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⚖️ '''Insurance bad faith''' is a legal doctrine holding that an [[Definition:Insurance carrier | insurance carrier]] owes its [[Definition:Policyholder | policyholders]] — and in some jurisdictions, third-party [[Definition:Claimant | claimants]] — a duty of good faith and fair dealing in handling [[Definition:Claim | claims]], and that a willful or unreasonable breach of this duty gives rise to liability beyond the original policy limits. In essence, when an insurer denies, delays, or underpays a legitimate claim without a reasonable basis, or fails to conduct a fair investigation, the policyholder may pursue a bad faith action seeking not only the contractual benefits owed but also consequential damages and, in many U.S. states, [[Definition:Punitive damages | punitive damages]]. While the concept is most extensively developed in American insurance law, analogous duties and remedies exist in other common-law jurisdictions and, to varying degrees, under civil-law frameworks that impose obligations of good faith on contracting parties.

🔍 Bad faith claims generally fall into two categories: first-party bad faith, where the insurer mistreats its own policyholder — for example, by unreasonably refusing to pay a valid [[Definition:Property insurance | property]] or [[Definition:Health insurance | health]] claim — and third-party bad faith, where the insurer mishandles the defense or settlement of a [[Definition:Liability insurance | liability]] claim against its insured, exposing the insured to a judgment exceeding [[Definition:Policy limit | policy limits]]. The standards for proving bad faith vary significantly by jurisdiction. In the United States, some states require only that the insurer lacked a reasonable basis for its conduct, while others impose a higher threshold demanding proof of conscious wrongdoing or reckless disregard. Outside the U.S., the United Kingdom's Insurance Act 2015 modernized [[Definition:Utmost good faith | utmost good faith]] obligations, and regulatory bodies like the Financial Conduct Authority enforce fair treatment standards that, while not identical to American bad faith tort law, serve a parallel disciplinary function. In markets such as Australia, the duty of utmost good faith is codified in the Insurance Contracts Act and carries enforceable consequences for breach.

💰 The financial stakes of bad faith exposure can be enormous, sometimes dwarfing the underlying [[Definition:Policy limit | policy limits]] when juries award punitive damages or when courts impose extra-contractual liability. This reality makes [[Definition:Claims management | claims handling]] practices one of the most closely scrutinized areas within any insurer's operations. Carriers invest heavily in training [[Definition:Claims adjuster | adjusters]], establishing clear [[Definition:Claims management | claims protocols]], and maintaining detailed documentation to defend against allegations that a denial or delay was unreasonable. From a [[Definition:Insurance governance | governance]] perspective, boards and senior management recognize that patterns of bad faith conduct — sometimes called "bad faith exposure" in actuarial reserving — can generate [[Definition:Loss reserve | reserve]] volatility, [[Definition:Regulatory action | regulatory sanctions]], and lasting reputational damage. For the broader industry, the doctrine serves as a powerful market discipline mechanism: it reinforces the fundamental promise that insurance is supposed to keep — paying covered claims promptly and fairly.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Utmost good faith]]
* [[Definition:Claims management]]
* [[Definition:Punitive damages]]
* [[Definition:Unfair claims settlement practices]]
* [[Definition:Extra-contractual obligation (ECO)]]
* [[Definition:Policyholder rights]]
{{Div col end}}

Definition:Insurance bad faith - Revision history

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