CHICAGO — Insurance bad faith occurs when an insurance carrier unreasonably denies, delays, or underpays a valid claim — or otherwise fails to fulfill its obligations to the policyholder in good faith. Here is what constitutes bad faith, how to document it, and what legal remedies are available.
Common examples of insurance bad faith include: denying a valid claim without a reasonable basis; failing to conduct a prompt and thorough investigation; offering a settlement that is unreasonably low compared to the actual loss; failing to communicate promptly with the policyholder; and misrepresenting policy terms or coverage.
All states recognize the legal concept of insurance bad faith, but the specific legal standards and remedies vary significantly. In first-party bad faith cases — where the policyholder sues their own carrier — some states allow policyholders to recover not only the amount of the denied claim but also consequential damages, attorney's fees, and in some cases punitive damages.
To pursue a bad faith claim, policyholders must document the carrier's conduct carefully. This includes keeping records of all communications with the carrier, including dates, times, and the names of all carrier representatives; preserving all written communications; and documenting any delays, denials, or lowball offers.
Policyholders who believe their carrier has acted in bad faith should consult with an insurance coverage attorney before taking any action. An experienced attorney can evaluate the facts, advise on the applicable legal standards, and help the policyholder pursue the appropriate remedy — whether through the appraisal process, mediation, or litigation.
