Key Takeaways
- Insurers must ACKNOWLEDGE receipt of claims within 10-15 days and begin investigation promptly
- After investigation, insurers must AFFIRM or DENY coverage in writing, citing specific policy provisions if denying
- BAD FAITH occurs when an insurer unreasonably denies or delays payment of a valid claim—can result in damages beyond policy limits
- Insurers must make GOOD FAITH settlement offers when liability is clear—cannot use delay as a negotiation tactic
- Prompt payment laws typically require payment within 30-60 days after proof of loss, with interest penalties for late payment
Last updated: December 2025
Claims Settlement Practices
Based on the NAIC Unfair Claims Settlement Practices Act, adopted by all states.
Required Claims Handling Timeframes
| Action | Typical Timeframe |
|---|---|
| Acknowledge claim | 10-15 days |
| Provide claim forms | 15 days |
| Begin investigation | Promptly upon notice |
| Make coverage decision | 30-60 days after proof of loss |
| Pay claim | 30-60 days after agreement |
Unfair Claims Practices
1. Misrepresenting Policy Provisions
- Cannot make false statements about coverage
- Must cite specific policy provisions when denying claims
- Must explain coverage position clearly
2. Failing to Acknowledge/Act Promptly
- Must acknowledge receipt within 10-15 days
- Must investigate within reasonable time
- Must keep claimant informed of progress
3. Failing to Affirm or Deny Coverage
After completing investigation, must:
- Provide written decision
- Explain basis for denial
- Cite relevant policy language
4. Denying Without Reasonable Investigation
- Cannot deny claims without investigating facts
- Must review all available evidence
- Must request necessary documentation
5. Not Attempting Good Faith Settlement
- Cannot make lowball offers on clear liability claims
- Must pay undisputed portions while investigating disputed amounts
- Cannot use delay as negotiation tactic
6. Compelling Litigation
- Cannot force claimant to sue to recover clearly owed amounts
- Must settle promptly when liability and damages are clear
Bad Faith Claims
What Constitutes Bad Faith?
First-Party Bad Faith: Insurer's unreasonable denial or delay of policyholder's own claim.
Third-Party Bad Faith: Insurer's failure to settle third-party claim within policy limits when liability is clear.
Examples of Bad Faith
| Action | Bad Faith? |
|---|---|
| Denying clearly covered claim without investigation | YES |
| Refusing to settle within limits when exposure exceeds limits | YES |
| Intentionally delaying payment to coerce lower settlement | YES |
| Failing to defend insured when required | YES |
| Denying claim after thorough investigation | Usually NO |
Consequences of Bad Faith
- Damages beyond policy limits
- Punitive damages possible
- Attorney fees
- Emotional distress damages (some states)
Prompt Payment Laws
Requirements
| Element | Typical Requirement |
|---|---|
| Payment deadline | 30-60 days after proof of loss |
| Interest penalty | 18% annual on overdue payments |
| Late payment penalty | Additional penalties for unreasonable delay |
Exceptions
- Extended time if investigation ongoing with reasonable basis
- Disputed claims (good faith dispute)
- Fraud investigation
Loading diagram...
Test Your Knowledge
An insurer denies a claim that is clearly covered under the policy without conducting any investigation. This is an example of:
A
B
C
D
Test Your Knowledge
After receiving a claim, within what timeframe must an insurer typically acknowledge receipt?
A
B
C
D
Up Next
12.5 State Insurance Department
Continue learning
Get free exam tips·