The Legal Definition of Bad Faith
Every insurance policy contains an "implied covenant of good faith and fair dealing." This means that even though it's not written in your policy, your insurance company has a legal duty to:
- Handle your claim fairly and promptly
- Investigate your claim thoroughly before making a decision
- Pay covered claims without unreasonable delay
- Communicate honestly about your coverage and claim status
- Put your interests at least equal to their own
Bad faith occurs when an insurance company unreasonably denies, delays, or underpays a claim, or otherwise fails to honor its duties to the policyholder without a legitimate basis for doing so.
The key word is "unreasonable." Insurance companies can deny claims - that's their right when a claim isn't covered. But when they deny covered claims, drag out investigations indefinitely, refuse to communicate, or make settlement offers they know are unfairly low, they cross the line into bad faith.
Bad Faith Is More Than a Contract Breach
What makes bad faith claims special is that they go beyond simple breach of contract. When you sue for breach of contract, you can only recover what the contract promised (your policy benefits). But bad faith is a tort - a civil wrong - which opens the door to additional damages:
- Emotional distress damages for the stress and anxiety caused by the insurer's conduct
- Consequential damages for financial harm beyond the policy (foreclosure, bankruptcy, etc.)
- Punitive damages in cases of especially egregious conduct (to punish the insurer)
- Attorney's fees in some states (like California's Brandt doctrine)
Legal Elements of a Bad Faith Claim
To win a bad faith lawsuit, you generally need to prove these elements (though specific requirements vary by state):
- You Had a Valid Insurance Policy The insurance policy must have been in effect at the time of the loss, and your premiums must have been paid. This is usually the easiest element to prove with your declarations page.
- You Submitted a Covered Claim Your loss must fall within the coverage provided by your policy. If your claim genuinely isn't covered, there's no bad faith - even if you disagree with the coverage interpretation.
- The Insurer Breached Its Duties The insurer must have failed in some duty - unreasonably denying coverage, delaying without reason, failing to investigate, making lowball offers, or similar conduct.
- The Breach Was Unreasonable This is often the key battleground. The insurer's conduct must lack any "reasonable basis." If there's a genuine coverage dispute, that may be a defense. But if the insurer ignored evidence, failed to investigate, or acted contrary to its own guidelines, that's unreasonable.
- You Suffered Damages You must show actual harm - unpaid benefits, emotional distress, financial consequences, etc.
In California, bad faith exists when benefits are withheld "without proper cause." Under Chateau Chamberay Homeowners Ass'n v. Associated Int'l Ins. Co. (2001), the insurer's conduct must be unreasonable - but the policyholder doesn't need to prove the insurer acted with specific intent to harm.
Examples of Insurance Bad Faith
Bad faith can take many forms. Here are common examples of conduct that courts have found to constitute bad faith:
Unreasonable Denials
- Denying a claim without investigating the facts
- Denying coverage based on policy language that doesn't apply
- Misrepresenting what your policy covers to justify a denial
- Denying a claim based on a technicality when coverage clearly applies
A homeowner files a water damage claim. The insurer denies it, claiming the damage was from "flooding" (excluded) when the damage was actually from a burst pipe (covered). The insurer never sent an adjuster to inspect and made the decision based solely on the word "water" in the claim. This is likely bad faith.
Unreasonable Delays
- Failing to acknowledge or respond to claims for weeks or months
- "Investigating" indefinitely without making a decision
- Repeatedly requesting the same documentation
- Passing your claim between adjusters to restart the process
A policyholder submits a clear-cut auto claim with photos, police report, and repair estimates. The insurer takes 6 months to process the claim, repeatedly asking for documents already provided, and only pays after the policyholder hires an attorney. This delay without legitimate reason is likely bad faith.
