Avoiding Bad Faith in Workers’ Compensation

Avoiding Bad Faith in Workers' CompensationHandling workers’ compensation claims in an effective manner requires members of the claims management team to be proactive on many issues.  This effort includes understanding issues concerning “bad faith” claims handling and denials.  The appearance of bad faith needs to be avoided at all costs.  Failure to do so can result in costly litigation and loss of reputation.



What is Bad Faith in Work Comp?


According to Black’s Law Dictionary, the term “Bad Faith” encompasses “dishonesty of belief or purpose” in a legal action, including matters concerning insurance law.  Examples of this include instances where an employer, insurer, third-party administrator or an attorney acts in a manner that misleads another or enters into an agreement without the intention to fulfill the obligations — or not have the means to fulfill such obligations.  It can also occur when someone acts in a manner to violate the basic standards of honesty when dealing with other individuals or entities.



Step #1 – Avoid the Appearance of Bad Faith


The slightest appearance of bad faith can result in costly legal actions.  Other extraneous costs include loss of goodwill and reputation.  This impact is why members of the claims management team need to act honestly and ethically at all times.


Regarding the financial considerations of bad faith ligation, it is important to remember what is at stake as it goes beyond the scope of litigation costs, expenses and settlement of a claim.  Other added costs can include:


  • Penalties defined by a workers’ compensation law;


  • Punitive damages if the action is successful; and


  • Claims for attorney’s fees by the prevailing party.



Common Missteps that Result in Bad Faith Claims


A review of bad faith claims litigation has provided attorneys and members of the claims management team with an extensive list of factors resulting in adverse actions.  Some of the more common themes in bad faith litigation include:


  • Poor claims management/handling. This includes failure to communicate with claimants and their attorneys, as well as failing to review the claim file properly.  It is important for teams to review and follow “best practices” constantly.


  • Claims investigation and acting in good faith. This duty includes the necessity for a claims handler to be reasonable in their efforts and not ignore information that would result in a claim being compensable.


  • Failing to pay attention to statutory timeliness. Every workers’ compensation law has specific timelines for the admission of primary liability, the filing of various forms and payment of claims.  Failure to undertake such activities may result in administrative fines, penalties, and other adverse sanctions.


  • Failure to cooperate. Insureds must cooperate in every workers’ compensation claim.  Failure to do so can result in “duty to defend” provisions in a policy to become null and void.



Implementing Best Practices Now


It is never too late to take steps to avoid bad faith claims against you, your claims team or insured.  Here are some ideas one can implement to avoid the unnecessary expenses associated with bad faith claims litigation:



  • Begin with proactive claims investigation. Be reasonable and complete the investigation on time.  All denials must be made in good faith and supported by the facts and the law;


  • Develop a relationship with employer/insureds. Breaking down barriers early on in the process allows claim management teams to avoid issues in the future;


  • Know and timely respond to all statutory deadlines. This prevents accusations of bad faith claims and needless fines, penalties and other sanctions;


  • Promptly pay claims when due. Defense attorneys can take steps to prevent bad faith litigation by communicating with the claims management team as to when a payment is due, to whom the payment is to be made, include their tax ID information and correct mailing address; and


  • Document your file contemporaneously. Accurate and complete claims notes and other documentation efforts are key to success.  Encourage new claims handlers to develop this habit early on in their career and remind more seasoned members of the team to continue this process as they advance their career.





Bad faith litigation in workers’ compensation claims can have a significant impact on a program’s bottom line.  It can also have an adverse impact on one’s reputation and other non-monetary matters.  Avoiding bad faith litigation can occur when a team learns from the lessons of the past and implements best practices.




Michael Stack - AmaxxAuthor Michael Stack, CEO Amaxx LLC. He is an expert in workers’ compensation cost containment systems and helps employers reduce their workers’ comp costs by 20% to 50%.  He works as a consultant to large and mid-market clients, is a co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder & lead trainer of Amaxx Workers’ Comp Training Center .


Contact: mstack@reduceyourworkerscomp.com.

Workers’ Comp Roundup Blog: https://blog.reduceyourworkerscomp.com/


©2018 Amaxx LLC. All rights reserved under International Copyright Law.


Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.

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