On behalf of a client, we sued one of the largest auto insurance companies in the United States. The case involved a client whose BMW was stolen and recovered the next day with significant portions of the interior missing and/or damaged. The very next day, the client contacted the police and then the insurer and filed a claim. The insurer took possession of the vehicle and later had their "expert" examine it. The expert concluded that since the BMW was equipped with an anti-theft device (a transponder) it could not have been moved/started without the assigned key, nor could the ignition lock be tampered with in order to start the vehicle. HINT: That plaintiff stole his own vehicle or gave the key to someone who did!!
The car was insured for theft and vandalism. The vehicle was declared a total loss. The insurer denied the claim based on their "expert” report. However, the insurer did pay off the balance of loan on our client's vehicle. But then, it attempted to collect from our client the entire amount it paid to the bank. When that didn’t work, the insurer attempted to recover the money it paid to the bank from our client through a collection agency.
In an examination under oath conducted by the insurer (held before our client retained counsel), the insurer's rep (a Special Investigative Unit investigator; i.e., "fraud investigator") conduced a scorched earth examination literally accusing our client of fraud and theft, without even a shred of evidence. Our client has never been in trouble with the law before, is married with two children and otherwise lived a law-abiding life.
The insurer then referred our client's claim to the New Jersey Office of Insurance Fraud for criminal prosecution.
We sued the insurer on behalf of our client for breach of contract, bad faith refuel to pay a valid claim, violation of the New Jersey Consumer Fraud Act, and various other claims. (We also sued the collection agency for violation of the Fair Debt Collection Practice Act). A full scale research was conducted on the reason for denying the claim. We found similar denials on the web and articles denouncing the practice of denial of auto theft claims on the sole basis that a vehicle cannot be stolen with the same particular anti theft device as plaintiff's vehicle. The insurer, however, took the smart way out and negotiated a settlement before any depositions were conducted, and prior to the court deciding our motion. The settlement, however, was more than 10 times what the insurer would have paid had it not denied the claim. Denying a claim without a legitimate reason other than a self-serving report from a paid "expert" regularly retained by the insurance company is a prime example of bad faith.
Insurance companies must abide by their own insurance policies and agreements with their policyholders. Many insurers have a good record of honest business practice, but many are downright dishonest and will make any excuse to deny a claim, and will conduct an "investigation" only to look for evidence to deny a claim. This particular insurer may have believed that the vehicle could not have been stolen and recovered without using the assigned key. But beliefs must be backed by reasonable proof. An insurer cannot deny coverage based on a mere belief, or a "hunch.". We are not saying that this particular insurer (which we cannot name because of a confidential settlement agreement) was dishonest. But they were wrong to deny the claim without evidence of wrongdoing.
The New Jersey Unfair Claims Settlement Practices and other laws and regulations require insurers to conduct a fair and honest investigation prior to the denial of claim. If after a fair and honest investigation, the insurer concludes that it must deny the claim relying on documents, information, tectimony, etc., demonstrating a justifiable ground for denial (fraud, for example), then the insurer is well within its right to deny coverage. However, if the insurer denies a claim based merely on the belief that "there was no way the vehicle could be stolen without the key," then the insurer failed to conduct a fair investigation under consumer protection regulations, and acts in bad faith in denial of claim.