Bad Faith
Bad faith describes blatantly unfair conduct by an insurer in handling a claim that exceeds mere breach of contract and can give rise to damages claims beyond the policy limit.
Concept
Bad faith describes blatantly unfair conduct by an insurer, exceeding mere negligence or breach of contract, in the handling and settlement of a claim. A classic example is an auto liability insurer’s arbitrary refusal to settle a claim within policy limits where the insured’s liability is incontrovertible.
Distinction from Utmost Good Faith
Whereas the general principle of utmost good faith describes the mutual duty of honesty owed by both the policyholder and the insurer throughout the entire contractual relationship, bad faith specifically refers to a serious, intentional, or reckless breach of duty by the insurer towards its own policyholder during claims handling – for example, through baseless denial of benefits, unreasonable delay, or a lack of diligence in evaluating a claim.
Legal Consequences
A successful bad faith claim can result in the insurer being held liable beyond the contractually agreed policy limit – so-called extracontractual damages, which in certain jurisdictions may also include punitive damages. These liability consequences are particularly pronounced in US law, but exist in a more moderate form in other jurisdictions as well, as a sanction for particularly serious breaches of the insurer’s claims-handling duties.