Insurance Bad Faith

An insurer's duty to deal fairly with its own policyholder - and the separate claim that arises when it does not.

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What it means

An insurance policy is a contract, so an insurer that refuses to pay what it owes can be sued for breach of contract. Bad faith is the additional idea layered on top: that because the insured has already paid, cannot shop elsewhere once the loss has happened, and is often in financial distress at exactly the moment the claim is made, the insurer owes something more than ordinary contractual performance. Most states recognize an implied duty of good faith and fair dealing in every insurance contract, and many allow a separate cause of action when it is breached.

The distinction that organizes the whole subject is first-party versus third-party bad faith. First-party is your own insurer refusing or underpaying your own claim - the fire loss, the health claim, the disability benefit. Third-party arises where your insurer is defending you against someone else's claim and mishandles that defense, most commonly by refusing a settlement offer within your policy limits and then losing at trial for more, leaving you personally exposed for the excess.

Conduct commonly alleged includes denying a claim without a reasonable investigation, misrepresenting what the policy covers, ignoring or unreasonably delaying communications, demanding documents already supplied, offering an amount with no rational relation to the loss, and applying an interpretation of the policy language that no reasonable reader would reach. Being wrong is generally not enough. Most states require something more than an incorrect denial - typically that the insurer had no reasonable basis for its position, or knew it had none. A genuine dispute over coverage, honestly maintained, is usually a defense.

Two structural points change the practical picture. Remedies for bad faith are frequently larger than the policy benefit itself and may include consequential losses, attorney fees, interest and in some states punitive damages, which is why the claim exists at all - without it, an insurer's worst case for wrongly refusing would be paying later what it owed anyway. And in most states there is a parallel regulatory route: a market conduct complaint to the state insurance department, which is free, does not require a lawyer, and sometimes resolves the claim on its own. Whether a violation of those regulations creates a private right to sue varies significantly by state.

One large category sits outside all of this. Most employer-provided health, disability and life benefits are governed by the federal ERISA statute, which generally displaces state bad-faith law for those plans and substitutes a narrower federal remedy. The practical consequence is severe and frequently discovered too late: for an ERISA plan the usual outcome of winning is the benefit itself, and the case is often decided on the administrative record built during the plan's own internal appeal rather than on new evidence.

Where this comes from

When people hire a lawyer for this

Two moments are worth advice. The first is before you accept a denial as final: denials are routinely reversed on internal appeal, and the appeal is where the record that a court may later be limited to is built - which matters enormously for an employer-provided plan, where new evidence may not be admitted afterwards. The second is any time an insurer defending you asks you to accept exposure above your policy limits, or refuses a settlement within them; that is the classic third-party scenario and your interests and your insurer's have just diverged. Free routes exist in parallel and are worth using: a complaint to your state insurance department costs nothing, and most states publish a consumer claims-handling guide. Keep every communication in writing, and ask for the reason for denial and the policy language relied on in writing too, because a denial that will not identify its own basis is itself informative.

Worried about the cost? A lawyer can be hired for one part of a case only (limited-scope representation), may be paid from what a claim recovers (contingency fee), or may be free through a pro bono program or legal aid; a court can also waive its own filing fees.

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Related terms

Other entries in the same area of law, each written from the same primary sources.

