What Is Bad Faith Insurance and How Does It Affect Injury Claims
Buying insurance is a promise: pay premiums now, and the insurer will handle claims fairly later. Most claims are resolved without major conflict. But sometimes an insurer delays without reason, denies a valid claim, or refuses a reasonable settlement, leaving a policyholder or an injured person worse off. When an insurer's conduct crosses a legal line, the law calls it bad faith. Bad faith can change the outcome of an injury claim. It can turn a capped policy payout into a much larger judgment, give claimants leverage in negotiation, and expose insurers to penalties. This article explains what bad faith means in US law, the difference between first-party and third-party claims, the conduct courts and regulators treat as improper, the remedies available, and what injured people and policyholders can do. It draws on landmark cases, state statutes, and scholarship on claims handling. What Does "Bad Faith" Mean? Every insurance contract carries an implied covenant of good faith and fair dealing, a principle that neither party will act to undermine the other's right to the benefits of the agreement. Because policyholders buy protection and often depend on the insurer during a crisis, courts treat insurers as having particular duties in handling claims and defending or settling lawsuits.
Bad faith is generally an unreasonable failure to honor those duties. It is not the same as an honest disagreement. If an insurer has a genuine, reasonable dispute about coverage or the value of a claim, it usually is not acting in bad faith even if a court later disagrees. Bad faith arises when the insurer lacks a reasonable basis for its position and, in many states, knows that or recklessly disregards it. Two Settings: First-Party and Third-Party Bad Faith First-party bad faith A first-party claim is made by a policyholder against their own insurer. Examples include claims for underinsured or uninsured motorist (UM/UIM) coverage, medical payments, personal injury protection (PIP), disability, health, and property damage. If the insurer unreasonably denies, delays, or underpays these benefits, the policyholder may sue for bad faith. California's Gruenberg v. Aetna Insurance Co. (1973) is a foundational case recognizing that an insurer's unreasonable failure to pay a first-party claim can be a tort, not only a breach of contract. Wisconsin's Anderson v. Continental Insurance Co. (1978) adopted a widely used test: the claimant must show the insurer had no reasonable basis for denying benefits and that it knew or recklessly disregarded the lack of a reasonable basis. A small number of states limit or reject a common-law bad faith tort and rely on statutes and contract remedies instead. Third-party bad faith A third-party claim arises when someone is injured by an insured driver, property owner, or business, and the injured person seeks compensation from the at-fault party's liability insurer. Here, the insurer owes duties to its own policyholder, the insured, including the duty to defend and to settle reasonably. The classic third-party bad faith scenario is failure to settle within policy limits. Suppose a driver has a $50,000 policy, the injured person's damages clearly exceed that, and the claimant offers to settle for the $50,000 limit. If the insurer unreasonably refuses and a jury later awards $400,000, the insured is personally exposed for the excess. Courts in many states allow the insured, or someone who obtains their rights, to recover that excess from the insurer. Comunale v. Traders & General Insurance Co. (Cal. 1958) held that an insurer that wrongfully refuses a reasonable settlement within limits can be liable for the whole judgment. Crisci v. Security Insurance Co. (Cal. 1967) confirmed that the insurer could also be liable for the insured's emotional distress. Texas has a similar rule known as the Stowers doctrine, from G.A. Stowers Furniture Co. v. American Indemnity Co. (Tex. Comm'n App. 1929), which imposes excess-judgment liability when an insurer negligently rejects a reasonable demand within limits. Many courts describe the test as whether the insurer gave the insured's interests at least as much consideration as its own, sometimes called the "equal consideration" standard.
