Insurance bad faith refers to a claim that an insured person has against an insurance company for bad acts. Under the law of nearly every U.S. jurisdiction, Insurance companies owe a duty of good faith in dealing with the persons they insure. If they violate that obligation, many states allow the insured person (or "policyholder") to sue the insurance company.

Historical background

Most laws regulating the insurance industry in the U.S. are state-specific. Beginning in the 1970's in California, courts began to hold that policyholders could sue insurance companies that acted in bad faith. Other states began to follow, holding that a tort claim exists for policy holders that can establish bad faith on the part of insurance carriers. In some cases, the legislatures of the states became involved and passed legislation that permitted bad faith claims.

What is bad faith?

An insurance company has many duties to its policyholders. One, it usually has a duty to defend a claim (or lawsuit) even if some or most of the lawsuit is not covered by the insurance policy. Two, it has a duty of indemnification, which is the duty to pay a judgment against the policyholder, up to the limit of coverage, but only if the judgment is for a covered act or omission. As a result, most insurance companies exercise a great deal of control over litigation.

Bad faith is a fluid concept and is defined primarily in case law.  Examples of bad faith include undue delay in handling claims, inadequate investigation, refusal to defend a lawsuit, threats against an insured, refusing to make a reasonable settlement offer, or making unreasonable interpretations of an insurance policy. The policyholder must be damaged, for example, if an insurance company refuses to make a reasonable settlement offer which the policyholder wants, and the policyholder is later subject to a judgment in excess of the policy limits, that is damage.

In some cases, the tort or the governing state statute allows punitive damages against insurance companies as a mechanism to prevent future behavior.

Our Firm has handled multiple insurance bad faith cases and we have obtained very favorable settlments for our clients.  Contact our attorney if you think you have expereinced insurance bad faith or if you need any additional infornmation.