by John Darer CLU ChFC MSSC CeFT RSP CLTC
What Does Bad Faith Mean in Connection With Insurance?
Bad faith in insurance has nothing to do with whether you spent Sunday praying in church, sipping a Bloody Mary while skipping Hail Marys, perfectly aligning yourself toward Mecca, or forgetting to light the Shabbos candles. It’s all about insurers pulling a fast one—like refusing to pay a legitimate claim or taking forever to investigate and process a policyholder’s request.
Insurance companies act in bad faith when they misrepresent an insurance contract’s language to the policyholder to avoid paying a claim. They also act in bad faith when they fail to disclose policy limitations and exclusions to policyholders before they purchase a policy or when they make unreasonable demands on the policyholder to prove a covered loss.
Can a Structured Settlement be used in a Bad Faith Settlement?
In Private Letter Ruling 200903073 released in January 18, 2009, the Internal Revenue Service, relying on the “origin of the claim” doctrine, determined that amounts received by an accident victim from the defendant’s insurance company as part of an assignment agreement and a settlement agreement are excludable from gross income to the extent they are attributable to medical expenses, pain and suffering, and lost earnings. An exclusion from income under IRC 104(a)(1) or IRC 104(a)(2) is essential in order for there to be a qualified assignment (whether directly from the Defendant or Insurer, or from a qualified settlement fund), under IRC 130(c)(2)(D). Click below to review a copy of the IRS Private Letter Ruling 200903073.
Download PLR 200903073 Bad Faith with Personal Injury IRC 104
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Of course even if the IRS had ruled unfavorably, or in other situations with no physical injury component, a non qualified assignment (tax deferred structured settlement) might be the next best thing.
Of course even if the IRS had ruled unfavorably, or in other situations with no physical injury component, a non qualified assignment (tax deferred structured settlement) might be the next best thing.
Last updated October 30, 2025
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