Insurance Bad Faith: Your Rights When an Insurer Wrongfully Denies Your Claim

Insurance Bad Faith: Your Rights When an Insurer Wrongfully Denies Your Claim

When an insurance company denies your claim, it may be wrong — but being wrong doesn't automatically make it bad faith. Bad faith is a specific legal concept that gives you rights and remedies that go well beyond simply having the claim paid. Understanding when a denial crosses the line into bad faith is one of the most powerful tools available to policyholders.

What Is Insurance Bad Faith?

Insurance bad faith (sometimes called an "unfair claims settlement practice") occurs when an insurer acts unreasonably or dishonestly in handling your claim. It goes beyond simply making a wrong decision — it involves the insurer acting in a manner that violates its duty of good faith and fair dealing to the policyholder.

Insurance policies are contracts, and in most jurisdictions, there is an implied covenant (promise) of good faith and fair dealing in every insurance contract. When an insurer breaches this covenant, it may be liable not just for the claim amount — but for additional damages including attorney fees and, in egregious cases, punitive damages.

Examples of Insurance Bad Faith

Bad faith is not just denying claims. It encompasses a wide range of insurer conduct:

Unreasonable denial without proper investigation:

• Denying a claim without conducting any investigation
• Denying based on a superficial or inadequate review
• Denying based on a review by a non-specialist clinical reviewer when the case requires specialist expertise

Deliberate delay:

• Unreasonably delaying the investigation or decision on a legitimate claim
• Failing to respond to communications within reasonable timeframes
• Requesting the same information repeatedly to delay processing

Misrepresentation of policy terms:

• Misrepresenting what the policy covers to deny a legitimate claim
• Citing non-existent exclusions
• Applying policy terms in a distorted or unreasonable way

Lowball settlement offers:

• Offering substantially less than the actual claim value when liability is clear
• Refusing to engage in meaningful negotiation on a legitimate claim

Failure to investigate adequately:

• Making a claim decision without obtaining or reviewing relevant medical records, witness statements, or expert opinions
• Failing to conduct a reasonable investigation before denying

Using biased experts:

• Ordering an Independent Medical Examination (IME) from a physician known for consistently providing opinions favouring insurers, without providing any weight to the treating physician's opinion
• Using surveillance results selectively to deny a claim without providing the policyholder an opportunity to respond

Denying claims of vulnerable policyholders based on their financial need:

• Courts have found bad faith when insurers make lower settlement offers to policyholders in financial distress knowing they are unlikely to challenge the offer

Bad Faith by Jurisdiction

United States

Bad faith law in the US is primarily state law — each state has developed its own standards and remedies.

First-party bad faith: Your own insurer's bad faith in handling your claim against them. This applies to health, disability, homeowner's, and auto claims.

Third-party bad faith: An at-fault party's insurer's bad faith in refusing to settle a claim against its insured within policy limits, exposing the insured to an excess judgment.

Remedies for bad faith (US):

• The original claim amount
• Consequential damages (additional losses caused by the bad faith, e.g., medical debt interest, income loss from delayed disability payment)
• Attorney fees
• Punitive damages — in states like California, bad faith can result in punitive damages many times the original claim value
• Emotional distress damages (in some states)

State insurance bad faith statutes: Most states have specific unfair claims settlement practices acts or similar statutes. Common violations include:

• Failing to acknowledge receipt of a claim within a reasonable time
• Failing to investigate within a reasonable time
• Failing to affirm or deny coverage within a reasonable time
• Making a settlement offer that is not related to the actual amount owed
• Compelling policyholders to initiate litigation to recover amounts clearly owed

Covenant of good faith (California): California has particularly strong bad faith law. In California, insurers can face punitive damages for bad faith that is "oppressive, fraudulent, or malicious." High-profile California bad faith verdicts have run into the millions.

