Insurance Bad Faith — No Win No Fee

What Constitutes Insurance Bad Faith?

Direct Answer: Insurance bad faith occurs when an insurer unreasonably denies, delays, or underpays a valid claim. It violates the implied covenant of good faith in every insurance contract. Bad faith attorneys typically work on contingency, and damages can include the policy amount, consequential losses, and punitive damages.

Insurance companies enter into contracts with policyholders that carry an implied covenant of good faith and fair dealing. Bad faith occurs when the insurer breaches this duty by acting unreasonably in handling a claim. The standard for "unreasonable" conduct varies by state, but common indicators include:

• Denying a claim without a reasonable basis
• Failing to conduct a thorough investigation
• Unreasonable delay in processing or paying a claim
• Offering significantly less than the claim's fair value
• Misrepresenting policy terms or coverage
• Failing to defend a policyholder in a covered lawsuit

First-Party vs Third-Party Bad Faith

First-party bad faith arises when an insurer mistreats its own policyholder — for example, denying a homeowner's claim after a fire, or underpaying an auto collision claim.

Third-party bad faith arises when an insurer fails to properly defend or settle a claim brought against the policyholder by a third party — for example, refusing a reasonable settlement demand within policy limits, exposing the policyholder to an excess judgment.

Damages and Remedies

Bad faith damages often exceed the original policy benefits. Available remedies may include the insurance benefits owed under the policy, consequential damages (e.g., financial harm from delayed payment), emotional distress, attorney fees, and punitive damages. Some states also provide statutory penalties or allow recovery of treble damages.