Insurance bad faith happens when an insurance company unreasonably denies, delays or underpays a claim it owes, or fails to treat its policyholder fairly. Your own insurer owes you a duty of good faith and fair dealing because you have a contract with it. When an insurer breaks that duty, many states let you recover not only the claim amount, but additional damages and sometimes attorney fees or penalties.
Bad faith is not the same as a disagreement. Insurers are allowed to dispute claims they honestly and reasonably believe aren’t covered or are worth less. The line is crossed when the insurer acts without a reasonable basis or ignores its own obligations. Here is how to recognize the signs and what you can do.
First Party vs Third Party Bad Faith
Bad faith comes in two main forms.
First party bad faith
This involves your own insurance company handling your own claim, such as an uninsured motorist claim, a collision claim, a homeowners claim, a health insurance claim or a disability claim. Because you are the policyholder, the insurer owes you a direct duty of good faith.
Third party bad faith
This usually involves your insurer’s duty when someone else sues you. If your insurer unreasonably refuses to settle a claim against you within your policy limits, and you are then hit with a judgment above your limits, the insurer may be liable for the excess. Injured people sometimes become involved in these claims when an at fault driver’s insurer refuses a reasonable policy limits offer.
In most states, an injured person can’t sue the other driver’s insurance company for bad faith directly, because they have no contract with it. A few states allow certain direct claims under specific statutes.
Warning Signs of Bad Faith
- Unreasonable delays. Months pass with no decision or explanation.
- No reason for a denial. The insurer denies without explaining why or cites a policy provision that doesn’t apply.
- Failing to investigate. Denying without looking at your evidence, talking to witnesses or reviewing records.
- Lowball offers with no basis. Offering far less than the documented value without explaining how they reached the number.
- Misrepresenting your policy. Telling you something isn’t covered when the policy says it is.
- Demanding unnecessary paperwork. Repeatedly asking for documents you already provided.
- Not responding to communications. Ignoring calls and letters.
- Threatening or pressuring you. Telling you to accept a low offer or get nothing.
- Changing the reason for denial after you answer the first one.
- Refusing to settle within policy limits when liability is clear and damages exceed the limits, exposing you to a larger judgment.
The Laws That Protect You
Most states have unfair claims settlement practices laws, often based on a model law from the National Association of Insurance Commissioners. These laws commonly require insurers to:
- Acknowledge claims and communications promptly
- Adopt reasonable standards for investigating claims
- Affirm or deny coverage within a reasonable time after proof of loss
- Explain the basis for a denial in writing
- Not misrepresent policy provisions
- Not offer substantially less than the amount owed in an effort to force litigation
Some states also have bad faith statutes that allow policyholders to sue and recover extra damages, interest or attorney fees. Others recognize bad faith as a common law claim through court decisions. A few states limit bad faith remedies more than others.
What You Can Recover in a Bad Faith Claim
| Type of recovery | What it covers |
|---|---|
| Contract damages | The benefits the policy should have paid |
| Consequential damages | Financial harm caused by the delay or denial, like late fees or losses |
| Emotional distress | Available in some states for bad faith conduct |
| Attorney fees | Allowed by statute in some states |
| Statutory penalties and interest | Set amounts or percentages under some state laws |
| Punitive damages | In some states for especially egregious conduct |
| Excess judgment | In third party cases, the amount of a judgment above policy limits |
How to Document Possible Bad Faith
Bad faith claims are built on records. Start now:
- Keep a log of every call, with the date, time, person you spoke to and what was said
- Follow every phone call with an email summarizing the conversation
- Save every letter, email and document from the insurer
- Keep copies of everything you send, with proof of delivery
- Note every deadline the insurer misses
- Request the reason for any denial in writing
- Request a copy of your full policy, including endorsements
Steps to Take Before Suing
Ask for a written explanation
Ask the insurer to explain its position in writing, citing the policy language it relies on.
Escalate internally
Ask for a supervisor or claims manager to review your claim.
File a complaint with your state insurance department
Regulators can’t usually force a specific payment, but insurers must respond to complaints, and patterns of complaints can lead to investigations. This step often gets a stalled claim moving.
Use policy dispute tools
Some policies include appraisal clauses for disputes about the amount of a property loss, or arbitration for uninsured motorist claims.
Send a demand letter
Some states require a formal notice before you can sue for bad faith. Florida, for example, requires a civil remedy notice that gives the insurer a window to fix the problem. A lawyer can tell you if your state has a similar requirement.
Bad Faith in Uninsured Motorist Claims
UM claims are a common setting for first party bad faith. When you claim under your own uninsured motorist coverage, your insurer stands in the shoes of the at fault driver, and some adjusters treat their own policyholder like an opponent. Insurers can dispute value, but they still owe you good faith. Unreasonable delays, refusing to evaluate your medical evidence or making offers with no reasonable basis can support a bad faith claim.
