Insurance bad faith: when a claim is handled unfairly

Bad faith vs. a claim you disagree with

Insurers and policyholders disagree all the time about what a car is worth or whether an exclusion applies. An honest disagreement, even one the insurer loses, is usually not bad faith. Bad faith is about how the claim was handled: whether the insurer acted unreasonably, without a proper basis, or put its own interests ahead of its policyholder's.

The NAIC's model Unfair Claims Settlement Practices Act, which most states have adopted in some form, gives a sense of the conduct regulators treat as unfair:

• Misrepresenting what the policy says or covers.
• Not acting reasonably promptly on claims, or not confirming or denying coverage within a reasonable time.
• Refusing to pay without a reasonable investigation.
• Not trying in good faith to settle once liability is reasonably clear.
• Forcing people to sue by offering substantially less than they ultimately recover.

Those rules are enforced by the state insurance department. Whether breaking them also lets you sue depends on your state.

In practice, the question tends to come up when a pattern shows in the file: the insurer asks again and again for documents you already sent, denies a claim without looking at the evidence, gives no reason for a decision, misstates what the policy says, or lets deadlines pass with no word. One of those on its own may be a mistake that a letter or a supervisor can fix. Several together, on a large claim, are the kind of facts a lawyer will want to see.

First-party and third-party bad faith

The third-party duty matters most when a claim against you is worth more than your liability limits. If your insurer turns down a reasonable chance to settle within the limits and a court later awards more, the gap could fall on you, and some states let you hold the insurer responsible for it.

If you are sued after a crash, send the papers to your insurer right away, check the duties section of your policy, and keep copies of any settlement offer the other side makes within your limits. Those dates and figures are the core of a third-party bad faith question later.

If you are the one claiming against another driver's insurer, the duty described above generally runs to that insurer's customer, not to you. Whether a third-party claimant can sue the other driver's insurer directly is a question of state law. Your usual routes are the claim against the driver, your own coverage, and a complaint; see first-party vs. third-party claims.

Court-made or written in a statute

States split on where bad faith comes from. In some, courts recognize it as a tort, as California did. In others, the legislature wrote it into a statute with its own procedure and remedies. Some states have both. These examples come from our state pages:

Each rule has its own conditions, deadlines and notice steps, and courts read them closely. That is why the right first step is a lawyer licensed in your state, not a general article.

Records that matter

Whether a claim was handled in bad faith is decided from the record. Start keeping one now, even if you hope never to need it:

1. Keep every letter and email to and from the insurer, with dates, including the denial and any offer.
2. Keep a call log: date, name, what was said and what was promised.
3. Keep proof of what you sent and when: the proof of loss, estimates, photos, medical records, receipts.
4. Note the deadlines in your state's rule and whether the insurer met them.
5. Ask in writing for the reason behind each decision and the policy language it relies on.

Talking to a lawyer

Bad faith law is specialized, and the answer turns on your state, your policy and your facts. Look for an attorney licensed in the state whose law applies who handles insurance disputes. Bring the record above, your full policy, and a one-page timeline. Ask how fees work before you agree to anything, and what the attorney thinks the realistic range of outcomes is, including none.

Valoroath is not a law firm, does not give legal advice, and does not refer readers to attorneys. Nothing here means you have a claim or will recover anything. If your dispute is really about a slow file rather than an unfair one, our page on claims that drag on covers the written steps that often get it moving.

Questions people ask