What Is Unfair Claims Settlement?

Definitions & Examples of Unfair Claims Settlement

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Unfair claims settlement refers to unjust behavior or acts by insurers when handling claims by policyholders.

Learn how to spot unfair claims settlement practices through examples, as well as how to file a complaint when you observe them and what penalties apply to insurers.

What Is Unfair Claims Settlement?

Unfair claims settlement is the improper handling of policyholder claims on the part of insurers that violates state laws on unfair claims settlement. Such laws are typically a variation of the National Association of Insurance Commissioners' (NAIC) Unfair Claims Settlement Practices Act (UCSPA).

How Unfair Claims Settlement Works

In 1990, the NAIC drafted a set of model laws known as the UCSPA that set forth standards for the investigation and settlement of claims under all types of insurance policies except workers compensation, boiler and machinery (equipment breakdown), fidelity, and surety. Although a majority of states have adopted the model laws in some form, each has incorporated its own modifications. Thus, unfair claims settlement regulations vary from state to state and are enforced by individual state insurance departments.

As the name suggests, the UCSPA is designed to protect policyholders from deceptive practices by insurers when settling claims. For example, let's say you're a small business owner who owns a warehouse insured under a commercial-property policy. A windstorm blew through town eight months ago, causing $50,000 in damage to your warehouse. You're unable to repair the damage because your insurer is doing all it can to avoid paying your claim. First, the claims representative kept "forgetting" to send you the claim forms. Then, the insurance adjuster says they need another proof-of-loss form. These delay tactics are classic unfair claims settlement practices.


Insurance is governed by the states so laws can vary widely from state to state. By developing model laws, the NAIC helps promote uniformity and consistency in state laws.

Types of Unfair Claims Settlements

While the scope of unjust practices may differ from one state to another, the UCSPA prohibits acts by insurers that broadly fit into four unofficial categories:

  • Misrepresentation or alternation
  • Timeliness issues
  • Unreasonable requirements
  • Lack of due diligence

Misrepresentation or Alteration

These practices include:

  • Misrepresenting relevant facts or policy provisions: For instance, your commercial property policy states that building-ordinance coverage is included, but your insurer says the coverage is excluded.
  • Making a significant alteration in an application without your consent and then settling a claim based on the alteration: For example, you requested a $50,000 limit for utility interruption when you applied for property coverage but your insurer reduced the limit to $10,000 without telling you. The insurer now refuses to pay more than $10,000 for a loss you've incurred.
  • Settling claims for less than what you would reasonably expect based on a written advertisement you received when applying for coverage: For instance, an ad indicates that your policy includes a $50,000 limit for extra-expense coverage. Your insurer now refuses to pay an extra-expense claim, arguing that you didn't pay the additional premium (which wasn't mentioned in the ad).

Timeliness Issues

Improper behavior includes:

  • Failing to respond promptly to your communications regarding claims you've filed: For instance, you've phoned your insurer repeatedly for an update on a claim you filed several months ago, but your insurer has not responded.
  • Failing to confirm or deny coverage within a reasonable time period after the insurer has finished its claim investigation: For example, your insurer sent out an adjuster to assess damage to your home months ago, but you still can't get an answer back about whether or not they'll pay the claim.
  • Failing to provide a prompt explanation after denying coverage or offering a compromise settlement: For example, your insurer denies your roof-replacement claim but doesn't inform you of the grounds for their denial.
  • Failing to provide claim forms within a specified period of time after your request: Forms should generally be given to you within 15 days.
  • Failing to make a prompt, fair settlement even though you've submitted a valid claim and the insurer's liability is clear: This is a tactic used by bad-faith insurers who know they're on the hook for payment to avoid paying you what's owed.

Unreasonable Requirements

Such requirements include:

  • Offering small settlement amounts that force you to sue the insurer to recover the amount you are owed: The amount the insurer offers in this scenario is typically much less than would be recovered by lawsuits.
  • Demanding written verification of a loss after you have submitted a completed proof-of-loss form, delaying the claim investigation or payment process: This practice is deemed unreasonable because the insurer is needlessly requesting information that would already have been supplied in the proof-of-loss form.

Lack of Due Diligence

These acts include:

  • Failing to adopt standards of reasonable investigation: For example, your insurer has no clear-cut policy for investigating and settling claims, enabling them to wiggle out of paying them.
  • Refusing to pay claims without conducting a reasonable investigation: For example, your insurer denies your claim for fire damage to your building. The insurer claims that no fire occurred but never dispatched an adjuster to inspect your property.

How to File a Complaint of Unfair Claims Settlement

If you suspect that your insurer is mishandling your claim, the first step is to raise it to your claim agent, and if that fails, escalate it to the claims department manager at your insurance company.

If you can't resolve the matter with your insurer, speak with your state insurance department. A representative of the department can tell you how the law applies in your state and how to file a formal complaint. Or, check the insurance department's website for information about your state's regulations governing unfair claims settlement practices. Some states even provide online forms on their insurance department website that consumers can use to file complaints about insurers' unfair claims practices.

The state will conduct a regulatory investigation, but in certain places (California, for example), the state will hold off on its investigation until any active lawsuits concerning the unfair practices have concluded.


Some states permit policyholders to file a tort claim against their insurer on the basis that the insurer's unfair claim handling constitutes bad faith. To determine whether your state permits this type of suit, consult an attorney.

What Are the Penalties?

Once a policyholder has filed a complaint with the state, the state regulator (typically the insurance commissioner) will determine if the insurer's behavior violates the law. If it does, the regulator may issue a statement of charges to the insurance, set up a hearing, and then do one or more of the following:

  • Issue a cease-and-desist order: This is a notice to the insurer to stop engaging in the unjust claims settlement practice.
  • Impose a monetary penalty: The commissioner may choose at their discretion to fine the insurer no more than $25,000 for each violation, but not exceeding $250,000 in total.
  • Suspend or revoke the insurer's license: The odds of this outcome increase if the insurer knew or should have known they were in violation of the law.

Key Takeaways

  • Unfair claims settlement refers to unjust behaviors by insurers in handling claims by policyholders.
  • Laws governing unfair claims settlement vary and are enforced by states, but are informed by the UCSPA model laws.
  • Acts deemed as unfair broadly fit into mistreatment or alteration, timeliness issues, unreasonable requirements, and lack of due diligence.
  • Policyholders who cannot resolve claims disputes with their insurer should file a complaint with their state insurance department, which may resort to measures including cease-and-desist orders, monetary penalties, or revocation of an insurer's licensure.
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  1. National Association of Insurance Commissioners. "Unfair Claims Settlement Practices Act." Pages 900-1–900-3. Accessed Sept. 15, 2020.

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