Bad faith conduct can include unreasonably delaying a claim decision, conducting an inadequate or one-sided investigation, misrepresenting the terms of a policy, failing to communicate with the policyholder, or denying a claim without a reasonable basis.

Courts generally distinguish between an insurer simply making a mistake or a debatable coverage decision and an insurer acting unreasonably or in disregard of the policyholder's rights, with only the latter typically rising to the level of bad faith.

First-party bad faith involves an insurer's treatment of its own policyholder, such as wrongfully denying or delaying a legitimate claim for benefits the policyholder is owed directly.

Third-party bad faith arises in the context of a liability claim, such as when an insurer unreasonably refuses to settle a lawsuit against its insured within the available policy limits, potentially exposing the policyholder to a judgment beyond what the policy would have covered.

Proving bad faith generally requires more than showing the insurer made an incorrect decision; it typically requires demonstrating that the insurer's conduct was unreasonable given the information available to it at the time.

The specific legal standard for what counts as bad faith, and what a policyholder must show to prove it, varies meaningfully from state to state, which affects how these claims are evaluated and litigated.

A successful bad faith claim can result in recovery of the amount originally owed under the policy, plus additional damages tied to the insurer's improper conduct.

Depending on the state and the severity of the insurer's conduct, some jurisdictions also allow for extracontractual damages or punitive damages in particularly egregious bad faith cases.