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    Wisconsin Lawyer
    December 09, 2021

    Recognizing Insurance Bad Faith: When Insurers Don't 'Insure'

    Individuals and organizations pay insurance premiums so that, when some calamity occurs, their insurance company will defend or indemnify them as required by the insurance policy contract. What if an insurer doesn't meet its contractual obligation? Learn how to recognize "bad-faith" practices.

    Justin F. Wallace

    house with tree damage

    Because individuals and organizations pay premiums to insurers in exchange for contractual rights in the event of some calamity, insurance companies have a duty of good faith and fair dealing to insureds at all times, including during the investigation, evaluation, and processing of a first-party insurance claim. But sometimes an insurer doesn’t meet its contractual obligations. What then?

    Insurance Bad Faith: What It Is

    When a two-vehicle accident occurs, either driver (or passengers) can bring a lawsuit for injuries sustained by the negligence of the other driver. In that situation, the defendant driver has every right to a vigorous defense. There is no preexisting relationship between the two motorists that would preclude the injured party from trying to maximize recovery from the defendant nor from the defendant taking a hard line on the liability situation or the compensable damages and refusing to settle, even if those defenses are flimsy.

    The same is not true of an insured’s relationship with an insurance company. An individual or an organization pays insurance premiums so that, when some calamity occurs, their insurance company will defend or indemnify the insured as required by the insurance policy contract. By virtue of that agreement, an insurance company has an obligation of good faith and fair dealing that is read into every insurance contract.1

    Your insurance company is not some other person randomly involved in an accident with you who is allowed to fight you tooth and nail. Because insureds pay premiums to insurers in exchange for contractual rights in the event of some calamity, insurance companies have a duty of good faith and fair dealing to insureds at all times, including during the investigation, evaluation, and processing of a first-party insurance claim.2 The insurance company’s job is to do an objective evaluation of what happened; to figure out, fairly and honestly, how much money it owes its insureds given what happened and the applicable policy language; and then to pay that amount to its insureds in a timely manner.

    When that doesn’t happen, the insured’s remedy may be to bring a tort claim for bad faith. Bad faith is a separate cause of action between the insured and the insurer, as parties to the contract, which can arise to protect holders of insurance policies against abusive, bad-faith practices of insurance companies in adjusting or settling liability claims against the insured when the interests of the insured are in the hands of the insurance company and may come into conflict with the insurance company’s own interests.3

    Actionable insurance bad faith can take many forms. The following are some examples.


    “Lowballing” is a common tactic. Instead of doing an objective evaluation of a property damage claim and paying the insured what is owed, the insurance company will initially offer a much lower amount and see whether the insured will accept the offer. For example: A motor vehicle accident happens, your vehicle is totaled, you believe your vehicle is worth $25,000. The insurance company first offers you $13,000 to “settle.” After a number of back-and-forth communications, the insurer announces that $17,500 is its “final offer.” You decide that either you take what you are being offered or the insurer will tie you up in court forever, you won’t see any money for years, and because the insurance company handles these matters every day, the company probably is right. At this point, most people understandably give up and accept the low offer.

    The insurance company’s obligation to the insured is not to see how small of an amount the insured will accept to walk away from an insurance claim; the insurer is supposed to figure out what the property is worth and then pay that amount. This is not supposed to be a negotiation.

    Holding Funds Hostage

    Insurers have a present, contractual obligation to the insured to pay what is owed. As it relates to the “lowballed” motorist above, the insurer that “offers” $17,500 agrees that it is responsible for paying at least that amount. Why else would it make the offer?

    If the insured rejects the $17,500 thinking that it is too low, the insurer will refuse to pay anything to the insured. This can be bad faith. The insurance company cannot hold the $17,500 “hostage” because the insured refuses to accept the lowball offer. This tactic is about psychology. Insurers know that people who just endured some calamity need money, and if the insurer withholds it for long enough, sometimes the desire to obtain payment soon outweighs the desire to obtain the full amount that the insured is entitled to.

    Note that insurance companies cannot ask for release documents as a condition of making such payments. Insurance policies require the insurer to pay what it owes; the policies do not require the insured to release claims or to “give up” anything to get what they are owed under an insurance contract. If an insurer believes it owes $17,500, it has to pay $17,500, period. Again, this is not a negotiated settlement in which one side will not pay without a signed release.