Examples of Conduct That May Amount to Bad Faith Courts and regulators look at the facts in each case, but these behaviors often appear in bad faith claims: ● Unreasonable delay. Ignoring calls, repeatedly requesting the same documents, or letting a claim sit without investigation. ● Denying without investigating. Rejecting a claim on speculation or without reviewing medical records, police reports, or other key evidence. ● Lowball offers with no basis. Offering far less than the documented value of a claim and refusing to explain the calculation. ● Misrepresenting the policy. Claiming an exclusion applies when it does not, or misstating coverage or deadlines. ● Refusing to pay the undisputed portion. Withholding money that is not in dispute to pressure the claimant on the disputed part. ● Failing to communicate settlement offers or excess exposure to the insured. ● Ignoring clear liability. Refusing to settle within limits when fault is obvious and damages exceed coverage. ● Forcing litigation. Making the insured or claimant sue to recover benefits that are plainly owed. ● Punishing the insured. Cancelling coverage or retaliating because a claim was made. The National Association of Insurance Commissioners' Unfair Claims Settlement Practices Act and related regulations list many of these practices, and most states have adopted some version. For example, California's Fair Claims Settlement Practices Regulations require insurers to accept or deny a claim within 40 days after receiving proof of claim, absent good reasons for delay. Legal Standards Differ by State Bad faith law is a patchwork. Important variations include: ● The standard of proof. Some states require proof that the insurer acted unreasonably and with knowledge or reckless disregard. Others apply a negligence-style test to failure-to-settle claims. A "fairly debatable" rule in some states protects insurers whose position on the claim was reasonable even if ultimately wrong. ● Statutory versus common-law claims. California generally does not allow private lawsuits directly under its unfair claims practices statute, as the state supreme court held in Moradi-Shalal v. Fireman's Fund Insurance Cos. (1988), but it recognizes common-law bad faith. Other states, such as Texas (Insurance Code chapters 541 and 542), allow statutory claims and penalty interest for late payment. ● Enhanced statutory damages. Washington's Insurance Fair Conduct Act allows a court to award up to three times actual damages, plus attorney fees, in certain first-party cases involving unreasonable denial of coverage or payment. Colorado's statutes (C.R.S. §§ 10-3-1115 and 10-3-1116) allow recovery of two times the
covered benefit plus attorney fees when a first-party claimant's benefits were unreasonably delayed or denied. ● Recent reforms. Florida's 2023 tort reform law amended the bad faith statute, in section 624.155, to provide that negligence alone is insufficient to establish bad faith and to create a safe harbor for liability insurers that tender the lesser of policy limits or the amount demanded within 90 days after receiving actual notice of a claim with sufficient supporting evidence. Before those changes, the Florida Supreme Court had emphasized a "totality of the circumstances" analysis in cases such as Harvey v. GEICO General Insurance Co. (2018). Because rules change, readers should check current law in their own state. How Bad Faith Affects Injury Claims It changes settlement dynamics When policy limits are at stake and the injury is serious, a well-documented demand to settle within limits places pressure on the insurer. If the insurer refuses unreasonably, it risks exposure far beyond the policy limit. Claimants' lawyers often send time-limited policy-limits demands with a clear deadline, medical documentation, and the terms required for release. Some states regulate these demands. Georgia, for example, has a statute (O.C.G.A. § 9-11-67.1) that sets requirements for certain pre-suit settlement offers in motor vehicle cases, and Florida's safe-harbor rule affects timing. It can create access to more than the policy limits An injured claimant generally cannot sue the at-fault party's insurer directly for bad faith, because the duty runs to the insured. However, if a judgment exceeds the limits after a wrongful refusal to settle, the insured may bring a bad faith claim, or may assign that claim to the injured person. In some states, insureds and claimants may also enter into a settlement and consent judgment when the insurer has refused to defend, sometimes called a Coblentz agreement (from Coblentz v. American Surety Co., 5th Cir. 1969) or a Damron agreement (from Damron v. Sledge, Ariz. 1969). These arrangements are technical, and the rules vary widely. It affects first-party injury benefits For an injured person who relies on their own UM/UIM, PIP, or medical payments coverage, bad faith can involve delay and lowball valuations by their own insurer. Because the claimant is a policyholder, they may sue for contract damages and, in many states, for bad faith damages as well. It influences how quickly claims move The mere possibility of bad faith exposure encourages insurers to investigate promptly, communicate clearly, and document their reasoning. Scholars such as Jay Feinman, in Delay, Deny, Defend: Why Insurance Companies Don't Pay Claims and What You Can Do
