Bad faith is when an insurance company denies, delays, or underpays a claim without a reasonable basis, after it knew or should have known the claim was valid. It differs from an ordinary, good-faith denial, where the insurer has a genuine, arguable reason grounded in the policy or the facts of the loss.
What does bad faith actually mean?
Insurers owe every policyholder a duty to investigate and handle claims fairly. Most states have adopted a version of the NAIC Unfair Claims Settlement Practices Act, which lists specific practices regulators treat as unfair, including not attempting in good faith to promptly, fairly, and equitably settle a claim once liability has become reasonably clear. A violation of that standard is not automatically the same thing as legal bad faith in most states (bad faith is usually its own separate claim, often brought with the help of an attorney), but a documented violation is commonly used as evidence supporting a bad-faith claim. Because bad faith is defined and enforced differently in each state, both through the state's own insurance code and through case law, the practical rules for what counts as bad faith, and what a policyholder can recover, depend on where the policy was written.
Example
A homeowner files a water-damage claim clearly covered under their policy. The insurer never sends an adjuster, never requests documentation, and stops responding to calls and emails for months without offering any explanation for not paying. That pattern (a clearly covered loss, no investigation, no communication, no stated reason) is the kind of fact pattern that can support a bad-faith claim, as opposed to a case where the insurer investigated, found a genuine coverage question, and denied the claim with a written explanation citing a specific policy provision.
When it applies
Bad faith applies when an insurer's conduct, not just its final decision, falls short of the fair-dealing standard: unreasonable delay, no real investigation, ignoring evidence that supports the claim, or lowballing a payment with no rational basis. It does not apply just because a claim was denied or a policyholder disagrees with the amount offered. Insurers are allowed to deny claims that are genuinely not covered and to dispute the value of a loss through processes like appraisal. Whether a specific situation rises to bad faith is a legal question that depends on your state's law and the specific facts, which is why it is handled by an attorney.
Related terms
Related: proof of loss, appraisal. See also: what is insurance bad faith in Georgia, signs your insurer is acting in bad faith, what O.C.G.A. Section 33-4-6 means for policyholders, and bad-faith claims guidance.
Sources
National Association of Insurance Commissioners, Unfair Claims Settlement Practices Act (Model Regulation MO-900-1), Section 4.D (Unfair Claims Practices Defined). content.naic.org/sites/default/files/model-law-900.pdf, accessed 2026-07-25.