    Expert Shopping

    Another example of potential bad faith is “expert shopping.” If a hailstorm damages a roof, for example, often an insurance company will send a roofing contractor to look at the building and evaluate the damage. The goal of that inspection should be to provide the insurance company with objective data that can be relied on to come to a fair claims decision. But sometimes the “expert” is not given the appropriate information or not allowed to do certain tasks, or the final report seems like a regurgitation of the information provided by the insurance company without any analysis.

    Worse, sometimes an expert does do an objective evaluation on the insurer’s behalf and comes to some conclusions that the insurance company does not like. The insurer then “buries” that report and either attempts to resolve the claim without telling the insured the results of that evaluation or hires another expert to tell them what they want to hear and presents that second report with no mention of the first. This can be bad faith. If the insurance company’s own expert says that the loss is covered or that the damages that should be paid are a certain amount, an insurer cannot reject that evaluation because it does not like the outcome. A party can do that in a negotiation or in arm’s length litigation, but not when the insurer has a good-faith duty to insureds to adjust claims honestly and fairly.


    Delay for the purposes of delay is perhaps the most frustrating example of insurance bad faith. Generally when first-party claims are made, the insured has some significant problem, be it a damaged house, wrecked car, temporarily closed business, or other “loss.”

    Wisconsin Statutes section 628.46 (timely payment of claims) provides that an insurer “shall promptly pay every insurance claim” once written notice of a covered loss and the amount of the loss have been provided to the insurer. “Promptly” means 30 days. While some claims are complicated and may require some additional time for analysis, insurance companies often do not demonstrate a sense of urgency that the 30-day deadline to pay is approaching. It is easier to ask forgiveness than permission, especially when the only statutory penalty is a relatively low interest rate, but the refusal to comply with clear law on the subject can be bad faith.


    Insurance companies have a duty to investigate losses. The insured has to cooperate with the process, but it is the insurance company’s obligation to properly investigate a claim and subject the results of the investigation to reasonable evaluation and review.4 “Figure out what you owe and pay it.” An insurance company might attempt to delegate that duty to the insured, sometimes in the form of unending demands for information or documents that are readily available to both parties. What the insurer is often trying to do is build the basis for denying a claim because the insured did not cooperate or did not properly complete a proof of loss.

    Proofs of Loss

    A proof of loss is an outdated insurance concept that requires an insured to essentially certify the loss and the damages claimed to have been caused by the loss. While in some claims this makes sense (how much personal property the insured had in a house before a fire, for example), in other contexts (hail damage to a roof, for example) insurers do an evaluation and send out different roofing experts to inspect the house and prepare estimates but then turn around and require the insured to complete a proof of loss at the penalty of denying the claim.

    Why should the insured be forced to fill out a document certifying the loss if the insurance company is on actual notice of the loss, has inspected the loss, and knows what the claim is? If the insured is not a roofing expert, how would the insured’s opinion on the damages influence the resolution of the claim one way or the other? Then the insurer often might reject the proof of loss for some reason, and the insured ends up in a lengthy battle over a document that has no significance, but this further holds up the process. (See the Delay section.)

    This is a common theme: Insurance companies try to make it as procedurally difficult as possible for the insured to actually get paid, hoping that, at some point, the insured will tire of the process, figure that the insurance company “knows better than I do,” and walk away. That can be bad faith.

    Examinations Under Oath

    Another example of potential bad faith is the requirement that an insured submit to an examination under oath, which is a question-and-answer session under oath with the insurance company’s lawyer. Usually the insured does not have counsel at that point. The insurer will often require the insured to bring 30-40 categories of documents (often including personal records such as tax returns, credit card records, mortgage agreements, text messages with friends, and the like) and then will accuse the insured of not properly complying with the document-production request and threaten to deny the claim outright because the insured did not gather documents properly.

    The lawyer for the insurance company might also scare the insured into thinking that the continued pursuit of the insurance claim may have side effects. For example, in a situation in which an insured is seeking payment of a claim after a house fire, the insurance company’s lawyer might imply or state outright that the insured committed arson. The lawyer will grill the insured – who likely isn’t represented – about what alibis the insured has and how the insured is going to “prove a negative”: that the insured did not commit arson.

