What Is Insurance Bad Faith?
Insurance bad faith is a legal doctrine holding insurers liable for damages beyond the policy limits when they act unfairly or deceptively toward policyholders or injured claimants. Every insurance policy contains an implied covenant of good faith and fair dealing—an insurer that violates this covenant by unreasonably denying valid claims, delaying payment, misrepresenting coverage, or failing to protect its policyholder from excess judgments has committed bad faith.
Bad faith is separate from a simple coverage dispute. An insurer can be wrong about coverage—courts resolve those disputes through contract interpretation. Bad faith requires more: the insurer must have acted unreasonably, either knowing the conduct was improper or with reckless disregard for whether it was appropriate.
First-Party vs. Third-Party Bad Faith
First-party bad faith involves your own insurer's handling of your claim. Examples: denying a homeowners claim without reasonable investigation; unreasonably delaying payment of a disability claim; misrepresenting policy coverage to avoid paying a legitimate claim. In first-party bad faith cases, the policyholder sues their own insurer for failing to treat them fairly.
Third-party bad faith involves an insurer's failure to protect its insured from excess liability exposure. When an insurer refuses a reasonable settlement offer within policy limits and a judgment against the insured then exceeds those limits, the insurer may owe the entire judgment—even the portion above policy limits—as damages for bad faith in failing to settle. Third-party bad faith claims are brought by the insured against their own liability insurer.
Common Bad Faith Behaviors
Courts and regulators have identified numerous bad faith behaviors: failing to conduct a prompt and thorough investigation; denying claims without citing specific policy language; making unreasonably low settlement offers on strong claims; delaying payment until statute of limitations pressure forces a low settlement; misrepresenting the extent of the insured's coverage; requiring excessive documentation not called for by the policy; and using a single investigation to serve both coverage denial and liability defense purposes (reservation of rights abuse).
What You Can Recover in a Bad Faith Claim
First-party bad faith damages typically include: all benefits owed under the policy; consequential damages caused by the bad faith delay or denial (additional loss from an unrepaired property, for example); emotional distress; attorney's fees in states that allow fee shifting; and punitive damages for particularly egregious conduct. The potential for punitive damages—often a multiple of actual damages—is the most powerful aspect of bad faith claims and the main reason insurers settle them.
Building a Bad Faith Case
Document everything: all communications with your insurer, dates and contents of adjusters' visits, every request for documentation and your timely response, every delay without explanation, and the ultimate resolution. Expert testimony from insurance claims professionals about the insurer's deviation from industry standards is often the cornerstone of a bad faith case. Most bad faith cases require an underlying coverage dispute to resolve first—once the covered loss is established, the bad faith claim examines how the insurer handled it.
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Frequently asked questions
Is being wrong about coverage the same as bad faith?
No. An insurer that has a reasonable basis for denying coverage—even if ultimately wrong—has not acted in bad faith. Bad faith requires that the insurer's position was unreasonable or that it acted improperly in the process of investigating and deciding the claim. Courts examine what the insurer knew at the time of the denial, not whether they were ultimately proven right or wrong.
Can I pursue bad faith in every state?
Bad faith remedies exist in all states, but the specific rules and available damages vary significantly. Some states (California, Florida, Alabama, Washington) have particularly well-developed bad faith doctrines and strong policyholder remedies. Others limit bad faith claims to breach of contract damages. Consult a local insurance attorney to understand the remedies available in your specific state.
What is a "reservation of rights" letter and should I be concerned?
A reservation of rights letter is the insurer's notice that it will defend a claim or investigate under the policy while reserving the right to deny coverage later. It protects the insurer from waiving coverage defenses. Receiving a reservation of rights letter does not mean your claim will be denied, but it is a signal that you should consult an attorney to protect your interests during the insurer's investigation.