Insurer bad faith: what it is and the remedies

Insurance bad faith means an insurer handling or refusing a claim in a way that is unreasonable, and in many states more than merely wrong. A denial you disagree with is a coverage dispute. It becomes bad faith when the insurer had no reasonable basis for its position, ignored evidence, delayed without cause, or put its own interests ahead of yours, and the remedies that follow depend heavily on the state.

The topic is mostly state law, built from court decisions and statutes. This guide sets out the common patterns and a few state examples, not a rule for any one state. For whether a particular insurer's conduct qualifies, you need a lawyer licensed where the policy was issued.

Two kinds: first-party and third-party

First-party bad faith arises when the insurer mistreats you on your own claim: unreasonably denying or underpaying a fire loss or business income claim, stalling an investigation, or lowballing to force a settlement. See first-party coverage.

Third-party bad faith arises under liability coverage, typically when the insurer refuses a reasonable settlement offer within the policy limits, loses the case, and the judgment exceeds the limits. The insured is left with the excess. See third-party coverage and the insurer's duty to defend: what triggers it and when it ends.

What courts and statutes look at

The test varies, but several themes recur.

• A reasonable basis. In many states, a first-party insurer is not liable in tort if it had a reasonable basis, sometimes called a "fairly debatable" basis, for its position on coverage or amount. Colorado's statute, for example, treats a delay or denial as unreasonable if the insurer acted "without a reasonable basis" (C.R.S. 10-3-1115(2)).
• A real investigation. The NAIC's Unfair Claims Settlement Practices Act (Model 900) lists refusing to pay without a reasonable investigation, not attempting in good faith to settle once liability is reasonably clear, compelling insureds to sue by offering substantially less than they recover, and failing to give a reasonable explanation of a denial. Texas Insurance Code section 541.060 contains similar items, including failing to affirm or deny coverage or reserve rights within a reasonable time, and requiring a full release after a partial payment.
• Knowledge or recklessness. Some states require the insurer to have known its position was unreasonable or recklessly disregarded that fact. California's civil jury instruction on first-party bad faith (CACI 2331) asks whether the insurer unreasonably failed or delayed payment. California also recognizes a "genuine dispute" doctrine that does not excuse a one-sided investigation (Wilson v. 21st Century Insurance Co., Cal. 2007).
• Conduct, not outcome. A court may agree with the insurer on coverage and still find bad faith in the way it handled the claim, and vice versa.

The NAIC model act itself says it should not be read to create a private cause of action. Violations are enforced by the regulator; the model's penalties are up to $1,000 per violation (aggregate $100,000), or up to $25,000 per violation (aggregate $250,000) if flagrant and in conscious disregard of the act. States that want private suits write a different statute.

How remedies differ by state

Check statutes for the current text; legislatures amend them often. Florida's 2023 legislation changed the framework, and the figures above come from the 2025 statute.

Damages beyond the policy

A successful claim can include more than the benefits owed:

• Policy benefits and interest on late payment.
• Consequential damages, such as lost profits when a delayed business income payment forced layoffs or a closing.
• Attorney's fees, where a statute or the policy allows them (not the American default).
• Statutory multipliers, as in Texas and Colorado.
• Emotional distress, usually for individuals rather than businesses.
• Punitive damages, which generally require something like fraud, malice or conscious disregard; see punitive damages.
• The excess judgment, in third-party cases where the insurer's refusal to settle exposed you above limits.

Businesses are generally able to bring these claims, although some states limit which damages a corporate plaintiff can recover.

The failure-to-settle problem

Say a company has a $1 million per-occurrence general liability limit and a plaintiff offers to settle for $900,000. The insurer rejects the offer, saying liability is disputed. At trial the verdict is $3.2 million. Under the common doctrine, if a court later finds the insurer unreasonably refused a reasonable settlement within limits, the insurer may be liable for the whole judgment, not only its $1 million. (This example is hypothetical.)

Texas calls its version the Stowers doctrine, after a 1929 decision; it generally requires a demand within policy limits, within the scope of coverage, on terms an ordinarily prudent insurer would accept. Other states use totality-of-the-circumstances tests. How defense costs, a consent-to-settle clause and your excess insurer's position affect this is covered in the hammer clause: what happens if you refuse a settlement, commercial umbrella insurance and defense costs inside vs outside policy limits: why it matters.

If your insurer refuses a settlement within limits that you want, put your request in writing, send it to your excess and umbrella carriers, and ask your own lawyer whether to demand that the insurer settle.

If you think the insurer is acting in bad faith

1. Document everything. Dates of each call, who said what, letters, the claim file requests and the insurer's deadlines. Keep a timeline.
2. Make clear, written demands, with a reasonable deadline and supporting evidence. A vague complaint is easier to dismiss.
3. Check the state's claims rules for time limits. Is the insurer late under the prompt-payment statute? See how to file a business insurance claim, step by step.
4. File a regulator complaint; see how to complain to your state insurance department. It is free and creates a record, but it is not a lawsuit.
5. Observe pre-suit steps. Florida's civil remedy notice is a condition to suit, and the 60-day window matters. Other states have notice and limitation requirements.
6. Talk to coverage counsel early. Fee arrangements vary, and some policyholder lawyers take strong first-party cases on contingency; see coverage litigation and declaratory judgment actions: when you and your insurer end up in court. A separate claim is usually filed alongside, or after, a breach of contract suit for the benefits.
7. Do not abandon the policy's own process. Appraisal and cooperation duties may still apply; see the appraisal clause in commercial property disputes.

A bad faith claim is not a way to avoid proving your loss. You still need a covered claim, documentation and compliance with policy conditions, such as notice and proof of loss.

Key takeaways

• Bad faith is about how the insurer behaved and whether it had a reasonable basis; a wrong decision is not automatically bad faith.
• First-party claims turn on delay, denial and investigation; third-party claims turn on refusing a reasonable settlement within limits and the excess judgment that follows.
• Remedies are state-specific: Texas allows up to three times damages for knowing violations; Colorado, two times the covered benefit plus fees; Florida requires a 60-day civil remedy notice.
• A regulator complaint is free and useful but does not award damages.
• Keep a written timeline and get coverage counsel involved early, before deadlines pass.