Derek
June 24, 2026
Learn the bad faith insurance claim meaning and how to fight back when an insurer unreasonably denies, delays, or underpays a valid home or auto claim you filed.
Written by Mark Lopez
You pay your premiums year after year. Then a claim that's obviously covered gets denied, or it drags on for months, or you get a lowball offer on a loss that was clearly worth more. Here's the thing: that may not just be lousy service. It can actually be illegal. Once you understand what a bad faith insurance claim really means, and how to push back, you've got real leverage the moment an insurer starts putting its own profits ahead of the promises it made to you.
None of this is unusual. Most of the time, insurers handle claims fairly and pay out millions without a fight. But disputes do come up, and when they do, the sides aren't evenly matched. The company has deep pockets and a team that makes claims all day; you don't. A 2024 Federal Reserve survey found that 37% of Americans couldn't handle a surprise $400 expense, which tells you how quickly a wrongly denied claim can wreck someone's finances. The Insurance Information Institute's guide to understanding deductibles walks through how claims and coverage are actually meant to function.
In the sections below, we'll break down what bad faith really means in the eyes of the law, look at some real bad faith claim examples, and walk through the practical steps for pushing back when you think your insurer is acting in bad faith.
Bad Faith Insurance Claim Meaning and How to Fight Back: The Short Answer
What Counts as Insurance Bad Faith Denial?
First-Party vs Third-Party Bad Faith
Common Bad Faith Claim Examples
How to Fight Back Against a Bad Faith Insurance Claim
Three Tips to Protect Yourself From Bad Faith
How PillowPays Can Help
Key Takeaways
FAQ
Sources and References
In plain terms, a bad faith insurance claim is a legal action you bring against an insurer that unreasonably denies, delays, underpays, or never really investigates a valid claim. Getting your head around the bad faith insurance claim meaning and how to fight back really comes down to a single idea: every policy carries an implied duty of good faith and fair dealing, and an insurer that breaks that duty can end up owing you a lot more than the claim was worth in the first place.
The essentials to know:
Every policy includes an implied covenant of good faith and fair dealing.
Bad faith means the insurer acted unreasonably, not just that you disagree on value.
A bad-faith claim is separate from your original claim and can recover extra damages.
The exact rules and remedies vary significantly by state.
The key insight: bad faith isn't a simple mistake or an honest disagreement over numbers. It's when an insurer unreasonably puts its own bottom line ahead of what it owes you. If you want more on how claims and deductibles fit together, take a look at our guide to how deductible reimbursement works.
A bad-faith denial occurs when an insurer rejects a valid claim without a reasonable basis or any real investigation. A denial on its own isn't bad faith. It crosses into bad faith when the refusal is unreasonable or arbitrary, or when the insurer skips the honest look at your claim that the policy actually requires.
Conduct that may rise to bad faith includes:
Denying a clearly covered claim without a legitimate, stated reason
Failing to conduct a prompt, thorough investigation
Unreasonably delaying a decision or payment on a valid claim.
Offering a settlement far below the claim's actual value, or misrepresenting policy language to avoid paying
Ignoring evidence that supports payment while focusing only on reasons to deny
What ties all of these together is that they're unreasonable. If there's a real coverage dispute and the insurer has a genuine, defensible reason, that's not bad faith. But flatly denying a tornado claim that's clearly covered, or letting a collision claim sit untouched for months without a word, is the kind of thing that can cross the line. For tactics aimed specifically at auto claims, check out our guide to auto deductible reimbursement by insurer.
"The line people miss is between a denial you disagree with and a denial that's unreasonable," says Robert Delgado, Independent Insurance Agent and member of the National Association of Insurance and Financial Advisors (NAIFA). "An insurer is allowed to dispute a claim in good faith. What they can't do is ignore evidence, stall without cause, or twist the policy language to avoid paying what they clearly owe."
It really hinges on whose insurer is behaving badly. With first-party bad faith, it's your own insurer dropping the ball on a claim you filed under your own policy. Third-party bad faith occurs when the at-fault person's insurer mishandles a liability claim, usually by refusing to settle within the policy limits and leaving its own customer exposed to a large judgment.
