Insurance bad faith explained

Insurance bad faith is an insurer's unreasonable failure to honor its duties to the people it covers, such as denying or delaying a valid claim without a reasonable basis, or refusing a reasonable settlement within policy limits and leaving its own customer exposed to a larger judgment. It is a separate legal claim from breach of contract, can carry damages beyond the policy benefits, and its rules vary considerably from state to state.

Two kinds of bad faith

First-party bad faith involves your own coverage: collision, comprehensive, uninsured motorist, personal injury protection. You are the claimant and the insurer owes you a duty to investigate fairly and pay what is owed promptly. The California Supreme Court's 1973 decision in Gruenberg v. Aetna Insurance Co. is widely cited as the case that recognized this as a tort claim, and many states have since followed some version of it.

Third-party bad faith arises from liability coverage. When someone sues you after a crash, your insurer controls the defense and the settlement decisions. If the injured person offers to settle within your policy limit and the insurer unreasonably refuses, a verdict above the limit can leave you personally liable for the excess. Courts in many states hold the insurer responsible for that excess when its refusal was unreasonable. The offer that sets this up is often a policy limits demand with a deadline.

Bad faith vs an honest dispute

Insurers are allowed to be wrong, to investigate, and to disagree about value. Bad faith generally requires conduct that is unreasonable, not merely mistaken. Examples courts and regulators commonly look at:

Where the rules come from

Bad faith law has three main sources, and the mix differs by state.

• Court decisions. Most states recognize some form of bad faith claim through case law, with their own tests for what counts as unreasonable.
• Unfair claims settlement practices acts. Nearly every state has a law listing prohibited claims practices, many modeled on the NAIC Unfair Claims Settlement Practices Act. The model says it does not create a private cause of action; it is enforced by the state's state department of insurance through investigations and penalties. Some states nonetheless allow consumers to sue under their version.
• Bad faith statutes. Some legislatures have written specific rights and procedures, described below.

Florida. Under section 624.155 of the Florida Statutes, a policyholder or claimant generally must file a civil remedy notice before suing, and the insurer has 60 days to cure the violation. The 2023 tort reform law (HB 837) added a safe harbor for liability claims: an insurer that tenders the lesser of its policy limits or the amount demanded within 90 days after receiving actual notice of a claim, with sufficient evidence to support it, is generally shielded from a bad faith action over that claim.

Washington. The Insurance Fair Conduct Act (RCW 48.30.015) lets a first-party claimant who is unreasonably denied coverage or payment sue for actual damages, and a court may increase the award up to three times actual damages and award attorney fees. The claimant must give the insurer and the insurance commissioner 20 days' written notice before filing.

Because the details decide cases, ask a lawyer licensed in your state before you assume any of these rules apply to you.

Warning signs in your own claim

• No written explanation of a denial, or a denial that does not cite a policy provision.
• Long gaps with no decision and no response to written questions.
• An adjuster telling you the policy says something it does not.
• Pressure to accept a low offer quickly, or to sign a release before the full extent of an injury is known.
• Requests for information that has nothing to do with the loss.
• In a liability case: the insurer ignores a settlement offer within your limits, or does not tell you about it.

What to do if you suspect bad faith

1. Put everything in writing. Follow every call with an email summarizing it. Keep a log of dates, names and what was promised.
2. Ask for the basis of each decision in writing, including the specific policy language and the evidence relied on.
3. Send a clear, documented request with a reasonable response date. how to appeal a denied car insurance claim covers the format.
4. File a complaint with your state insurance department. Regulators can investigate claims-handling practices and penalize violations; see how to file a complaint against a car insurance company.
5. If you are being sued above your limits, write to your insurer asking it to settle within limits if a reasonable offer is on the table, and consider hiring your own attorney to protect your personal assets.
6. Talk to a lawyer who handles insurance disputes. Many take bad faith cases on contingency; when to hire a lawyer after a car accident explains how that works.

Watch your deadlines: the contract claim, the bad faith claim and any statutory notice periods can each have different clocks.

What a bad faith claim can recover

Depending on the state and the facts, possible recoveries include:

• The policy benefits that should have been paid, with interest.
• Consequential losses caused by the delay or denial, such as a lost job or extra expenses.
• Attorney fees, where a statute or case law allows them.
• In a third-party case, the amount of a judgment above the policy limit.
• Punitive damages in egregious cases, in states that permit them.

Large bad faith awards are part of the debate over litigation costs and premiums discussed in social inflation and nuclear verdicts: how lawsuits raise premiums. For an individual policyholder, the practical point is simpler: a well-documented file is what turns a frustrating claim into one an insurer, a regulator or a court takes seriously.

Key takeaways

• Bad faith means unreasonable claim handling, not just a disagreement or a mistake.
• First-party bad faith concerns your own claims; third-party bad faith usually involves refusing a reasonable settlement within your limits.
• State law decides what you can sue for, and procedures such as Florida's civil remedy notice or Washington's 20-day notice must be followed first.
• Document every step, demand written reasons, and use the state insurance department before or alongside legal action.
• An attorney licensed in your state is the right source for whether your facts support a claim.