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Insurance · Bad Faith and Ethics

What is 'bad faith' in insurance claims handling?

Reviewed by Jordan Morley, Editorial Lead at 247SimpleTests. Written by the 247SimpleTests Editorial Team from the official source material cited on every question.

Correct answer

An insurer failing to act reasonably and in good faith in investigating, evaluating, or paying a covered claim — a violation that exposes the insurer to extra-contractual damages

  1. A An insured lying on their application
  2. B An adjuster making a small mistake in valuation
  3. C An insurer failing to act reasonably and in good faith in investigating, evaluating, or paying a covered claim — a violation that exposes the insurer to extra-contractual damages
  4. D Denying any disputed claim

Why this is the answer

Insurance bad faith is a legal claim against an insurer for unreasonable handling of a covered claim. Common bad faith acts: failing to investigate promptly; denying claims without adequate investigation; misrepresenting policy provisions; offering unconscionably low settlements; unreasonably delaying payment. In addition to the policy benefits owed, bad faith can result in extra-contractual damages (attorney fees, consequential damages, punitive damages in egregious cases). Adjusters must handle every claim reasonably and document their reasoning thoroughly.
Source: Adjuster Exam, Bad Faith Claims Handling

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About this topic: Bad Faith and Ethics

Bad faith and ethics questions cover the insurer's duty of good faith, the conduct that unfair-claims-practice laws prohibit, and the consequences — extra-contractual damages — when a claim is handled unfairly. This is one of 7 Insurance Adjuster questions on bad faith and ethics, each with a full explanation on a single study page.

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