Feature | First-Party | Third-Party |
Whose insurer? | Your own | The at-fault party's |
Typical claim | Your property or injury loss | A liability claim against someone |
Common trigger | Denial, delay, underpayment | Refusal to settle within limits |
Who's exposed | You, the policyholder | The insured, to an excess judgment |
Easier to prove? | Generally yes | Often more complex |
For most regular policyholders, first-party bad faith is the one they're more likely to encounter: think of a homeowner whose insurer won't cover fire damage that clearly falls under the policy, or a driver whose collision claim just sits unprocessed for months. Third-party bad faith tends to show up in liability cases, where an insurer's refusal to settle a reasonable claim leaves its own policyholder personally on the hook. A handful of states, California among them, only permit first-party claims. For strategies geared toward homeowners, see our homeowners' deductible reimbursement guide.
Real-world bad-faith claim examples make it much easier to see where the line actually sits. In each case, the insurer's conduct could support a bad-faith action if it's shown to be unreasonable, and every case hinges on the insurer acting without any legitimate basis.
Say a fire or storm damages your home, both are covered events. You file right away, but the insurer never sends out an adjuster, ignores your calls and letters, and tells you not to start repairs until the investigation wraps up, an investigation that somehow never gets going. That sort of open-ended, unexplained stalling can amount to bad faith.
After a crash, your covered loss is clearly worth a specific amount, and you've got the repair estimates to prove it. The insurer comes back with a fraction of that figure and no real explanation, betting that you'll cave out of sheer frustration. An offer that lands far below your documented value, with nothing to justify it, can be a sign of bad faith.
You file a perfectly valid claim, and the insurer denies it for one reason. You knock that reason down, so they switch to another, then another after that. When the justifications keep shifting like this, it looks less like an honest review of your claim and more like a hunt for any excuse to say no, and that pattern can be strong evidence of bad faith. For more on this, see "More Deductible Protection Strategies."
"When an insurer changes its denial reason two or three times, that pattern tells a story," says Linda Park, Certified Financial Planner at Horizon Wealth Advisors. "One honest reason I can respect. A moving target usually means they're looking for any way out of paying, and that's exactly the kind of documentation that supports a bad faith case."
Pushing back means a few things: keep records of everything, challenge the insurer formally in writing, take it up with your state regulator, and bring in an attorney if you need one. The burden falls on you to prove the insurer behaved unreasonably, which is exactly why solid documentation matters so much. And if you ultimately decide to sue your insurer for bad faith, all of that documentation is what your case is built on.
Hang on to every email, letter, and call log, complete with dates and names. Keep copies of your policy, the claim itself, any denial letters, and all the back-and-forth in between. Records like these have a way of exposing patterns: the shifting reasons, the follow-ups nobody answered, the stretches of silence. More often than not, the quality of your documentation determines whether you even have a case.
Outside opinions carry a lot of weight. A repair estimate from a licensed contractor, a third-party damage appraisal, or some other independent evaluation can flatly contradict what the insurer concluded, which makes your case that their handling was unreasonable that much stronger.
Lay out your concerns to the insurer in writing, spelling out exactly what they did, or didn't do, that you think amounts to bad faith. If that goes nowhere, file a complaint with your state's Department of Insurance, the agency that polices how insurers behave. Keep in mind that some states make you give specific notice before you're allowed to sue.
Bad faith law is complicated and changes from state to state, so if the dispute is a serious one, talk to an attorney who actually handles these cases. Plenty offers a free first consultation and takes cases on a contingency basis. What you can recover may include the benefits that were wrongly withheld plus interest, any other financial losses, your attorney's fees, and, in the worst cases, punitive damages on top.
Don't hold off on record-keeping until you already smell bad faith. Starting with that very first call about a claim, jot down the date, who you spoke to, the reference number, and what was said, and save every letter and email. If the claim later falls apart, a record you kept in the moment is far more convincing than something you piece together from memory afterwards.
Whenever an adjuster promises something or gives you a reason over the phone, follow it up in writing to lock it in. A quick email summarising what was said does the trick. It builds a paper trail and makes it harder for them to keep changing their story. Insurers tend to act differently once they know their words are on the record.
