Insurance Bad Faith Overview

Understanding Insurance Bad Faith and Claims Handling Obligations

Insurance bad faith occurs when an insurer fails to act reasonably, fairly, or in good faith when evaluating, investigating, or paying a claim. Courts expect insurers to place the interests of the insured on equal footing with their own and to follow established claims handling standards.

Bad faith claims can arise in first-party and third-party contexts, and the standards governing insurer conduct vary by jurisdiction. However, certain expectations are widely recognized across states and within the insurance industry. Understanding these principles can help insurers, policyholders, and counsel navigate disputes and assess whether conduct met the applicable standard of care.

What Is Insurance Bad Faith?

Broadly, bad faith refers to an insurer’s failure to treat the insured fairly. Common allegations include:

• Unreasonable delay in investigating, evaluating, or paying a claim.
• Failure to conduct a fair, thorough, or timely investigation.
• Misrepresentation of policy terms or facts.
• Placing the insurer’s financial interests ahead of the insured’s interests.
• Failure to settle within policy limits when liability is reasonably clear.

Each of these behaviors may signal that the insurer failed to meet the standard of good faith and fair dealing that accompanies every insurance policy.

Key Elements Courts Consider

While bad faith standards vary, courts often examine similar core questions when evaluating allegations:

• Did the insurer investigate properly and promptly?
• Did the insurer evaluate liability and damages fairly?
• Did the insurer respond to communications and requests in a timely manner?
• Did the insurer rely on facts and reasonable interpretations rather than assumptions or financial motives?
• Were policy terms applied consistently and in good faith?

Courts often look for objective indicators of fairness, including documented efforts to investigate, consult experts, and engage with the insured.

First-Party vs. Third-Party Bad Faith

Bad faith obligations differ depending on whether the claim involves the insurer’s own insured (first-party) or a liability claim against an insured (third-party):

• First-party bad faith involves the insurer’s direct evaluation of the insured’s claim for benefits.
• Third-party bad faith arises when the insurer controls the defense and settlement of claims against the insured.
• Failure to settle within limits when liability is clear is a common basis for third-party bad faith claims.

Both contexts require insurers to act reasonably and protect the insured from unnecessary exposure or harm.

Common Signs of Potential Bad Faith

While every case is unique, certain patterns often suggest conduct inconsistent with the insurer’s obligations:

• Repeated delays or requests for unnecessary documentation.
• Failure to communicate coverage positions clearly and promptly.
• Lack of documented investigative steps.
• Minimal or incomplete evaluation records.
• Ignoring information that supports the insured’s claim.

These issues often create evidentiary challenges for insurers and strengthen claims brought by insureds.

Claims Handling Standards and Industry Best Practices

Industry standards and regulatory guidelines often reflect what constitutes reasonable claims handling conduct. These typically include:

• Prompt acknowledgment and investigation of claims.
• Fair evaluation based on all available information.
• Accurate documentation of claim file activity.
• Clear communication with insureds and third parties.
• Timely and reasonable settlement practices.

Claims handling standards play a critical role in court evaluations of insurer conduct and often serve as benchmarks in litigation.

Role of Expert Analysis in Bad Faith Cases

Experienced claims handling experts help courts and parties understand whether the insurer’s conduct met industry standards. Expert analysis may include:

• Reviewing claim file materials and internal communications.
• Evaluating the insurer’s investigation, decision-making, and settlement posture.
• Comparing conduct to regulatory requirements and industry practices.
• Preparing reports and testimony explaining deviations from standards.

With decades of experience as an adjuster and insurance executive, Jim Schratz provides insight into how claims decisions are made and how they align with accepted industry standards.