View source for Definition:Bad faith (insurance)

⚠️ '''Bad faith (insurance)''' is a legal doctrine holding that [[Definition:Insurance carrier | insurers]] owe a duty of fair dealing and good faith to their [[Definition:Policyholder | policyholders]], and that a willful or unreasonable breach of that duty exposes the carrier to liability beyond the original [[Definition:Policy | policy]] limits. In practice, bad faith allegations most commonly arise when an insurer unreasonably denies or delays a valid [[Definition:Claims | claim]], fails to conduct a thorough investigation, or refuses to settle a [[Definition:Liability insurance | liability]] claim within policy limits when it reasonably should have done so. The doctrine exists in virtually every U.S. jurisdiction, though the standards, available remedies, and statutory frameworks vary significantly from state to state.

🔍 Bad faith claims typically fall into two categories: first-party and third-party. First-party bad faith occurs when an insurer mistreats its own policyholder — for example, by lowballing a [[Definition:Property insurance | property]] damage payment, imposing unreasonable documentation demands, or invoking [[Definition:Avoidance (insurance) | policy avoidance]] without adequate grounds. Third-party bad faith arises in liability contexts when an insurer's failure to accept a reasonable settlement offer within [[Definition:Policy limit | policy limits]] exposes the insured to an [[Definition:Excess judgment | excess judgment]]. The [[Definition:Claims management | claims handling]] process is the primary battleground: adjusters must document their decisions, adhere to [[Definition:Unfair claims settlement practices | unfair claims settlement practices]] statutes, and communicate transparently with insureds. Some states recognize bad faith as a tort, opening the door to [[Definition:Punitive damages | punitive damages]] that can dwarf the underlying claim.

💡 The financial and reputational stakes of bad faith litigation have reshaped how carriers approach [[Definition:Claims management | claims]] operations. Insurers invest heavily in adjuster training, quality assurance audits, and [[Definition:Litigation management | litigation management]] protocols specifically to reduce bad faith exposure. [[Definition:Excess and surplus lines | Excess carriers]] and [[Definition:Reinsurance | reinsurers]] closely monitor cedants' claims practices because a bad faith finding can amplify losses far beyond modeled expectations. For the broader industry, the doctrine functions as a powerful check on insurer conduct — reinforcing the promise at the heart of the insurance contract and ensuring that policyholders receive the benefit of the coverage they purchased.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Unfair claims settlement practices]]
* [[Definition:Punitive damages]]
* [[Definition:Claims management]]
* [[Definition:Utmost good faith]]
* [[Definition:Excess judgment]]
* [[Definition:Policy limit]]
{{Div col end}}