Bad Faith Insurance

Bad faith insurance is a claim or cause of action against an insurance company for failing to act in good faith toward its insured in the handling of a claim. Insurance companies owe a duty of good faith and fair dealing to their policyholders — they must investigate claims promptly and thoroughly, offer fair compensation for covered losses, and not unreasonably delay or deny claims. When an insurer violates this duty — for example, by deliberately underpaying a claim, refusing to settle within policy limits when it is reasonable to do so, or failing to defend a covered lawsuit — the insured may have a bad faith claim against the insurer.

Bad faith claims most commonly arise in two contexts in personal injury cases. In first-party bad faith, an insured sues their own insurer for improperly handling their claim — such as a policyholder whose insurer refuses to pay a valid claim for medical payments coverage or underinsured motorist benefits. In third-party bad faith (also called excess judgment bad faith), a defendant's liability insurer fails to settle a personal injury claim within policy limits when a reasonable insurer would have settled, resulting in a jury verdict in excess of the policy limits for which the defendant-insured would otherwise be personally responsible.

Insurance bad faith law is governed by a combination of state statutes, common law, and administrative regulations. Many states have enacted unfair trade practices acts or unfair claims settlement practices acts that set specific standards for how insurers must handle claims and provide additional remedies — including punitive damages and attorney's fees — for violations. The availability and extent of bad faith remedies varies significantly from state to state, with some states having very robust bad faith laws and others providing more limited recourse.

Proving bad faith requires more than simply showing that the insurer was wrong about the value of a claim — the plaintiff must typically demonstrate that the insurer's conduct was unreasonable and that it knew of or recklessly disregarded facts showing the claim was valid. Evidence of bad faith commonly includes internal claims handling documents showing the adjuster's true assessment of claim value versus the offer made, communications reflecting an intent to delay or minimize claims, failure to retain appropriate experts, and patterns of similar conduct toward other policyholders.