Insurance bad-faith claims explained
An insurance company owes a duty of good faith and fair dealing to its policyholder. Breach of that duty supports a separate tort claim with damages that can exceed the original policy limits. This article defines first-party and third-party bad faith, lists the most common breach patterns, and identifies the evidence a claimant must preserve.
Insurance bad-faith claims explained
An insurance company owes a duty of good faith and fair dealing to its policyholder. A breach of that duty supports a separate tort claim against the insurer with damages that can exceed the original policy limits. This article defines first-party and third-party bad faith, lists the most common breach patterns recognized by U.S. courts, identifies the evidence a claimant must preserve, and explains the procedural differences between bad-faith and standard breach-of-contract claims.
What the duty of good faith actually requires
The duty of good faith and fair dealing requires an insurance company to handle a covered claim with the same diligence the insurer would apply to its own business: prompt investigation, reasonable evaluation, timely communication, and payment when coverage clearly applies. The duty is implied by law in every state insurance contract and cannot be waived by policy language. A breach exposes the insurer to compensatory damages, consequential damages, attorney fees in many states, and punitive damages in cases of egregious misconduct.
First-party vs third-party bad faith
| Form | Definition | Examples |
|---|---|---|
| First-party | Insurer mishandles a claim by its own policyholder | Auto insurer denies a totaled-vehicle claim by its own insured; homeowners insurer underpays a fire loss; UM insurer denies a covered claim |
| Third-party | Insurer mishandles a liability claim by an injured non-policyholder against the insured | Insurer refuses to settle within policy limits, exposing the insured to an excess judgment; insurer fails to defend a covered suit |
Common first-party bad-faith patterns
Unreasonable denial of a covered claim
An insurer denies a claim despite clear coverage under the policy language. The denial is unreasonable if it relies on an exclusion that does not apply, misinterprets the policy, or invokes a basis the insurer could not reasonably support after investigation. The Hawaii Supreme Court in Best Place v. Penn America Insurance (1996) recognized this pattern as the foundational form of first-party bad faith.
Lowball settlement offers
An insurer offers an amount far below the claims reasonable value, particularly before the claimant has retained counsel. The offer is bad faith if it is not supported by an independent damages evaluation. Repeated lowball offers in the face of clear evidence of higher value support a bad-faith claim.
Failure to investigate
An insurer closes a claim or denies it without conducting a reasonable investigation: no witness interviews, no claim-specific medical-record review, no scene inspection where appropriate. The standard is what a reasonable insurer would do in the same circumstances. An insurer that issues a denial within 48 hours of receiving the claim without any external investigation creates a strong record of failure to investigate.
Unreasonable delay
An insurer strings a claim out beyond reasonable timeframes, requesting duplicative documentation, missing internal deadlines, or failing to respond to communications. Delay is more difficult to prove than outright denial but is actionable when the pattern is documented in writing.
Misrepresentation of policy terms
An insurer tells the policyholder that coverage does not apply when the policy clearly says it does, or selectively quotes policy language to support a denial. Misrepresentation is the most clearly actionable form of first-party bad faith because it shifts the case from policy interpretation to insurer misconduct.
The classic third-party bad-faith pattern: failure to settle within limits
When an injured claimant offers to settle within the at-fault drivers liability policy limit, the insurer has a duty to seriously consider the offer. If the insurer rejects a reasonable within-limits offer and the case later produces an excess verdict, the insurer is liable to its own insured for the entire excess (not just the policy limit). The leading case is Crisci v. Security Insurance Co. (California Supreme Court 1967). The doctrine exists in some form in every state.
What the insurer must consider when evaluating a within-limits demand
- The strength of the liability case.
- The likely range of damages a jury would award.
- The insureds exposure to an excess judgment.
- The insureds personal financial circumstances and ability to pay an excess.
- The claimants demonstrated willingness to litigate.
Damages recoverable in a bad-faith claim
| Damages category | Recoverable |
|---|---|
| The amount that should have been paid under the policy | Yes |
| Consequential damages caused by the wrongful denial (lost wages, foreclosure, credit damage) | Yes |
| Emotional distress damages | Yes in most states |
| Attorney fees | Yes in most states by statute or common law |
| Excess judgment beyond policy limits (third-party) | Yes (Crisci doctrine) |
| Punitive damages | Yes for egregious misconduct, subject to constitutional limits |
Evidence a claimant should preserve from day one
- Every written communication. Letters, emails, claim portal messages.
- Notes of every phone call. Date, time, names, and the substance of the conversation.
- The full policy document. Not just the declarations page; the entire form.
- Demand letters and offers. Both sides, with dates.
- Medical records and bills. Already preserved for the underlying claim.
- Independent damages evaluations. Treating-physician opinions, vocational expert reports.
Statutes that codify the bad-faith remedy
Most states have a statutory bad-faith remedy in addition to (or instead of) the common-law tort. Texas Insurance Code Chapter 541 and Chapter 542 provide statutory damages and attorney fees. Florida Statute 624.155 imposes a 60-day notice requirement before a bad-faith suit can be filed. California Insurance Code 790.03 and the related Royal Globe doctrine were limited by Moradi-Shalal but the duty of good faith remains. A claimant should know whether the state of the claim uses a statutory or common-law remedy because the procedural requirements differ.
The 60-day notice requirement in Florida and similar states
Some statutes require the claimant to give the insurer notice of the alleged bad-faith conduct and an opportunity to cure before filing suit. Florida Statute 624.155(3) requires a Civil Remedy Notice filed with the Department of Financial Services; the insurer has 60 days to cure. If the insurer pays the amount specified in the notice within the cure period, the bad-faith claim is barred.
When to retain bad-faith counsel
A claimant should consult a personal injury attorney experienced in bad-faith claims when any of the following occur: the insurer denies a claim that appears clearly covered, the insurer offers a fraction of the claims documented value without explanation, the insurer fails to respond to claim communications for more than 30 days, the insurer requests duplicative documentation already provided, or an excess verdict appears likely against an at-fault insured. The bad-faith claim is separate from the underlying claim and has its own statute of limitations.
To find personal injury attorneys experienced in bad-faith litigation, use the directory at injury-lawyer.help. Browse California, Texas, Florida, New York, or any of the 50 states. For the structured-intake matching service, use the get-matched form.