What Is Bad Faith Insurance? Plain-English Guide
Bad faith insurance is when an insurer acts unreasonably toward a policyholder — denying valid claims, delaying without reason, or failing to investigate properly. Here is what it means.
Informational purposes only. This article is for general informational purposes only and is not legal advice. Laws vary by jurisdiction. If you need advice about your specific situation, consider speaking with a licensed attorney.
## Short Answer
Bad faith insurance refers to an insurer's unreasonable or dishonest conduct toward a policyholder — such as wrongfully denying a valid claim, delaying payment without justification, or failing to properly investigate. In many states, bad faith gives rise to a separate legal claim beyond the policy value.
What Constitutes Bad Faith
Common examples of potentially bad faith conduct include: denying a claim without a reasonable basis, failing to investigate a claim within a reasonable time, offering a settlement amount far below the claim's clear value, misrepresenting policy language to avoid payment, failing to communicate claim status to the policyholder, and refusing to defend a policyholder against a covered lawsuit.
First-Party vs. Third-Party Bad Faith
First-party bad faith occurs when your own insurer treats you unreasonably in handling your own claim — a homeowner dealing with their own home insurer, for example.
Third-party bad faith occurs when your insurer fails to adequately defend you against claims made by others or refuses to settle within your policy limits, exposing you to a judgment above your coverage.
Why Bad Faith Claims Matter
A standard insurance dispute only lets you recover the amount owed under the policy. A bad faith claim can result in additional damages — including consequential damages, emotional distress damages, and in some states, punitive damages.
What States Differ On
State laws on bad faith vary significantly. Some states have specific bad faith statutes with defined remedies. Others rely on common law. A few states provide limited bad faith remedies. An attorney in your state can tell you what applies to your situation.
When to Consult an Attorney
If you believe your insurer is acting in bad faith — not just making a coverage decision you disagree with — consult an insurance attorney. Bad faith claims are complex and highly fact-specific.
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*This article is for general informational purposes only and is not legal advice. Consult a licensed attorney for advice specific to your situation.*
Informational purposes only. This article is for general informational purposes only and is not legal advice. Laws vary by jurisdiction. If you need advice about your specific situation, consider speaking with a licensed attorney.