    This is a common theme: Insurance companies try to make it as procedurally difficult as possible for the insured to actually get paid hoping that, at some point, the insured will tire of the process, figure that the insurance company “knows better than I do,” and walk away.

    Sometimes an insurer will hire a fire “cause and origin” expert who reports that there is no evidence of any arson, but the insurer decides to interrogate the insured on the subject without any evidence to support these claims. Even a completely innocent insured walks out of that cross-examination thinking, “Do I really want there to be a record of an investigation into me for arson? Maybe the lawyer is right, I was out hunting when the fire happened and nobody was with me to verify my whereabouts so maybe I will get criminally prosecuted here unless I take whatever the insurance company is offering me.” That is bad faith.

    Insurers take the position that they are always entitled to a proof of loss document and to take an examination under oath of the insured regardless of the facts of the claim. Other states have held that an examination under oath has to be material to the investigation or else it violates the insurer’s good-faith duties to its insured; Wisconsin has not directly weighed in on the subject.5 It is difficult to see how the request for documents or for an examination under oath can be in good faith when the claim does not hinge in any way on the insured’s testimony or documents; these requests simply become hoops for the insured to jump through with the hopes that the policyholder will eventually give up.

    Other Types of Insurance Bad Faith

    Insurance bad faith is not limited to any particular type of malfeasance. Section Ins 6.11(3) of the Wisconsin Administrative Code sets forth some generic examples of unfair claims-settlement practices that can serve as a guide. But any means by which the insurance company departs from its obligation to the insured to 1) figure out what it owes and 2) pay that amount in a timely fashion can constitute bad faith. The more difficulty and stress and pain inflicted on the insured to try to get a simple claim paid, the more compelling the case.

    Consequences of Bad Faith

    If an insurer is found to have committed bad faith, it is responsible for all of the consequences of those actions. Depending on the situation, this can include the waiver of any right to further challenge the claim, the payment of the policyholder’s attorney fees, and punitive damages. Insurers do not enjoy paying policyholders and their lawyers these sorts of damages and attorneys representing policyholders need to understand that these types of recoveries will not come without a fight.

    Meet Our Contributors

    What are your interests outside of the office?

    Justin F. WallaceI love to golf, ski, and scuba dive. I am a member and sit on the board of directors at Pine Hills Country Club, love to travel out west to Colorado or Idaho to go skiing in the winter (as well as taking advantage of Granite Peak in Wausau!), and have traveled to Belize and Bonaire this year to spend some quality time underwater. There has to be a reason why we spend so much of our time and mental energy on work, right?

    Justin F. Wallace, Mayer Graff & Wallace LLP, Manitowoc.

    Become a contributor! Are you working on an interesting case? Have a practice tip to share? There are several ways to contribute to Wisconsin Lawyer. To discuss a topic idea, contact Managing Editor Karlé Lester at (800) 444-9404, ext. 6127, or email Check out our writing and submission guidelines.


    1Dannerv. Auto-Owners Ins., 2001 WI 90, ¶ 57, 245 Wis. 2d 49, 629 N.W.2d 159.


    3Wosinski v. Advance Cast Stone Co., 2017 WI App 51, ¶ 133, 377 Wis. 2d 596, 901 N.W.2d 797.

    4Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 692, 271 N.W.2d 368 (1978).

    5 “We agree with Staples that there must be some outside limit to an insurer’s ability to demand an EUO. As we said in Tran, ‘an insurance company should not have license to burden an insured with demands for items that are immaterial.’ [Tran v. State Farm Fire & Cas. Co., 961 P.2d 358, 368 (Wash. 1998).] For example, it would surely violate an insurer’s good faith duty to demand an examination under oath (EUO) from every single claimant simply to burden insureds and set up pretexts for denying claims. Given the quasi-fiduciary nature of the insurance relationship, we hold that if an EUO is not material to the investigation or handling of a claim, an insurer cannot demand it.” Staples v. Allstate Ins. Co., 295 P.3d 201, 206-07 (Wash. 2013).

    » Cite this article: 94 Wis. Law. 14-17 (December 2021).

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