Bad Faith Insurance Claims: What the Term Means

When you buy insurance, you pay premiums in exchange for a promise: if a covered loss happens, the company will handle your claim fairly. Most claims are handled without a major fight. Sometimes, though, a policyholder feels the insurer is delaying, underpaying, or denying a claim without a good reason. The phrase people often use for this is "bad faith." This guide explains what the term generally means, what it does not mean, and how to protect yourself.

What "bad faith" generally means

In general terms, bad faith refers to an insurance company failing to treat its own policyholder fairly when handling a claim. Insurance policies are contracts, and courts in many states recognize that insurers owe their policyholders a duty of good faith and fair dealing in carrying out that contract.

The exact rules come from state law. Some states have statutes about unfair claim practices. Some rely mostly on court decisions. What counts as bad faith, who can bring a claim, and what can be recovered all differ from state to state.

What bad faith is not

A denied or reduced claim is not automatically bad faith. Insurers are allowed to:

• Investigate a claim before paying
• Deny a claim that the policy does not cover
• Dispute the amount of a loss when there is a reasonable basis for doing so

A disagreement about value or coverage can be a normal contract dispute. The question in a bad faith case is usually whether the insurer acted without a reasonable basis, or handled the claim in a way that state law treats as unfair. Only a lawyer who knows your state's rules can tell you whether your situation might fit.

Warning signs people often raise

The following situations are not proof of bad faith, but they are the kinds of issues policyholders often bring to a lawyer:

• Long delays with no clear explanation
• A denial that does not say which policy language it relies on
• Repeated requests for the same documents
• Little or no investigation before a denial
• An offer that seems far below the documented loss, with no explanation
• Pressure to accept a quick settlement or sign a release

Your own policyholder claim vs. a claim against someone else's insurer

It helps to know which kind of claim you have. A "first-party" claim is one you make under your own policy, such as your homeowners or auto policy. A "third-party" claim is one you make against someone else's insurance, such as the other driver's insurer after a crash.

Bad faith rules often focus on how an insurer treats its own policyholder. Whether someone who is not the policyholder can raise bad faith depends heavily on state law. Ask a lawyer which category your claim falls into.

How to document an insurance dispute

Good records make every option stronger. Consider keeping:

• A copy of the full policy, including all endorsements. Ask the insurer for a certified copy if you do not have one.
• The claim number and the names of every adjuster you deal with.
• A log of every call: date, time, who you spoke with, and what was said.
• All letters and emails, including denial letters.
• Proof of your loss: photos, estimates, receipts, medical records, and bills.

Ask for important decisions in writing. If a claim is denied, ask the insurer to identify the specific policy language it relies on.

Where to complain

The USAGov guide to complaints about a company suggests a general path: gather your documents, contact the company and its management, then turn to government or consumer programs, and finally the legal system if needed.

For insurance problems, every state has an insurance regulator, often called the state department of insurance, that accepts consumer complaints. Your state consumer protection office and your state attorney general may also be able to point you in the right direction. A complaint to a regulator is not a lawsuit, but it creates a record and may prompt a response from the company.

When to talk to a lawyer

Consider speaking with a lawyer if a large claim is denied, if you are being pressured to sign a release, or if a deadline in your policy or under state law is approaching. Insurance policies can include their own time limits for filing suit, and state law sets others. Ask about both.

A lawyer can review the policy, the claim file, and your state's rules. If your dispute arises out of an injury, see our personal injury practice page. If you cannot afford a private lawyer, the USAGov legal aid page lists free and low-cost options.

Frequently asked questions

Is every denied claim bad faith?

No. Insurers may deny claims that are not covered or dispute amounts when they have a reasonable basis. Bad faith generally involves unfair claim handling as defined by state law.

Who decides whether an insurer acted in bad faith?

That depends on state law and the facts. A state insurance regulator may look into complaints, and courts decide legal claims.

Should I accept a low offer while I think it over?

Read any release carefully before signing. Accepting payment and signing a release may end your claim. Ask a lawyer first if the amount matters to you.

Where can I file a complaint about my insurer?

Your state's insurance regulator accepts consumer complaints. Your state consumer protection office and attorney general may also help.

Related: Browse guides on legal topics.

This page is general information, not legal advice. Laws change and every case is different — talk to a licensed attorney about your situation.