Your Rights as a Policyholder: How to Handle Insurance Bad Faith

Insurance is supposed to be your safety net—a financial buffer when life takes an unexpected turn. But what happens when the very company you rely on refuses to uphold its end of the bargain?

Insurance bad faith occurs when an insurance company unreasonably denies, delays, or underpays a valid claim. It’s more than just poor service—it’s a breach of contract and, in many cases, a violation of the law.

If you’re a policyholder facing an unfair denial or delay, this guide will walk you through your rights, the signs of bad faith, and what legal steps you can take to protect yourself and recover what you’re owed.

What Is Insurance Bad Faith?

In legal terms, “bad faith” refers to a breach of the implied covenant of good faith and fair dealing that every insurance contract includes. This means insurers must treat their policyholders honestly and fairly when evaluating, investigating, and paying out claims.

There are two main types of bad faith:

1. First-Party Bad Faith

Occurs when your own insurance company mishandles a claim you filed for coverage under your policy—such as a homeowner’s, auto, or health claim.

2. Third-Party Bad Faith

Applies when an insurer refuses to defend or indemnify you in a lawsuit filed by another party—even when the policy requires it.

Your Rights as a Policyholder

Policyholders are legally entitled to fair, prompt, and honest treatment. That includes:

• The right to a fair claims investigation

• The right to full compensation under your policy

• The right to prompt communication and payment

• The right to a clear explanation of any denial or limitation of coverage

In most states, consumer protection laws reinforce these rights. Many jurisdictions impose deadlines for insurer response times and penalties for unjustified delays or denials.

Common Examples of Insurance Bad Faith

Not all claim denials are illegal—but when an insurer strays from reasonable standards of conduct, it may cross the line into bad faith. Examples include:

• Denying a valid claim without proper investigation

• Delaying payment without justification

• Offering far less than a claim is worth (a “lowball” offer)

• Failing to respond to communication or documentation

• Misrepresenting your policy terms

• Refusing to defend you in a third-party lawsuit

• Intimidating you into dropping your claim

If you suspect your insurer is acting in bad faith, it’s important to take immediate steps to protect yourself.

Steps to Take if You Suspect Bad Faith

1. Review Your Policy Carefully

Understand the scope of your coverage. Knowing your deductibles, exclusions, and claim deadlines helps you spot when something is off.

2. Document Everything

Keep records of:

• All emails and letters

• Notes from phone calls (including dates and names)

• Claim submissions and supporting evidence

• Screenshots of online correspondence

3. Ask for a Written Explanation

If your claim is denied or underpaid, demand a written explanation citing specific policy language. This creates a paper trail and limits verbal manipulation.

4. File a Complaint with Your State Insurance Commissioner

Most states allow you to submit a complaint online. The Department of Insurance can investigate whether your insurer violated any statutes or regulations.

5. Consult a Bad Faith Insurance Attorney

If the situation doesn’t improve—or worsens—it may be time to escalate with legal action. Many attorneys offer free consultations and take cases on contingency.

Legal Remedies in Bad Faith Cases

If you can prove that your insurer acted in bad faith, you may be entitled to damages far beyond the original claim value.

These may include:

• Compensatory damages: The amount originally owed under your policy

• Consequential damages: Costs you incurred due to the delay or denial (e.g., additional medical bills, loss of property value)

• Punitive damages: Awarded to punish intentional wrongdoing (available in egregious cases)

• Attorney’s fees: In many states, your legal fees can be recovered

When to Involve an Attorney

While some issues can be resolved directly with your insurance company, certain red flags signal the need for legal help:

• You’ve hit a wall with communication

• The claim has been delayed unreasonably

• You’ve received an unreasonably low offer

• You’re being blamed for something outside your control

• You’ve suffered major financial losses because of the insurer’s actions

An experienced insurance bad faith attorney can evaluate your case, negotiate with the insurer, and pursue litigation if necessary.

Pro Tips:

• Read your policy thoroughly. Ask for clarification on unclear language.

• Submit all claims in writing. Always follow up in writing after phone calls.

• Keep copies of all documents, photos, estimates, and medical records.

• Don’t settle immediately. If an offer feels unfair, ask for a breakdown and seek legal advice.