Policy Limits Demands and Third Party Bad Faith
When an injured person’s damages clearly exceed the at fault driver’s policy limits, their lawyer may send a policy limits demand, offering to settle for the full limit within a set time. If the insurer unreasonably refuses and a jury later awards much more than the limits, the insurer may be liable for the entire judgment. This rule exists to protect policyholders, but it also gives injured people leverage. Insurers take these demands seriously because of the risk.
Bad Faith in Health and Disability Insurance
Bad faith isn’t limited to car and home insurance. Health insurers that wrongly deny necessary treatment and disability insurers that cut off benefits without a fair review can also act in bad faith. Be aware that many health and disability policies provided through employers are governed by a federal law called ERISA, which has its own appeal process and generally limits the damages available compared with state bad faith laws. If your policy came through work, the rules may be quite different, so get advice specific to your plan.
What Bad Faith Is Not
It helps to be realistic. An insurer isn’t acting in bad faith just because:
- It disagrees with you about the value of your claim, if it has a reasonable basis
- It asks for reasonable documentation
- It denies a claim that truly falls outside your policy’s coverage
- It takes a reasonable amount of time to investigate a complex loss
- It makes an honest mistake that it promptly corrects
Courts generally look for conduct that is unreasonable, not merely unfavorable to you. A clear record helps show the difference.
Mistakes That Weaken a Bad Faith Claim
- Not cooperating with reasonable requests for information
- Missing policy deadlines for notice or proof of loss
- Handling everything by phone with no written record
- Exaggerating the claim, which can give the insurer a legitimate reason to dispute it
- Waiting too long, since bad faith claims have their own statutes of limitations
How Insurers Are Supposed to Handle Your Claim
A fair claims process usually looks like this: the insurer acknowledges your claim promptly, assigns an adjuster, tells you what documents it needs, investigates reasonably, gives you a decision within a reasonable time and explains any denial or reduction in writing with reference to your policy. When an insurer follows these steps, even a disagreement over value is usually just a negotiation. When several of these steps are missing, that pattern is often what a bad faith claim is built on.
Bad Faith and Total Loss Claims
Car owners often run into problems when their own insurer declares a vehicle a total loss and offers a value well below what similar cars sell for. Insurers use valuation reports based on comparable vehicles, and those reports sometimes rely on cars in worse condition, with higher mileage or from distant markets. Ask for a copy of the valuation report, check the comparables, and send your own listings for similar cars nearby. Many auto policies include an appraisal clause for value disputes. An insurer that refuses to explain or correct an obviously flawed valuation may be acting unfairly.
A Quick Example
Brenda’s home in Louisiana is damaged in a storm. She files a claim with photos and contractor estimates. Her insurer takes months to send an adjuster, then offers a fraction of the repair cost with no explanation. She asks repeatedly for the basis of the offer and gets no answer. Meanwhile, more damage occurs because repairs can’t start.
Brenda documents every delay, files a complaint with the state insurance department and hires a lawyer. Because the insurer failed to explain its offer, delayed without reason and allowed additional damage to happen, her lawyer pursues both the policy benefits and additional damages under the state’s bad faith law. The case settles for the full repair cost plus extra compensation for the delay.
When to Talk to a Lawyer
Bad faith law is complex and varies a lot by state. If you have a significant claim and see several warning signs, talk to a lawyer who handles insurance disputes. Many take bad faith cases on contingency, and some state laws allow you to recover attorney fees from the insurer.
What to Do Next
Start a written log of every interaction with your insurer and request written explanations for any denial or low offer. Get a full copy of your policy. If delays continue or the insurer won’t explain itself, file a complaint with your state insurance department and consider consulting a lawyer. Good records are the foundation of any bad faith claim.
Sources
- National Association of Insurance Commissioners: Unfair Claims Settlement Practices Model Act
- NAIC: File a Consumer Complaint
- Insurance Information Institute
This article is for general information only and is not legal advice. Laws change and every case is different, so speak with a licensed attorney in your state about your own situation.
Frequently Asked Questions
Can I switch insurers in the middle of a claim?
You can buy new coverage going forward, but your current claim stays with the insurer whose policy covered the date of loss.
Is there a deadline to file a bad faith lawsuit?
Yes. Bad faith claims have their own statutes of limitations, which vary by state. Some states also require notice before suing.
What is insurance bad faith?
It is when an insurer unreasonably denies, delays or underpays a claim, or otherwise fails to treat its policyholder fairly.
Can I sue my insurance company for bad faith?
In most states, yes, through state statutes or common law. Remedies and requirements vary by state.
Can I sue the other driver's insurer for bad faith?
Usually not directly, because you have no contract with them. A few states allow limited direct claims.
How long can an insurer take to pay a claim?
It depends on state law, but many states require acknowledgment within a couple of weeks and a decision within a reasonable time, often 30 to 45 days after proof of loss.
What damages are available for bad faith?
Depending on the state, you may recover the policy benefits, consequential damages, emotional distress, attorney fees, penalties and sometimes punitive damages.
Should I file a complaint with the insurance department?
Yes, if your insurer is acting unfairly. It creates a record and often prompts a response.