Lowball Settlements
- Offering far less than the claim is worth without justification
- Using improper depreciation to reduce payouts
- Ignoring evidence of the claim's true value
- Pressuring policyholders to accept inadequate settlements quickly
Investigation Failures
- Failing to interview witnesses or review evidence
- Ignoring information that supports the claim
- Only seeking evidence that supports denial
- Hiring biased "independent" experts
Communication Failures
- Failing to explain reasons for denial
- Misrepresenting policy terms
- Not responding to policyholder communications
- Failing to inform policyholders of deadlines or requirements
What Is NOT Bad Faith
Not every frustrating insurance experience constitutes bad faith. Understanding the limits helps you evaluate your situation realistically:
Legitimate Denials
If your claim genuinely isn't covered under your policy, a denial is not bad faith - even if you're disappointed. For example, if your policy excludes flood damage and you file a flood claim, the denial is proper.
Genuine Coverage Disputes
When policy language is ambiguous and reasonable people could disagree about coverage, an insurer's interpretation (even if wrong) may not be bad faith. However, if the insurer's interpretation is unreasonable or ignores established law, that changes.
Honest Mistakes
Simple errors that are quickly corrected generally don't constitute bad faith. The insurer's conduct must be unreasonable, not just imperfect.
Normal Processing Time
Some claims legitimately require time to investigate. A complex claim that takes a few weeks isn't automatically bad faith. But extended delays without justification or communication are.
The difference between a legitimate coverage dispute and bad faith often comes down to how the insurer handled the claim. Did they investigate thoroughly? Did they communicate clearly? Did they have any reasonable basis for their position? An insurer that acts reasonably but reaches the wrong conclusion may not be liable for bad faith - but may still be liable for breach of contract.
First-Party vs. Third-Party Bad Faith
Bad faith claims come in two main types, depending on your relationship to the insurance policy:
| Type | Situation | Example |
|---|---|---|
| First-Party | You're the policyholder making a claim on your own policy | Filing a homeowners claim for fire damage to your house |
| Third-Party | You're injured and the at-fault party's insurer mistreats you OR your insurer fails to properly defend/settle a claim against you | An insurer refuses to settle within policy limits, exposing their insured to excess judgment |
Most individual policyholder bad faith cases are first-party - you bought the policy, you suffered a loss, and your insurer wrongly denied or underpaid your claim.
Third-party bad faith often arises in liability contexts. For example, if you're sued after a car accident and your insurer refuses a reasonable settlement offer, then you get hit with a judgment exceeding your policy limits, your insurer may have acted in bad faith by exposing you to that excess liability.
What To Do If You Suspect Bad Faith
If you believe your insurer is acting in bad faith, take these steps to protect your rights:
1. Document Everything
Keep detailed records of all communications with your insurer. Note dates, times, who you spoke with, and what was said. Save all letters, emails, and denial notices. This documentation is crucial if you later pursue a bad faith claim.
2. Follow Up in Writing
After phone calls, send a follow-up email or letter summarizing the conversation. If the insurer makes verbal promises or representations, put them in writing. Ask for written explanations of any denials.
3. Know Your Policy
Read your policy carefully. Understand what's covered, what's excluded, and what your duties are. If the insurer cites a policy provision to deny your claim, verify that the provision actually says what they claim.
4. Meet Your Deadlines
Don't give the insurer an excuse. Submit requested documents on time. Meet any proof of loss deadlines. Cooperate with reasonable investigation requests.
5. Consider a Demand Letter
A formal demand letter puts the insurer on notice that you believe they're acting in bad faith. It creates a record and sometimes prompts insurers to re-evaluate their position.
6. File a Department of Insurance Complaint
Your state's Department of Insurance can investigate insurer misconduct. While they can't award you damages, a complaint creates an official record and may pressure the insurer to act fairly.
7. Consult an Attorney
If significant money is at stake or the insurer's conduct is egregious, consult an attorney experienced in insurance bad faith cases. Many offer free consultations and work on contingency for bad faith claims.
Need Help With Your Claim?
I help policyholders fight back against insurance companies that act in bad faith. Whether you need a demand letter, help understanding your rights, or representation in a bad faith case, I can help.