Bad Faith Insurance

Key Takeaways

• Bad faith insurance involves insurers failing to honor their policy obligations.
• Misrepresenting contract terms and making unreasonable demands are signs of bad faith.
• State laws protect consumers from insurance companies' bad faith practices.
• Insurance companies must quickly and reasonably investigate claims to avoid bad faith.
• Policyholders can seek damages if harmed by insurer bad faith actions.
• Investopedia / Joules Garcia

What Is Bad Faith Insurance?

Bad faith insurance refers to an insurer’s attempt to renege on its obligations to its clients, either through its refusal to pay a legitimate claim or to investigate and process a claim within a reasonable period of time.

Additionally, the failure to disclose policy limitations and exclusions before purchase, misrepresenting contract terms, or ignoring evidence may indicate bad faith. Bad faith applies to all types of insurance, including auto, health, and homeowners' policies. State laws provide penalties for insurers acting in bad faith and aim to protect consumers from such unfair practices. Mistakes differ from bad faith; genuine errors require only claim payment as a remedy.

If you as a policyholder suspect bad faith, consider confronting your insurance company or consult with a lawyer.1

How Bad Faith Insurance Practices Affect Policyholders

Bad faith insurance can apply to any type of insurance policy—including homeowners' insurance, health insurance, auto insurance, and life insurance—and any type of contract.

A difference in opinion between the policyholder and the adjuster over an adjuster’s opinion of the loss amount does not constitute bad faith unless the adjuster refuses to provide reasonable support for their findings. Simply making a mistake does not constitute bad faith, either.

Looking for evidence that supports the insurance company’s basis for denying a claim and ignoring evidence that supports the policyholder’s basis for making a claim is considered bad faith. If an insurer fails to promptly reply to a policyholder’s claim, that act of negligence, willful or not, is considered bad faith. To avoid acting in bad faith, insurers must also explain why they refuse to cover a claim or partly cover it.1

Legal Remedies Against Bad Faith Insurance Practices

State laws that specifically address bad faith practices, also called unfair claims practices acts, are meant to protect consumers against malicious behaviors by insurance companies. California law is a model for many other states’ bad faith laws.2

Some laws require an insurance company acting in bad faith to pay basic damages to help compensate the victim for having a claim denied, above and beyond the amount owed under the claim. This compensation covers not only out-of-pocket expenses or borrowed funds to address damage but also missed work and attorney's fees.

If an insurance company acts particularly egregiously, a jury may award punitive damages to the policyholder to punish the insurance company for its wrongdoing and to discourage it from acting in bad faith with other policyholders. If the insurance company simply makes a mistake and has not acted in bad faith, the proper remedy is only to pay the claim.3