Claims & Disputes

Bad Faith Insurance

Insurance bad faith occurs when a carrier fails to investigate promptly, unreasonably delays or denies a valid claim, or fails to communicate claim decisions—potentially exposing the insurer to damages beyond the policy limits.

Last reviewed: May 2026 · Editorial methodology

Definition

Insurance bad faith refers to an insurer's failure to fulfill its contractual and legal duty of good faith and fair dealing toward its policyholders. Every insurance policy contains an implied covenant of good faith; when an insurer breaches this duty, the policyholder may have a claim for bad faith—either under first-party bad faith (the insured suing their own insurer) or third-party bad faith (the insured suing for failure to settle a liability claim within policy limits). Common bad faith acts include: unreasonable delay in investigating or paying a valid claim, failing to conduct a thorough investigation, misrepresenting policy terms, denying a claim without a legitimate basis, and failing to communicate claim decisions timely. State bad faith laws vary significantly: in first-party states like Florida, a policyholder must exhaust the civil remedy notice (CRN) process before suing; California's Insurance Code §790.03 lists specific unfair practices; and many states follow the NAIC Unfair Claims Settlement Practices Model Act. Damages in successful bad faith cases can include the original claim amount, consequential damages, attorney's fees, and in egregious cases—punitive damages. Florida's SB 2-A (2023) significantly reformed the state's bad faith framework, raising the threshold for bad faith claims.

Where this term matters

Claims Help Center →/claims/bad-faith-insurance →/claims/claim-denied →How to file a state insurance complaint →

Tip

Glossary definitions are educational. Always check your own policy language — insurers can define common terms differently from one another. When in doubt, request a written explanation from your agent.

Related terms

Claim DenialA claim denial is the insurer's written notification that it will not pay a claim, citing specific policy provisions, exclusions, or conditions as the basis for the denial.Reservation of Rights LetterA Reservation of Rights (ROR) letter allows an insurer to handle a claim without waiving potential coverage defenses, signaling that one or more policy provisions may limit or bar payment.Appraisal ClauseThe appraisal clause provides an alternative dispute resolution mechanism for disagreements about the dollar value of a loss—without going to court.MediationMediation in insurance claims involves a neutral third party facilitating negotiation between the policyholder and insurer to resolve a dispute without litigation or binding arbitration.ArbitrationArbitration is a more formal alternative to mediation in which a neutral arbitrator (or panel) hears evidence from both sides and renders a decision—which may be final and binding.Examination Under Oath (EUO)An Examination Under Oath is a powerful insurer investigative tool—analogous to a deposition—that the insured is contractually required to submit to as a condition of policy coverage.
Source: Cover Forge USA editorial team|Last verified: May 2026|Methodology
Definitions are educational and may be simplified. Always refer to your policy contract and consult a licensed agent for terms that affect coverage decisions.
CF

Cover Forge USA Editorial Team

Editorial Lead

This article was researched and written by the Cover Forge USA editorial team against federal sources (NAIC, CMS, FEMA, DOL, SSA, state DOIs) and standard policy forms. Bylines organize content by topic — they do not assert individual licensure. See our editorial-policy for details.

Reviewed June 2026

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