Legal Fee Audits

Insurance Bad Faith Overview

Insurance bad faith arises when an insurer’s conduct falls short of accepted standards of good faith and fair dealing.

Not every coverage dispute or claims disagreement constitutes bad faith. The analysis focuses on whether decisions were reasonable given the facts known at the time, whether the investigation was adequate, and whether the insurer acted consistently with industry standards.

This page is part of our Insurance Bad Faith & Claims Handling practice.

First-Party vs. Third-Party Bad Faith

Bad faith claims typically arise in two contexts:

• First-Party Bad Faith — disputes between an insurer and its insured regarding payment of benefits under the policy (property damage, business interruption, disability, etc.).
• Third-Party Bad Faith — disputes arising from the insurer’s handling of liability claims brought against the insured, including settlement decisions and defense management.

The duties implicated differ depending on the context, but both require reasonable investigation, communication, and decision-making.

The Duty to Defend

In third-party liability cases, the insurer’s duty to defend may arise whenever a claim potentially falls within coverage. Decisions regarding defense strategy, selection of counsel, and management of litigation can become central to later disputes.

Related issues involving independent counsel and conflict scenarios are discussed here: Independent Counsel & Conflict Issues.

The Duty to Indemnify

The duty to indemnify concerns payment of covered losses. Disputes may arise over policy interpretation, valuation of damages, exclusions, or timing of payment.

The key analytical question is whether the insurer’s evaluation and conclusions were reasonable based on the information available at the time — not based on hindsight.

Common Allegations in Bad Faith Litigation

• Failure to conduct a reasonable investigation
• Unreasonable delay in communication or payment
• Failure to properly evaluate settlement opportunities
• Improper denial or reservation of rights
• Inadequate supervision of defense counsel

Each allegation must be evaluated against accepted claims handling standards and documented decision-making processes.

See: Claims Handling Standards.

Context Matters

Claims handling decisions are often made under time pressure, incomplete information, and evolving facts. Proper analysis requires reconstruction of the chronology — what was known, what was documented, and what options were reasonably available at each stage.

This practice evaluates conduct in context, not with hindsight bias.

Expert Witness Services

For expert testimony in matters involving alleged insurance bad faith, see: Insurance Bad Faith Expert Witness.