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Hello and thank you for contacting us. This is Dwayne B. and I’m an expert here and looking forward to assisting you today. If at any point any of my answers aren’t clear please don’t hesitate to ask for clarification. Also, I can only answer the questions you specifically ask and based on the facts that you give so please be sure that you ask the questions you want to ask and provide all necessary facts.
Yes, you could sue them but the issue will be did they return the money in a reasonable period of time after the denial. Most courts hold that 30 days is reasonable and some courts will find up to 60 days is reasonable. You could sue them in small claims court for that amount of money though and filing and serving them will cost you a couple of hundred dollars. If you win the case the judge should award that back to you though.
You can ask for punitive damages for bad faith.
No, you don't have to have a lawyer. You would want to pick up a good book or ebook on the topic, like the one at http://www.lessonsinlaw.com/the-guerrilla-guides-to-the-law/the-guerrilla-guide-to-small-claims-court/ , so you're familair with the process but other than that you can likely handle it without a lawyer.