Bad faith rules vary a lot depending on where you live. Some states only allow you to bring first-party claims; others require specific written notice before a lawsuit; and the deadlines aren't the same everywhere. You don't have to become a legal expert; simply knowing that your state has its own rules helps you figure out when it's time to call in a professional. Your state's Department of Insurance website is a solid place to start getting a handle on your rights.
How PillowPays Can Help Going up against an insurer is stressful enough; the last thing you need is to be sweating your deductible at the same time. PillowPays pays back your home and auto deductibles within days of a valid claim, so the moment a claim is approved, that out-of-pocket hit gets handled quickly. Basic Protection runs $10/month and covers up to $500/year for home and auto. Premium Shield is $30/month and covers up to $2,000/year across home, auto, renters, and commercial property, with priority processing. Compare deductible protection plans to find the right fit for protecting your deductible. |
A bad faith insurance claim is a legal action you take against an insurer that unreasonably denies, delays, underpays, or never properly investigates a valid claim. Every policy comes with an implied duty of good faith and fair dealing baked in.
Bad faith takes unreasonable conduct, not just a disagreement about how much something is worth. A genuine, well-grounded coverage dispute isn't bad faith, but ignoring evidence, stalling for no reason, or twisting the policy wording can be.
First-party bad faith is your own insurer mishandling your claim, which is the more common situation and usually easier to prove. Third-party bad faith is the at-fault party's insurer refusing to settle within the limits.
To push back: keep records from the very first contact, gather independent evidence, send a formal bad-faith letter, take it to your state's Department of Insurance, and bring in an attorney for the bigger disputes.
In a winning bad-faith case, damages can run well beyond the original claim, covering the withheld benefits plus interest, consequential losses, attorneys' fees, and, in some cases, punitive damages.
Bad faith is when an insurer unreasonably fails to live up to its obligations, whether that's denying a valid claim for no good reason, dragging out payment, underpaying, or refusing to investigate at all. Since every policy carries an implied duty of good faith and fair dealing, breaching it can leave the insurer on the hook for damages beyond the original claim.
First-party bad faith is when your own insurer botches a claim you filed under your policy, say, by wrongly denying it or letting it drag on. Third-party bad faith is when the at-fault party's insurer botches a liability claim, usually by unreasonably refusing to settle inside the policy limits and leaving its own insured facing a large judgment.
Yes. If you can show the insurer handled your valid claim unreasonably, suing for bad faith may be on the table. The proof is on your shoulders, so documentation really matters. The rules differ by state, with some requiring upfront notice and others permitting only first-party claims. Talking to a bad-faith attorney, and plenty of them offer free consultations, is a smart first move.
What you can recover usually covers the benefits the insurer wrongly held back, plus interest, any extra financial losses you took on, and your attorney's fees. In the worst cases, a court might tack on punitive damages that dwarf the original claim. Exactly what you get depends on your state's laws and whether it's a first-party or third-party claim.
You make the case for bad faith with documentation that shows the insurer acted unreasonably, not just that the two of you disagreed. Hold on to all your correspondence, call logs with names and dates, denial letters, and outside evidence, such as contractor estimates that run counter to the insurer's position. Patterns, such as shifting reasons for denial or a flat refusal to investigate, count as strong evidence. A bad-faith attorney can look at your records and tell you whether you've got a case.
This article is meant for general information only and isn't legal, insurance, or financial advice. Bad faith laws, requirements, deadlines, and the remedies you can pursue differ quite a bit from state to state. Before you take any legal action, talk to a licensed attorney in your state who can advise you on your specific situation.
National Association of Insurance Commissioners (NAIC). (2025). How to Appeal a Denied Claim.
Insurance Information Institute (III). (2025). Understanding Your Insurance Deductibles.
Federal Reserve Board. (2025). Economic Well-Being of U.S. Households in 2024.
Insurance Information Institute (III). (2025). 12 Ways to Lower Your Insurance Costs.
About the Author Mark Lopez Mark Lopez is an insurtech entrepreneur, angel investor, and Co-Founder of Pillow Pays, a subscription-based life insurance platform. His career has taken him through RBC Ventures, Mastercard Fintech, and the founding of RedFlagDeals.com, and that path has given him real depth in subscription financial products, embedded insurance, and consumer deductible protection strategy. He earned a Bachelor of Commerce from Queen's University and has been named a Top 40 Under 40 leader in Canada's technology and finance scene. |