Insurance companies and policyholders have contractual obligations which must be satisfied to ensure resolution of claims. Insurance policies list specific things a policyholder must do in order to perfect a claim once a loss has taken place. These duties are known as contract conditions. For example, policies typically require an insured to give prompt notice of any loss, information about what property was damaged, or the time and place of an accident or injury. In the case of property damage, the policyholder will be required to take steps to protect the property from further destruction. In the event of theft, policies usually require a police report. Liability claims require the policyholder to give the insurance company copies of any notices or legal papers received.
The insurance company may deny or refuse to pay a claim. The insurance company may take the position that the loss is not covered by the policy, or that the claimant was not insured under the policy. In some cases, the insurance company may conclude that the policyholder took some type of action that rendered the policy void. Because insurance policies are contracts which are open to interpretation by the courts, policyholders may be able to use the legal system to reverse insurance coverage decisions.
All insurance policies are contracts, and all contracts contain an implied obligation of good faith and fair dealing. When a claim is presented, this implied obligation means that an insurance company must make a thorough, good faith investigation of the claim. This investigation includes an obligation for the insurance company to review potential reasons and circumstances that could justify the claim.
If an insurance company breaches this implied covenant of good faith and fair dealing, and refuses to pay a claim that it is legally obligated to pay -- or denies a claim without adequate investigation -- the policyholder may have a "bad faith" claim against the company. If the company is found to have acted in bad faith in its handling of a claim, the policyholder would be entitled to damages. If the conduct by the insurance company is outrageous and totally unconscionable, the insured also may be entitled to recover punitive damages.