• Assumption of Risk and Liability WaiversThe defense that a person who knowingly took on a danger cannot complain of it - and the signed waiver that tries to make that agreement explicit before the gym, the ski slope or the trampoline park.
• Comparative and Contributory NegligenceRules that decide what happens to a claim when the injured person was also partly careless - and they differ sharply from state to state.
• Contingency FeeA fee arrangement in which the lawyer is paid a percentage of what is recovered, and is paid no fee if nothing is recovered.
• Damages in a Personal Injury ClaimThe categories of loss an injured person can be compensated for - the bills and lost earnings, the pain and the lost enjoyment of life - plus the separate and rarer category meant to punish, and the state caps that limit some of them.
• Dog Bite LiabilityWho pays when a dog injures someone - the strict-liability statutes most states have and what they cover, the older "one-bite" rule that survives in the rest, negligence and leash-law claims that exist under either, the defenses of trespass and provocation, landlord and keeper liability, how homeowners' insurance responds, and the dangerous-dog proceedings that run alongside the civil claim.
• Dram Shop and Social Host LiabilityWhen a bar, restaurant, liquor store or private host can be held responsible for injuries caused by someone they served alcohol to - the statutes that create the claim in most states and the very different standards they set (visibly intoxicated, under the legal drinking age, or both), the states with no claim at all, social-host rules for minors, what must be proved, the notice requirements, and who can sue.
• Emotional Distress Claims (IIED and NIED)When the law compensates psychological harm on its own, without a physical injury - the intentional-infliction tort and its "outrageous conduct" threshold, the negligent-infliction claim and the limits states put on it (the impact, zone-of-danger and bystander rules), the proof a claim needs, and how these differ from the emotional-distress damages that ride on any ordinary injury claim.
• Independent Medical ExaminationAn examination by a doctor chosen and paid for by the other side - routine in injury, disability and workers' compensation claims, and not treatment.
• Joint and Several LiabilityWhat happens when more than one person is responsible for the same injury - the traditional rule that each is liable for the whole judgment, the modern rules in most states that limit it by share of fault or by type of damages, contribution between defendants, the effect of settling with one of them, and why the rule decides who actually pays when one defendant is uninsured or bankrupt.
• Loss of ConsortiumThe claim of a spouse - and in some states a child or parent - for what an injury to a family member took from the relationship itself: companionship, affection, household services and the marital relationship, what has to be proved, why it is derivative of the injured person's claim, and how it is pleaded, valued and settled.
• NegligenceCarelessness that the law treats as a legal wrong because it fell below the level of care a reasonable person owed to someone else.
• Negligence Per SeThe rule that breaking a safety statute - running a red light, serving alcohol to a minor, violating a building code - can itself establish that the defendant was careless, without the jury deciding what a reasonable person would have done.
• Premises LiabilityThe responsibility of whoever owns or controls property for injuries caused by its condition - the slip on the wet floor, the broken stair, the unlit car park - and the rules that make the visitor's reason for being there matter.
• Product LiabilityA claim against the maker or seller of a product that injured someone because of how it was designed, how it was made, or what it failed to warn about - and the federal rules that can shut some of those claims down.
• Res Ipsa LoquiturThe doctrine that lets an injured person prove negligence from the accident itself when the cause is unknown but the event is one that does not ordinarily happen without carelessness - its elements, the exclusive-control requirement and how it has loosened, what the doctrine does procedurally (an inference, or a presumption shifting the burden), and where it is and is not used.
• Strict LiabilityLiability for harm without any showing of carelessness - the rule for abnormally dangerous activities, for defective products in most states, and, under many state statutes, for the owner of a dog that bites.
• Subrogation and Medical Liens on a SettlementWhy an injured person does not keep the whole settlement - the right of health insurers, Medicare, Medicaid, ERISA plans, workers' compensation carriers and hospitals to be repaid from a recovery for the treatment they paid for, how each kind of lien is created and enforced, the rules that reduce them, and why the liens have to be resolved before the check is cashed.
• Suing the Government for an Injury (Tort Claims Acts)Why an injury caused by a government employee or a public property defect follows different rules - sovereign immunity and the statutes that waive it, the written claim that must be presented to the agency before any lawsuit and the short deadline for it, the exceptions that keep immunity (discretionary functions, most intentional torts, certain activities), damage caps, and the no-jury and no-punitive-damages rules.
• Vicarious Liability (Respondeat Superior)The rule that makes an employer liable for harm its employee causes while doing the job - the reason the trucking company, the hospital or the delivery firm is the defendant, and the reason "independent contractor" is fought over so hard.
• Workers' CompensationThe state no-fault system that pays medical care and part of lost wages for an injury at work without any proof of fault - and, in exchange, takes away the right to sue the employer, though not the right to sue anyone else who caused it.
• Wrongful Death ClaimA claim brought by surviving family members or an estate when someone dies because of another party's wrongful act.

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