigation is complete,” which stretches to 90 days.
- Lowball Offer – After three months, the insurer offers $7,500 for repairs that actually cost $12,300. The claimant, facing mounting temporary housing costs, feels pressured to accept.
In this scenario, the insurer’s unreasonable investigation and delayed payment constitute a textbook example of an unfair claim settlement practice.
Impact on Claimants
- Financial Strain – Delays force policyholders to cover expenses out‑of‑pocket, sometimes incurring high‑interest loans or credit‑card debt.
- Emotional Toll – The stress of fighting an insurer can lead to anxiety, depression, and a sense of helplessness.
- Loss of Trust – Even after a resolution, many claimants switch insurers, leading to market churn and higher premiums industry‑wide.
- Legal Costs – Pursuing a bad‑faith claim can be expensive, discouraging many from taking action.
How to Recognize and Counter the Practice
1. Keep Detailed Records
- Document every communication (emails, phone calls, letters). Note dates, times, and the name of the representative.
- Save copies of all requested documents and your responses.
2. Know Your Policy
- Review the definitions of covered losses, deductibles, and policy limits.
- Identify any time‑frames the insurer is required to meet (e.g., acknowledgment within 15 days, settlement within 30 days for simple claims).
3. Use the “Request for Clarification” Strategy
When the insurer asks for additional information, respond with a written request for a specific justification. Example:
“Please provide the exact policy provision that requires a licensed plumber’s certification for a burst pipe claim, as the loss is clearly covered under Section 3, ‘Sudden and Accidental Water Damage.’”
A clear, written request forces the insurer to justify its request and can halt unnecessary delays Practical, not theoretical..
4. Invoke State UCSPA
If the insurer fails to meet statutory deadlines, send a formal notice citing the relevant state UCSPA section. Example:
“Pursuant to [State] Unfair Claims Settlement Practices Act, Section 6(a), you are required to acknowledge receipt of this claim within 15 days. As of today, 22 days have passed without acknowledgment. Please confirm receipt and provide a timeline for settlement within 5 business days Nothing fancy..
5. Escalate to Regulators
File a complaint with the state department of insurance. Regulators often intervene, especially when a pattern of delays is evident.
6. Consider Legal Action
If the insurer continues to stall or offers an inadequate settlement, consult an attorney experienced in insurance bad‑faith claims. Many work on a contingency basis, meaning you pay only if you win. Potential remedies include:
- Actual damages (the amount you should have received).
- Consequential damages (e.g., additional living expenses).
- Punitive damages (to punish egregious conduct).
- Attorney’s fees and costs.
Frequently Asked Questions (FAQ)
Q1: How long is a “reasonable” investigation period?
A: While it varies by claim type, most states consider 30‑45 days reasonable for straightforward claims. Complex claims (e.g., large commercial losses) may allow up to 90 days, but the insurer must provide a clear justification.
Q2: Can an insurer request any document they want?
A: Insurers may request reasonable documentation necessary to verify the loss. Requests that are unrelated, excessively burdensome, or duplicative can be challenged as unfair.
Q3: What if the insurer claims the delay is due to a “pending lawsuit”?
A: If no lawsuit exists, the insurer must produce evidence of the pending litigation. Otherwise, this is a classic stalling tactic.
Q4: Does the presence of a “claims adjuster” guarantee fairness?
A: Not necessarily. Adjusters are employees or contractors of the insurer and may be incentivized to minimize payouts. Independent public adjusters can provide an unbiased assessment.
Q5: Are there insurance policies that protect against unfair settlement practices?
A: Some professional liability or legal expense policies offer coverage for legal fees incurred in a bad‑faith claim, but they are not common for personal lines of insurance.
Prevention Tips for Policyholders
- Choose Reputable Insurers – Look for companies with high NAIC consumer complaint ratios and strong financial strength ratings.
- Read Reviews and Ask for References – Speak with friends or colleagues about their claim experiences.
- Maintain an Organized Claims File – From the day of loss, keep a dedicated folder (physical or digital) for all claim‑related materials.
- Consider a Public Adjuster – For large or complex claims, hiring a licensed public adjuster can level the playing field.
- Stay Informed About Your Rights – Familiarize yourself with your state’s UCSPA and keep a copy of the relevant statutes handy.
Conclusion: Turning Awareness into Action
An unreasonable investigation leading to delayed or denied payment is a textbook example of an unfair claim settlement practice that harms policyholders and erodes confidence in the insurance system. By understanding how the tactic works, recognizing its legal violations, and employing proactive strategies—such as meticulous documentation, timely statutory citations, and, when necessary, legal counsel—claimants can protect their rights and push insurers toward fairer outcomes.
Insurance should be a safety net, not a source of additional stress. Empowered with knowledge and a clear plan of action, policyholders can confront unfair practices, secure the compensation they deserve, and help drive industry-wide improvements that benefit everyone.
