Bad Faith
Definition
Bad faith refers to an insurance company’s unreasonable or unfair denial, delay, or underpayment of a valid insurance claim. Insurance companies have an implied duty of good faith and fair dealing toward their policyholders, meaning they must handle claims honestly and promptly. When insurers breach this duty by acting unreasonably, they may be liable for bad faith beyond the policy benefits themselves.
How It’s Used in Personal Injury Cases
Bad faith claims arise when insurance companies fail to properly investigate claims, unreasonably deny coverage, refuse to settle within policy limits when liability is clear, deliberately delay payments, or misrepresent policy provisions. Under Texas Insurance Code Chapter 541, unfair claim practices can expose insurers to additional damages including attorney fees and potentially treble damages for knowing violations. Bad faith opens the door to compensation beyond policy limits.
Practical Example
After John’s car accident, the at-fault driver’s insurance company had $100,000 in liability coverage. John offered to settle for $100,000, but the insurer refused without investigation, believing they could win at trial. The jury awarded John $500,000, leaving their insured personally liable for $400,000. The insured assigned his bad faith claim to John, who then pursued the insurance company for the excess judgment based on its unreasonable failure to settle within policy limits.
Why It Matters to Your Case
Bad faith conduct by insurance companies may expose them to damages beyond their policy limits. If an insurance company is treating you unfairly—delaying your claim without explanation, denying coverage without proper investigation, or offering unreasonably low settlements—they may be acting in bad faith. Document all communications with insurance companies and report unreasonable conduct to your attorney.
Key Takeaway
Bad faith occurs when insurance companies unreasonably deny or delay valid claims—this misconduct can expose insurers to liability beyond their policy limits.