What is insurance bad faith?
Insurance bad faith is the term lawyers use to refer to an insurance companies breach of its duty of good faith to its insured. Insurance bad faith can arise in one of two context, first-party bad faith or third-party bad faith. To understand the differences between the two context it’s important to understand that an insurance companies duty of good faith is to the person that purchase the insurance policy not to the person who is injured by the insured. In that context when we talk about third-party bad faith what we’re referring to is an insurance company’s duty to make a good faith attempt to settle an insured’s liability to an injured person within the policy limits. In that context an insurance company does not on a duty to pay an injured persons bills it’s also duty to the at-fault driver who has the insurance to resolve the at-fault drivers liability to the injured person within the policy limits if the injured person offers to settle the case within the policy limits. Put another way an insurance company for an at-fault driver is not entitled unreasonably refused to tender its policy limits when demanded by the injured person. If the refusal to pay the policy limits is likely to result in a verdict and excess of the policy which would result in personal liability by the at-fault driver to the injured person. In such an instance the at-fault driver may have a claim for breach of the duty of good faith to settle within the policy limits. When set up properly by the injured party to a type of settlement demand known as a tiger river letter an insured party may have a claim directly against its insurance company for any portion of the verdict over and above his policy limit. That claim can be assigned by the insured to the injured party and the injured party can then pursue payment of that claim directly from the insurance company.
The other type of the breach of duty of good faith that we discuss is called first-party bad faith.
First-party bad faith is another type of bad faith. In that context what we’re referencing is an insurance company’s duty of good faith and fair dealing to the person that actually bought the insurance policy.
This type of bad faith does not result from a third party’s claim against the liability policy of an insured it results from an insured’s claim against his own insurance company. This normally occurs under types of policies such as a homeowner’s hazard insurance policy or an under insurance policy for the insurance company has payment directly to its insured. In this type of case an insurance company owes a duty of good faith and fair dealing to properly investigate the claim and to pay to its insured any amounts of the insurance company recognizes is fairly owed. This means an insurance company cannot unfairly deny a claim and require its insured to file lawsuit to determine the amount that it is entitled to under its own insurance policy. When an insurance company breaches its first party duty of good faith and fair dealing it may be liable to its insured for attorney fees and for other damages incurred by the insured in being forced to pursue the unnecessary litigation.