Glossary

Bad faith

An insurer's unreasonable handling of a claim, such as denying, delaying or underpaying without a proper basis, which can expose it to damages.

Also called: insurance bad faith, insurer bad faith, unfair claims practices

Bad faith is the legal term for an insurer breaking its duty to deal fairly with its policyholders and, in some situations, with people claiming against them. Every insurance contract carries an implied duty of good faith and fair dealing. An insurer can act in bad faith by denying a valid claim without a reasonable basis, failing to investigate, delaying payment, misrepresenting what the policy covers or making unreasonably low offers.

There are two main types. First-party bad faith involves your own coverage, such as a collision or uninsured motorist claim. Third-party bad faith usually arises when your insurer passes up a reasonable chance to settle a liability claim within your limits and you are later hit with a judgment above them; a policy limits demand often sets up that situation.

Remedies depend on the state. Some states let policyholders sue under a statute, some through case law, and others rely mainly on regulators enforcing unfair claims practices laws. Florida requires a civil remedy notice giving the insurer 60 days to cure before a statutory suit, and Washington's Insurance Fair Conduct Act allows up to triple damages after 20 days' notice. An honest coverage dispute is not bad faith. Keep records, complain to your state department of insurance, and talk to a licensed attorney about a possible claim. See insurance bad faith explained.

Last reviewed October 4, 2026

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Related terms

Policy limits demand An injured person's offer to settle for the at-fault driver's full liability limit by a deadline; mishandling it can expose the insurer to bad faith. State department of insurance The state agency that licenses insurers and agents, reviews rates and policy forms, monitors solvency and handles consumer complaints. Demand letter A written request to an at-fault driver's insurer that sets out your injuries and losses and asks for a specific settlement amount. Appraisal clause A policy provision letting you or the insurer call in independent appraisers, plus an umpire if needed, to settle a dispute over the amount of a loss. Claims adjuster The insurance company employee or contractor who investigates a claim, decides what the policy covers and sets how much is paid.

Related guides

Insurance bad faith explained What counts as insurer bad faith, how first-party and third-party claims differ, the state laws behind them, and what to do if your claim is mishandled. Class actions against car insurers How class actions against car insurers work, why total-loss valuation suits keep failing class certification, and what to do if you get a class notice. How to appeal a denied car insurance claim Get the denial reason in writing, test it against your policy, send a documented reconsideration request, then escalate to appraisal or your regulator. How to file a complaint against a car insurance company When and how to complain to your state insurance department about a car insurer, what to include, what regulators can and cannot do, and other options. Tort reform and car insurance What tort reform changes in car accident cases, the recent laws in Florida, Georgia, Louisiana and New York, and what they mean for your premium and your claim. Why car insurance claims get denied The most common reasons auto insurers deny claims, from lapsed policies and excluded drivers to business use and late notice, and how to avoid each one.