Insurance Bad Faith Basics: What It Is and What It Is Not

“Bad faith” is one of the most used and least understood phrases in insurance disputes. It does not mean the insurer was rude, slow once, or paid less than you hoped. It is a specific legal concept, and the rules differ from state to state. Understanding the basics helps you recognize when a claim problem may be more than a disagreement, and what kind of record you need to keep.

The implied covenant of good faith and fair dealing

Courts in many states hold that every contract, including an insurance policy, contains an implied promise. Each side agrees not to do anything that would unfairly interfere with the other’s right to receive the benefits of the agreement. In insurance, this is usually called the implied covenant of good faith and fair dealing.

You pay premiums. In return, the insurer promises to investigate, evaluate, and pay covered losses. The covenant is the legal recognition that the insurer must carry out that promise fairly, not just technically.

First-party bad faith

A first-party claim is one you make on your own policy, such as a homeowners claim after a fire or water loss. A third-party claim is one where someone else claims against you and your insurer is supposed to defend or settle on your behalf. This guide focuses on first-party property claims.

Gruenberg v. Aetna (1973)

In Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, the California Supreme Court addressed a fire claim on a restaurant and bar. The court held that when an insurer fails to deal fairly and in good faith by refusing, without proper cause, to compensate its insured for a covered loss, that conduct may give rise to a cause of action in tort. That matters because tort damages can go beyond the policy benefits themselves.

Egan v. Mutual of Omaha (1979)

In Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, a disability insurance case, the court made clear that a poor investigation can itself be bad faith. The court stated that an insurer “cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.” Egan is also known for its discussion of when a claims employee’s conduct can be attributed to the company for purposes of punitive damages.

Brandt v. Superior Court (1985)

In Brandt v. Superior Court (1985) 37 Cal.3d 813, the court held that when an insurer’s bad faith reasonably forces the insured to hire an attorney to get policy benefits, the attorney fees spent recovering those benefits can be recovered as damages. These are often called “Brandt fees.” The rule is limited: it covers fees attributable to getting the policy benefits, not fees for every part of the case.

The genuine dispute rule

Insurers often respond to bad faith claims by pointing to a genuine dispute. In California, the idea is that an insurer is not acting in bad faith just because it disagreed with you about coverage or value, if its position was reasonable.

In Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, the California Supreme Court set limits on this defense. The court said a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds. It also said the rule does not relieve an insurer of its obligation to thoroughly and fairly investigate, process, and evaluate the claim.

In practical terms: an insurer that hires a qualified expert, considers your evidence, and reaches a reasonable conclusion you disagree with may have a genuine dispute. An insurer that ignores your evidence, never inspects key damage, or relies on a conclusion with no reasonable basis may not.

Statutes versus case law

California’s bad faith rules come mostly from court decisions. California’s unfair claims practices statute, Insurance Code section 790.03, does not itself support a private lawsuit. The California Supreme Court held this in Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287. See Unfair Claims Practices Laws Explained.

Other states take different routes.

Florida: civil remedy notice

Florida Statutes section 624.155 allows a civil action against an insurer for certain conduct, including not attempting in good faith to settle claims when, under all the circumstances, it could and should have done so. Key requirements:

• Notice first. Under § 624.155(3), the state and the insurer must receive 60 days’ written notice of the violation, on a state form, before an action can be brought.
• Specific content. The notice must state the statutory provision allegedly violated, the facts and circumstances, the names of any individuals involved, and relevant policy language.
• Cure period. If, within 60 days after the insurer receives the notice, it pays the damages or corrects the circumstances, no action lies under the statute.
• Residential appraisal. A notice may not be filed within 60 days after appraisal is invoked by any party in a residential property claim.
• Negligence is not enough. The current statute states that mere negligence alone is insufficient to constitute bad faith.

Texas: statutory action

Texas Insurance Code section 541.151 lets a person who sustains actual damages sue for unfair or deceptive acts defined in Chapter 541, including the unfair settlement practices in section 541.060.

Some states recognize first-party bad faith as a tort, some only through statute, and some in more limited ways. Do not assume the California or Florida rules apply where you live.

What evidence matters

Bad faith cases are built on records. The questions usually come down to what the insurer knew, when it knew it, and what it did about it. Evidence that tends to matter:

• Timeline. Dates of notice, inspections, requests, responses, and payments. Missed regulatory deadlines are often central.
• What you gave them. Estimates, photos, expert reports, invoices, and the date each was sent.
• What they relied on. Their estimates, engineer or expert reports, and any written explanation of a denial or offer. In California, Insurance Code section 2071 lets an insured request claim-related documents.
• Unexplained reductions. Line items removed or depreciation applied without explanation.
• Inconsistent reasons. A denial basis that changes over time.
• Requests for information you already provided, or for information not reasonably needed.

See Document Your Claim Like Evidence for how to build that record from the start.

Red flag: If an adjuster tells you not to bother hiring a lawyer, or gives you a deadline for suing that does not match your policy, write down exactly what was said, by whom, and when. California’s Insurance Code section 790.03(h) lists both directly advising a claimant not to obtain an attorney and misleading a claimant about the statute of limitations as unfair claims practices.

When to talk to an attorney

Bad faith claims are fact-heavy and time-sensitive. If your claim was denied with little explanation, if a large gap remains after you provided strong evidence, or if deadlines are approaching, talk with an attorney licensed in your state who represents policyholders. Many will review a claim file before you decide anything. For your immediate next steps on a disputed claim, see Denied or Lowballed: What to Do Next.