About It (2010), argue that claims practices driven by cost-cutting can lead to unreasonable denials and delay, while insurers emphasize that most claims are paid and that disputes often involve genuine differences in valuation. Consumer complaint data compiled by state regulators and the NAIC repeatedly show that delays, denials, and unsatisfactory settlement offers are among the most common complaint reasons, though complaints alone do not prove bad faith. Remedies Available Depending on the state and the facts, successful plaintiffs may recover: ● Policy benefits that were wrongfully withheld. ● Consequential damages caused by the delay or denial, such as lost income, medical debt, or foreclosure. ● Excess judgment amounts above the policy limit in failure-to-settle cases. ● Emotional distress damages in states that allow them. ● Attorney's fees, either by statute or, in some states, when the insured must sue to obtain benefits. ● Interest and statutory penalties, such as those in Texas, Colorado, and Washington. ● Punitive damages when the insurer's conduct is malicious, oppressive, or fraudulent. Punitive damages are limited by constitutional principles. In State Farm Mutual Automobile Insurance Co. v. Campbell (U.S. 2003), an insurer refused to settle within a $50,000 limit, and the insured faced a much larger excess judgment. The jury awarded $145 million in punitive damages on about $1 million in compensatory damages. The Supreme Court held the award excessive and explained that few awards exceeding a single-digit ratio between punitive and compensatory damages are likely to satisfy due process. What Must a Plaintiff Prove? Although details vary, a bad faith plaintiff usually must show: 1. A covered claim or a duty to settle, meaning the policy applied or the insurer had a duty to defend and settle. 2. Unreasonable conduct by the insurer, measured against industry standards and the information the insurer had. 3. Knowledge or reckless disregard, in states that require it. 4. Damages, such as unpaid benefits, an excess judgment, or other losses. In a third-party case, the claimant typically also must show that a reasonable settlement within limits was available and that the insurer failed to accept it. Key Evidence
● The claim file, including adjuster notes, reserve information, and internal communications. ● A timeline of communications, showing when documents were sent and how long the insurer took to respond. ● Settlement demands and responses, including deadlines and terms. ● Medical records and bills, showing that damages were documented. ● Internal guidelines and training materials that show what the insurer expected of adjusters. ● Expert testimony on industry claims-handling standards. Common Defenses ● Genuine dispute. The insurer had reasonable grounds to question coverage, liability, or the value of the claim. ● Reliance on advice. The insurer relied on a reasoned legal or medical opinion, although this is not a complete defense. ● Claimant's conduct. The claimant failed to provide requested information, imposed unreasonable conditions, or gave insufficient time to evaluate a demand. ● No excess judgment or damages. Without harm, a failure-to-settle claim may fail. ● Statute of limitations. Deadlines depend on the state and on whether the claim is treated as tort or contract, often running between two and six years. Practical Steps for Injured Claimants and Policyholders 1. Put important communications in writing and keep a dated log of calls and emails. 2. Respond promptly to reasonable insurer requests and keep copies of what you send. 3. Get a copy of your policy, and learn the coverage limits and deadlines. 4. Document damages thoroughly with medical records, bills, and proof of lost income. 5. Ask for written explanations when a claim is denied or reduced. 6. File a complaint with your state's department of insurance if you believe the insurer is violating claims rules. Regulators can investigate and fine insurers but usually do not award personal damages. 7. Consult a licensed attorney early, especially when policy limits are at issue or a serious injury is involved. Bad faith claims are technical, and mistakes in timing or wording of a demand can weaken them. 8. If you are an insured with excess exposure, tell your insurer in writing that you want the claim settled within limits and consider consulting independent counsel. Conclusion Bad faith law exists because insureds and injured people are often at a disadvantage in dealing with large insurers. It holds insurers to a standard of reasonableness in how they investigate, evaluate, and settle claims, and it can transform a claim by exposing the insurer
to losses that go beyond policy limits. But bad faith is not simply a bad result or a disappointing offer. It requires proof that the insurer acted unreasonably, and the rules differ across states. Understanding the concept helps claimants protect their rights and helps policyholders recognize when to seek professional advice. Frequently Asked Questions (FAQs) 1. What is the difference between a denied claim and bad faith? A denial is not automatically bad faith. If the insurer had a reasonable basis, such as a genuine coverage question or a legitimate dispute over value, it may not be liable. Bad faith arises when the denial, delay, or offer had no reasonable basis and the insurer knew or recklessly ignored that fact. 2. Can I sue an insurance company directly if I was injured by its policyholder? Usually not for bad faith. In most states, the duty of good faith runs to the insured, not to the injured third party. However, if the insurer wrongfully refused a reasonable settlement and a judgment exceeded the policy limit, the insured may sue, and the claim may sometimes be assigned to the injured person. 3. What is a policy-limits demand? It is a written offer by an injured person to settle the claim for the at-fault party's policy limit, often with a deadline and specific conditions. If the insurer unreasonably rejects it and the case later results in a larger judgment, the insurer may face bad faith liability. 4. What damages can I recover in a bad faith case? Depending on the state, damages may include the unpaid benefits, consequential losses, the excess portion of a judgment, emotional distress, attorney's fees, interest, and in serious cases punitive damages. Some states also allow statutory multiples or penalties. 5. How long do I have to file a bad faith claim? It varies by state and by whether the claim is based on contract or tort, but deadlines commonly range from about two to six years. Some claims cannot be filed until the underlying claim or lawsuit is resolved, so speak with a licensed attorney promptly.