Insurance bad faith generally describes conduct where the insurer breaches its duty to deal fairly and honestly with the policyholder — not merely making a decision the policyholder disagrees with. Common examples include denying a claim without a reasonable investigation, misrepresenting policy terms, unreasonably delaying payment, failing to communicate the reasons for a denial, or offering a settlement far below what the evidence supports without justification.

An insurer is generally allowed to dispute a claim in good faith — disagreeing about coverage or value is not automatically bad faith. The distinction usually turns on whether the insurer had a reasonable basis for its decision and followed a fair process, or whether it ignored evidence, misapplied the policy, or dragged out the process without cause.

First-party bad faith arises when an insurer mistreats its own policyholder on a claim the policyholder filed directly, such as a homeowner's property claim or a disability claim. Third-party bad faith arises when a liability insurer fails to properly defend or settle a claim against its own insured, potentially exposing that insured to a judgment beyond the policy limits.

The legal standards and available remedies for each type differ by state, and some states treat third-party bad faith more strictly because the insurer is controlling litigation on behalf of someone who may not have another way to protect themselves.

At minimum, a successful bad-faith claim generally results in recovery of the policy benefits that should have been paid in the first place. Beyond that, many states allow recovery of additional damages that flowed from the bad-faith conduct itself — for example, financial harm caused by delayed payment, or emotional distress in some jurisdictions.

In particularly egregious cases, some states allow punitive damages, which are intended to punish and deter the insurer's conduct rather than simply compensate the policyholder. Whether punitive damages are available, and under what standard, varies significantly by state and by the strength of the evidence of the insurer's state of mind.

Documentation is central to a bad-faith claim: the full claim file, every communication with the insurer, internal notes and adjuster reports (often obtainable through discovery if a lawsuit is filed), and a clear timeline showing what the insurer knew and when. Comparing the insurer's stated reasons for denial against the actual policy language and the evidence submitted is often where the strongest arguments emerge.

Because the legal standard for bad faith and the available remedies vary widely by state, a policyholder who suspects bad-faith conduct typically benefits from consulting an attorney experienced in insurance disputes before filing a formal complaint or lawsuit, since the framing of the initial claim can affect what remedies remain available later.