What’s Bad Faith Insurance? See Our Guide

Bad faith insurance refers to an insurance company’s actions that are not in the best interest of its policyholder. This can include denying a legitimate claim, failing to adequately investigate a claim, or failing to provide a fair settlement. Such actions by insurance companies may violate the implied covenant of good faith and fair dealing that is present in every insurance contract and can result in legal action being taken against them. 

First-party vs. third-party bad faith

First-party bad faith in insurance refers to situations where an insurance company acts in bad faith towards its own policyholder. This can occur when the insurance company fails to adequately investigate, process, or pay out a claim made by the policyholder under a policy that the policyholder has paid premiums for. The insurance company’s duty of good faith requires that it must act in the best interest of the policyholder and fulfill its obligations under the policy. When the insurance company fails to do so, it may be liable for damages in a first-party bad faith insurance claim. 

Third-party bad faith, on the other hand, refers to situations where an insurance company acts in bad faith towards a third party — such as an individual or entity that is not a policyholder, but has a claim against a policyholder who’s insured by the insurance company.

For example, if a policyholder causes an accident and the injured party files a claim against the policyholder, the insurance company may act in bad faith by denying the claim, failing to adequately investigate the claim, or failing to provide a fair settlement. The insurance company’s duty of good faith and fair dealing extends to third parties and if it fails to fulfill its obligations, it may be liable for damages in a third-party bad faith insurance claim. 

How to appeal an insurance claim denial

If an insurance company denies a claim, policyholders typically have the right to appeal the decision. The process and specific rights of policyholders vary depending on the insurance policy and jurisdiction, but generally, policyholders have the following rights: 

  1. The right to receive a written explanation of the reasons for the denial of their claim
  2. The right to request a review of the denial decision by a higher level of management within the insurance company
  3. The right to present additional evidence or information that may support their claim
  4. The right to file a complaint with the state insurance commissioner if they believe the insurance company has acted in bad faith or violated state insurance regulations
  5. The right to take legal action against the insurance company if they believe their rights have been violated or their claim was wrongly denied 

It is important to note that the appeals process and rights of policyholders can vary by state and by insurance policy — so it is advisable for policyholders to review their policy and understand the appeals process before making an appeal. 

If you believe you have good cause to appeal your insurance denial, but the insurance company has not made a reasonable investigation of your claim – or if you believe that the insurance company has not acted fairly or denied your claim in bad faith – call the insurance bad faith attorneys at Gallagher Krich, APC at (858) 926-5797 or email us at info [at] tomgallagherlaw.com today.

You can also learn more at:

When Can You Sue an Insurance Company for Bad Faith?


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