Understanding Bad Faith in Insurance: Legal Remedies for Policyholders (2025)

June 26, 2025

Legal Remedies for Policyholders

Insurance policies are supposed to be a safety net, but what happens when your insurer doesn’t play fair? Bad faith insurance practices can leave policyholders feeling powerless. This comprehensive 2025 guide explores what constitutes bad faith, how to identify it, and the legal remedies available to you if your insurer acts dishonestly.

What Is Bad Faith in Insurance?

Bad faith refers to dishonest or unfair practices by an insurance company. When an insurer deliberately delays, denies, or underpays a legitimate claim without a reasonable basis, it may be acting in bad faith.

Examples include:

  • Ignoring claim submissions or communication
  • Failing to investigate claims properly or promptly
  • Misrepresenting policy terms
  • Offering unreasonably low settlements
  • Denying claims without valid justification

Insurers have a legal duty to act in good faith and fair dealing with their policyholders.

Common Signs of Bad Faith

Be on the lookout for:

  • Unjustified delays in processing your claim
  • Incomplete investigations or no investigation at all
  • Changing reasons for denial
  • Refusing to provide documentation explaining a decision
  • Threatening language or pressure to accept a low offer

If any of these occur, it’s time to investigate further.

First Steps to Take if You Suspect Bad Faith

  1. Document everything: Keep records of all communication, including emails, letters, and phone calls.
  2. Request a written explanation: Demand the insurer provide the specific policy reasons for denial or delay.
  3. Review your policy: Understand your coverage and exclusions.
  4. Contact your state’s Department of Insurance: They may mediate or investigate complaints.

Policyholders have the right to sue an insurance company that acts in bad faith. Legal remedies can include:

  • Contract damages: The amount originally owed under the policy
  • Consequential damages: Financial losses resulting from the denial
  • Emotional distress damages: Compensation for stress caused by bad faith
  • Punitive damages: Additional penalties if the insurer’s behavior was especially malicious

In many states, courts take bad faith cases seriously and may award significant compensation.

Filing a Bad Faith Insurance Lawsuit

Step-by-step process:

  1. Hire a qualified attorney: Find one specializing in insurance litigation.
  2. File a formal complaint: Your lawyer will draft a legal complaint detailing the insurer’s bad faith.
  3. Pre-trial process: This includes discovery, depositions, and potential settlement talks.
  4. Trial or settlement: Many cases settle out of court, but some proceed to a judge or jury.

Your attorney may work on a contingency fee, meaning they only get paid if you win.

State Laws and Variations

Bad faith laws vary by state. For example:

  • California: Allows policyholders to sue for both contract and tort damages
  • Texas: Provides remedies under both common law and the Insurance Code
  • Florida: Has strict requirements before filing a lawsuit, including a civil remedy notice

Always consult an attorney familiar with your state’s specific regulations.

Real-Life Case Studies

Case 1: Homeowner vs. National Insurance Co.
A homeowner in Colorado won $250,000 in damages after the insurer delayed payment for roof repairs caused by hail, despite multiple inspections confirming the damage.

Case 2: Cancer Patient Denied Treatment
An insurance company was ordered to pay punitive damages for denying chemotherapy to a policyholder with stage III cancer, citing a pre-existing condition that didn’t exist.

Preventing Bad Faith Issues

Tips for policyholders:

  • Read and understand your policy
  • Report claims promptly and truthfully
  • Keep detailed records of every interaction
  • Get second opinions for disputed claims

Frequently Asked Questions

Q: Can I sue for bad faith even if the insurer eventually pays?
A: Yes, if the delay caused you financial harm or emotional distress.

Q: What if I signed a settlement under pressure?
A: It might be invalid. A lawyer can help assess whether it was done under duress.

Q: How long do I have to file a lawsuit?
A: Each state has a statute of limitations. Act quickly to preserve your rights.

Conclusion

Insurance bad faith is more than just an inconvenience—it’s a serious legal issue with financial and emotional consequences. Knowing your rights in 2025, documenting your interactions, and seeking legal help when necessary can protect you and hold dishonest insurers accountable.