Claims & Billing
What Is a Bad Faith Insurance Claim? When Insurers Wrongfully Deny
By the PolicyZen Team · Updated March 2026 · 9 min read
Insurance is a contract. In exchange for your premiums, your insurer promises to pay covered claims. But insurers also have a legal duty — called the implied covenant of good faith and fair dealing — that goes beyond the written contract. When an insurer violates that duty, it's called insurance bad faith, and it can entitle you to far more than the original claim value.
Insurance bad faith occurs when an insurer unreasonably denies, delays, or underpays a valid claim without a legitimate basis. It's different from a simple coverage dispute — bad faith involves conduct that's unreasonable, reckless, or intentional. In most states, bad faith gives rise to damages beyond the policy limits, including consequential damages, attorney fees, and in egregious cases, punitive damages.
Common Examples of Bad Faith Conduct
- Unreasonable denial without investigation: Denying a claim without conducting a reasonable investigation into the facts
- Unreasonable delay: Failing to acknowledge a claim, respond to communications, or make a coverage decision within a reasonable time (most states have specific deadlines)
- Lowball offers: Offering far less than the claim's value when the insurer knows the full value and has no legitimate basis for the reduction
- Misrepresenting policy terms: Telling policyholders their claim isn't covered when it actually is
- Refusing to settle within policy limits: For liability claims, refusing a reasonable settlement offer that's within policy limits, exposing the insured to an excess judgment
- Failing to defend: For liability policies, refusing to provide a defense for a covered claim
- Canceling coverage retaliatorily: Canceling a policy in retaliation for filing a claim
- Ignoring evidence supporting coverage: Selectively using only evidence that supports denial while ignoring evidence that supports payment
First-Party vs. Third-Party Bad Faith
First-party bad faith involves your own insurer's handling of your claim (homeowners, auto collision/comp, disability, health). You're the policyholder and the claimant.
Third-party bad faith typically involves an at-fault party's liability insurer failing to settle a claim against their insured within policy limits. If the at-fault driver's insurer refuses a reasonable settlement at $250,000 (their policy limit) and a jury awards $700,000, the insurer may be liable for the full $700,000 plus bad faith damages.
What You Can Recover in a Bad Faith Claim
- The original policy benefits wrongfully withheld
- Consequential damages (financial harm caused by the denial — mortgage default due to denied disability claim, for example)
- Emotional distress damages (in many states)
- Attorney fees
- Punitive damages (in cases of egregious or malicious conduct — can be multiples of the actual damages)
The leverage is real: Bad faith exposure is one of the reasons insurance companies eventually pay significant claims even after initial denials. An insurer that denies a $200,000 claim and faces a $1 million bad faith suit (policy limits + consequential damages + punitive damages + attorney fees) has a very different risk calculus than they did at the time of denial.
What to Do If You Suspect Bad Faith
- Document everything: Keep records of every communication, every denial letter, every request for information
- Get denial reasons in writing: Require the insurer to specify in writing the policy provision(s) on which they're relying to deny your claim
- File a state insurance department complaint: State regulators investigate unfair claims practices and complaints create a paper trail
- Consult a bad faith attorney: Most work on contingency (no fee unless you win) and can evaluate whether you have a viable bad faith claim
- Know your state's deadlines: Bad faith claims have statutes of limitations — typically 2–4 years from the denial or discovery of the bad faith conduct
Not every denial is bad faith. Insurers are permitted to dispute coverage, conduct investigations, and deny claims they believe aren't covered. Bad faith requires unreasonable conduct — not just being wrong about coverage. The line between a legitimate dispute and bad faith is often the thoroughness of the investigation and the reasonableness of the denial given the policy language and facts.
Does bad faith apply to health insurance denials?
For employer-sponsored health plans (ERISA), traditional state bad faith law generally doesn't apply — ERISA pre-empts it. ERISA plans have their own remedies, but they're typically more limited (benefits owed + attorney fees; no punitive damages). For individually purchased health insurance and state-regulated small group plans, state bad faith law applies. This is one reason employer plan members have fewer remedies for wrongful denials than individual market policyholders.
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