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What is “bad faith” as it relates to insurance claims?

On Behalf of | Jan 25, 2024 | Homeowner's Insurance Matters |

“Bad faith” in the context of insurance claims is a legal term used to describe a situation where an insurance company fails to fulfill its obligations to its policyholder in a fair and honest manner.

At the heart of bad faith is the breach of the insurer’s duty to the policyholder. Insurance companies have a legal obligation to act in good faith. This means they must handle claims with honesty, fairness and reasonable promptness. When an insurer deviates from this standard, it may constitute bad faith. The affected policyholder may then be able to hold the offending insurer accountable for their failures.

Examples of bad faith practices

Bad faith can manifest in various forms, including:

  • Unreasonably delaying the processing of a claim
  • Denying a claim without a valid reason
  • Failing to conduct a proper investigation of a claim
  • Refusing to pay a claim without conducting a reasonable investigation
  • Offering significantly less compensation to settle a claim than it’s worth
  • Misinterpreting the language in an insurance policy to avoid paying a claim
  • Failing to disclose policy limitations and exclusions to a policyholder

Bad faith practices can leave policyholders in a vulnerable position, often when they are most in need of support. Thankfully, if a policyholder believes their insurance company is acting in bad faith, they may have opportunities to pursue legal recourse. This could involve filing a complaint with the state’s insurance commissioner or pursuing legal action against the insurer. In a lawsuit, if bad faith is proven, the policyholder may be entitled to receive the original amount due under the policy, along with additional damages for the insurer’s misconduct.

It isn’t always easy to identify bad faith practices accurately. Those who have questions should know that seeking personalized legal guidance is always an option.