ERISA limitation: For employer-sponsored health insurance (ERISA plans), federal ERISA law preempts state bad faith claims, significantly limiting your remedies. Under ERISA, you can typically only recover the value of the denied benefit and attorney fees — not consequential damages or punitive damages. This is one of the most significant limitations of ERISA for policyholders.

United Kingdom

The UK doesn't use "bad faith" as a legal category in the same way as the US, but policyholders have protections under:

• FCA's Treating Customers Fairly (TCF) principle — insurers must treat customers fairly in all dealings
• Financial Ombudsman Service (FOS) — can award compensation for distress and inconvenience caused by insurer misconduct, up to £375,000 for general insurance and £10,000 for distress/inconvenience
• Contract law — breach of the insurance contract and breach of implied terms of good faith

Australia

Australia's Corporations Act and ASIC's regulatory framework impose good faith obligations on insurers. The Insurance Contracts Act 1984 includes implied terms of good faith. AFCA can award compensation for non-financial loss (distress, inconvenience) in addition to the claim amount.

Singapore and Malaysia

Both Singapore and Malaysia impose regulatory conduct standards on insurers through MAS and BNM respectively. FIDREC (Singapore) and OFS (Malaysia) can consider the manner of claim handling and award compensation accordingly.

Signs That a Denial May Be Bad Faith

Look for these red flags in your claim handling:

• The insurer denied your claim without ever requesting or reviewing your medical records
• The insurer's IME physician reviewed records but never examined you
• Your claim sat for weeks or months without any communication
• The insurer cited a policy exclusion that doesn't exist or doesn't apply
• The insurer refused to provide a written explanation of the denial
• The insurer's reviewer had the wrong specialty for a complex medical claim
• The insurer made a settlement offer that is grossly inadequate without explanation
• The insurer repeatedly requested the same information you already submitted

How to Use Bad Faith Rights

Step 1: Document everything. Create a comprehensive record of every claim-related communication — every call, every letter, every email, every document submitted, and every response (or non-response).

Step 2: Reference good faith obligations in your appeal. Include language in your appeal letter noting that you are aware of the insurer's good faith obligations and that certain conduct (delay, inadequate investigation, non-specialist review) may constitute bad faith.

Step 3: Consult an insurance bad faith attorney. If you believe the denial involves bad faith, consult an attorney who specialises in insurance bad faith in your state. Many work on contingency. They can assess whether you have a bad faith case and advise on strategy.

Step 4: File a regulatory complaint. Regulators take bad faith conduct seriously. A pattern of bad faith practices by an insurer can result in fines, sanctions, and regulatory action.

Step 5: Send a formal bad faith demand. Before filing suit, your attorney may send a formal demand to the insurer asserting bad faith and demanding payment of the claim plus additional damages. This demand sometimes resolves claims without litigation.

What Bad Faith Is NOT

A simple mistake: Insurers can make mistakes in claim processing without that constituting bad faith. Bad faith requires unreasonable conduct.

A dispute about the value of a claim: Disagreement about the amount of a legitimate claim is not automatically bad faith — though a grossly inadequate offer with no factual basis can be.

A denial based on a plausible interpretation of the policy: If the insurer's denial is based on a reasonable (even if wrong) reading of the policy, this generally won't constitute bad faith — even if an external reviewer would disagree.

An administrative error: Processing errors that are promptly corrected are generally not bad faith.

Conclusion

Insurance bad faith is a powerful legal concept that can result in significant remedies beyond just the claim amount — including punitive damages in egregious cases. If you believe your insurer has not just denied a legitimate claim but has done so unreasonably, dishonestly, or through deliberate delay and inadequate investigation, you may have a bad faith claim. Consult an insurance attorney, document everything, and use ClaimBack at claimback.app to generate a professional appeal letter that makes clear you are aware of your rights — and prepared to enforce them.

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Related Reading:

• How to Negotiate with Your Insurance Company
• How to Write an Insurance Demand Letter
• Can You Sue Your Insurance Company?
• What If Your Insurance Appeal Is Denied Again?