When an insurance company unfairly refuses to pay an insurance policyholder for a legitimate insurance claim, the insurance policyholder can sue the insurer for damages that can potentially amount to much more than insurance benefits owed under the policy. Victims of insurance bad faith may be entitled to recover consequential damages, emotional damages, attorneys’ fees and, in some circumstances, punitive damages or other special damages. See Filasky v. Preferred Risk Nut. Ins. Co, 152 Ariz. 591 (1987); Rawlings v. Apodaca, 151 Ariz. 149, (1986); and A.R.S. § 12-341.01.

Some may see the extent of recoverable damages as a windfall for policyholders, but these damages actually play an important role in compensating victims of insurance bad faith and preventing insurers from cheating policyholders with legitimate insurance claims.

Allowing victims of bad faith lawsuits to collect damages above the amount of the benefits allowed pursuant to the insurance policy reflects the special nature of insurance contracts. Insurance agreements are not simple business contracts for the purchase of a mundane service. Insurance contracts are supposed to provide insurance consumers with peace of mind from losing their property due to accidental catastrophe; making them personal agreements.

Given the special relationship insurance companies have with insurance consumers, insurers also owe special duties to their insurance customers. An insurance company owes a duty of equal consideration, fairness, and honesty to the insurance policyholder.

Additionally, if insurance policyholders were only allowed to recover the amount rightfully owed to them, insurance companies would have little incentive to pay out legitimate claims. Many insurance companies would intentionally delay or low ball claims because at worst, the insurance company would need to pay the insurance benefits that it should have paid in the first place. These insurers would be more inclined to withhold payment of claims and make the insurance policyholder sue them to recover the insurance benefits owed under the insurance policy.

All these reasons highlight that a bad faith insurance lawsuit and damages help the insured recover what they are rightfully entitled to and also acts as a deterrent to bad faith acts by insurance companies.