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Unreasonably low settlements are bad faith insurance

On Behalf of | Jun 12, 2023 | Insurance Bad Faith

California homes may be at risk of the next big wildfire or earthquake event, but at least homeowners can rest easy knowing their insurers can cover any damage to their properties. At least, that’s how insurance is supposed to work on paper.

However, the homeowners insurance claims process is much less straightforward. After confirming the property damage, homeowners should notify their insurer to start the claim process. Policyholders must also work with an insurance adjuster to calculate the costs and ensure coverage applies to the damage reported. The insurer then has to review the estimates or even conduct its investigations of the property before it can approve the claim.

Once an insurer agrees to a claim, the policyholder can review the settlement amount for final approval before payment. But there may be occasions when the settlement amount is lower than the estimated total home repair costs. Why does this happen, and can homeowners sue their insurer for it?

Why would insurers make low settlements?

There are several reasons why an insurer would offer homeowners a low settlement. They include:

  • Coverage based on actual cash value: If a homeowner’s policy terms state that the coverage they’re entitled to is based on actual cash value, the settlement amount they will receive will be adjusted for depreciation. Only insurance with replacement cost coverage would cover the total amount of loss.
  • Lack of critical facts: An insurer might miss essential information about a policyholder’s claim. The insurer might’ve failed to account for hidden damage or had mistakenly labeled part of the property damage as an exclusion, which often happens when it comes to some forms of water damage. This omission could lead to a lower settlement.
  • For profit: An unscrupulous insurer might offer lowball settlements to avoid losing money. Insurers are still businesses at the end of the day, and if they can get away with paying as little as possible, the most unprincipled carriers will take every opportunity.

Barring the first reason (a legitimate reason), insurers that engage in the two other practices can be held negligent because they act in bad faith.

Responding to unreasonable low settlements

According to California’s laws on fair insurance settlements, insurers are prohibited from trying to settle a claim by making a settlement that’s too low. Policyholders who feel their insurer is being unreasonable with payments can try hiring an attorney to help settle the claim. An attorney can help negotiate with the insurer or even take legal action for their acts of bad faith.