Bad Faith
An insurer's unreasonable denial, delay, or underpayment of a valid claim, exposing the carrier to damages beyond policy limits.
What It Is
Bad faith in insurance occurs when a carrier unreasonably denies, delays, or underpays a valid claim, or fails to meet its obligations to the insured without a legitimate basis. Bad faith is both a common law tort and, in many states, a statutory cause of action that can expose the carrier to damages well beyond the policy limits, including emotional distress, punitive damages, and attorney fees.
Common examples of bad faith include: denying a claim without conducting a reasonable investigation, unreasonable delay in claim processing or payment, failing to communicate claim status to the insured, offering a settlement far below the claim's reasonable value, failing to settle a third-party claim within policy limits when liability is clear (exposing the insured to an excess judgment), and misrepresenting policy provisions to justify a denial.
Bad faith standards vary significantly by state. Some states recognize both first-party bad faith (the carrier acts in bad faith toward its own insured) and third-party bad faith (the carrier fails to protect its insured from excess liability). Other states limit bad faith claims to statutory remedies. A few states impose a quasi-fiduciary duty on the carrier, creating a higher standard of conduct than simple reasonableness.
Why It Matters for Brokers
Brokers need to recognize potential bad faith situations because they can advocate for their clients when carriers are not handling claims appropriately. While the broker cannot bring a bad faith claim, they can escalate issues to carrier management, document delays and unreasonable conduct, and refer the client to coverage counsel when bad faith is suspected. Brokers also need to avoid their own potential bad faith exposure in states where agents have duties to assist with claims.
Real-World Example
A carrier takes 14 months to pay a clear $210,000 first-party property claim on a retail store fire, during which the store remains closed. The carrier requested the same documentation three times, reassigned the adjuster twice, and made a lowball $95,000 offer. The insured's attorney files a bad faith lawsuit. The carrier settles for the $210,000 claim plus $380,000 in bad faith damages including lost business income during the delay, attorney fees, and emotional distress. Total carrier cost: $590,000 on a $210,000 claim.
Common Mistakes
- 1Not documenting unreasonable carrier conduct during claims handling, which makes it harder for the insured to prove bad faith if litigation becomes necessary.
- 2Accepting a carrier's claim denial at face value without reviewing the denial rationale against the policy language and claim facts.
How brokerageaudit.com Handles This
brokerageaudit.com tracks claim handling timelines and flags claims that exceed expected resolution benchmarks. The system documents all communications between the broker, carrier, and insured with timestamps, creating an audit trail that can support the insured if carrier conduct becomes unreasonable.