Not every denial of an insurance claim is an act of bad faith by an insurance company. In fact, the law in Oklahoma provides an insurance company has a right to be wrong about a decision on a claim without automatically being in bad faith. However, not every dispute is “legitimate.” If every claim denial amounted to a “legitimate dispute,” there would never be a bad faith case. Instead, the insurance company would simply claim they legitimately thought they were on the right side of the dispute with the policyholder and seek to insulate itself from all bad faith liability.
Clearly, this is not the way the system works. The real inquiry is whether the insurance company had a good faith basis for its claim decision. If it did, then there is no bad faith liability. However, under the law, an insurance company is not allowed to manufacture a dispute where none should exist. An insurance company cannot use biased experts (like biased doctors or engineers, for example) against its insured. It cannot investigate the claim only to find reasons to deny the claim while ignoring facts indicating the claim should be paid. It cannot unreasonably and unfairly interpret policy language against an insured in an effort to avoid coverage.
The “legitimate dispute” defense is raised as a defense in almost every bad faith case. The insurance company and its lawyers attempt to focus on whatever evidence might exist to support a claim denial, and argue a legitimate dispute exists. On the other hand, the policyholder and her lawyer hammer away at the weaknesses in the insurance company’s investigation of the claim and reasoning for the denial, arguing whatever dispute exists about the claim is unfounded and manufactured in a bad faith. Policyholders and their lawyers often claim the insurance company’s denial was not based on a fair evaluation of the evidence, but on a desire by the insurance company to avoid paying a legitimate claim.
When an insurance company raises the “legitimate dispute” defense in response to a bad faith case, the company’s investigation and decision-making process are placed directly in the crosshairs of the policyholder’s lawyer’s attack. Bad faith cases are won or lost based on the quality of the adjusters’ work, their ability to defend their positions under cross-examination, and the relative skill of the lawyers on both sides of the case. This is definitely true when the “legitimate dispute” defense is in play.