Insurance Bad Faith Law

Most people purchase insurance to guard against unforeseen losses such as injuries, property damage, or lawsuits. When policyholders pay their premiums, they expect their insurance company to handle situations covered by the policy promptly and fairly. Insurance bad faith occurs when an insurer fails to meet these obligations and instead engages in deceitful or unfair tactics that harm the policyholder.

The Insurer's Duty to Act Fairly

Insurers have a legal duty to process claims in good faith. This means investigating losses thoroughly, refraining from misrepresentations, and avoiding unreasonable delays. When an insurer neglects these responsibilities or intentionally deceives policyholders about coverage, it may be considered bad faith. Such behavior can include denying a claim without a proper basis, requesting excessive documentation beyond what the situation reasonably requires, or providing misleading information about the policy’s terms.

Bad Faith in Claims by the Policyholder

A bad faith claim may arise when a policyholder files a claim with their own insurer, and the insurer fails to respond appropriately. These are often called first-party bad faith claims. For example, if a homeowner’s policy covers fire damage, and the insurer ignores evidence of the fire and refuses to inspect the scene, the insurer might be acting in bad faith. A policyholder generally can expect prompt communication, thorough investigation, and a clear decision regarding coverage when seeking benefits under their own policy.

Bad Faith in Claims Against the Policyholder

Bad faith also may occur when an insurer fails in its duty to defend a policyholder with liability coverage against a lawsuit by someone else. These may be known as third-party bad faith claims. For example, suppose that a business owner faces a lawsuit after someone slips and falls on the premises. The business owner’s liability insurer must defend against the claim if it falls under the policy. If the insurer unreasonably delays appointing defense counsel, fails to investigate the facts of the accident, or rejects reasonable settlement offers within policy limits without just cause, that conduct may constitute bad faith.

Damages for Bad Faith

Damages in first-party bad faith claims typically focus on the insurer’s failure to provide the benefits guaranteed under the policy. Often, the policyholder can recover the unpaid amount and potentially consequential or punitive damages. Emotional distress, attorney fees, and interest on late payments can also come into play if they stem from the insurer’s bad faith.

By contrast, damages in third-party bad faith claims can include the full amount of any judgment won by a third party against the policyholder, even if it exceeds the policy limits. In that scenario, the insurer’s wrongful refusal to settle or defend appropriately may expose it to liability for amounts beyond what the policy provides, along with additional damages for emotional distress or other harm that directly resulted from the insurer’s failure to meet its legal obligations.

Last reviewed March 2025