Bad Faith and Ethics: Practice Questions & Explanations

Bad faith is conduct breaching the implied covenant of good faith and fair dealing inherent in every insurance contract. Examples of bad faith handling: (1) Denying a clearly covered claim without reasonable basis; (2) Unreasonable delay in investigation, decision, or payment; (3) Inadequate investigation — making decisions without proper fact-finding; (4) Misrepresenting policy provisions or coverages; (5) Requiring documentation not required by the policy or law; (6) Refusing to communicate with the insured; (7) Failing to settle a liability claim within policy limits when liability is clear and damages exceed limits — exposing the insured to personal liability ('Stowers' doctrine); (8) Pressuring the insured into accepting less than full value through threats, intimidation, or misinformation; (9) Failing to acknowledge or respond to a claim within reasonable time; (10) Compelling litigation to recover what is properly owed. Bad faith creates 'extra-contractual' liability — damages beyond the policy limits, often including emotional distress, attorney fees, and (in some states) punitive damages. Adjusters should: be timely and responsive; document their investigation and decision basis; explain coverage decisions clearly in writing; never pressure the insured. Insurers train adjusters specifically on bad-faith avoidance because the liability exposure is significant.

The Stowers Doctrine (Texas) and its equivalents in other states (e.g., Cantanese in Pennsylvania, Crisci in California) establish that an insurer can be liable for damages exceeding the policy limit if it acts in bad faith by refusing to settle a third-party claim within policy limits. The classic scenario: (1) The insured's auto policy has $100,000 limits; (2) The insured causes a serious accident with clear liability and $500,000 in damages; (3) The injured party offers to settle for $100,000 (the policy limit); (4) The insurer refuses to settle, gambles on a lower verdict or hopes to win at trial; (5) The jury awards $500,000; (6) The insured is now personally liable for $400,000 above the policy limits; (7) Under Stowers, the insurer is liable for the $400,000 excess because it acted in bad faith by not protecting the insured's interests. The doctrine requires: clear liability of the insured; damages potentially exceeding limits; an opportunity to settle within limits; the insurer's refusal to settle. The insurer's duty is to give equal consideration to the insured's interest, not just its own. Stowers claims are pursued by the insured (often after the underlying judgment); some states allow direct claims by injured parties via assignment. The doctrine creates strong incentive for insurers to settle when limits are clearly inadequate.

Most states have enacted Unfair Claims Settlement Practices Acts (UCSPA) modeled on the NAIC Model Act. Common prohibited practices when occurring with such frequency as to indicate a general business practice: (1) Misrepresenting pertinent facts or insurance policy provisions; (2) Failing to acknowledge or act reasonably promptly upon communications about claims; (3) Failing to adopt and implement reasonable standards for prompt claim investigation; (4) Refusing to pay claims without conducting a reasonable investigation; (5) Failing to affirm or deny coverage within a reasonable time after proof of loss; (6) Not attempting in good faith to effectuate prompt, fair, and equitable settlements when liability is reasonably clear; (7) Compelling insureds to institute litigation by offering substantially less than amounts ultimately recovered in actions; (8) Misleading insureds about applicable statutes of limitations; (9) Attempting to settle claims for less than reasonable amounts; (10) Failing to settle claims under one coverage to influence settlements under other coverages. Penalties: state regulatory action (fines, license consequences); some states allow private rights of action against insurers; consumer complaint procedures. Adjusters should know their state's specific UCSPA provisions and follow time limits and standards rigorously. Industry training emphasizes these practices because regulatory and litigation exposure is significant.

BAD FAITH in insurance claims handling refers to an insurer's breach of its implied covenant of good faith and fair dealing — an obligation all insurers owe to their insureds (and in some states, to third-party claimants). BAD FAITH EXAMPLES — conduct that is clearly actionable:

Unreasonable delay: deliberately stalling payment of a valid, undisputed claim (as in the scenario) without any legitimate reason; claimants often accept reduced settlements out of financial desperation after long delays — using delay as a settlement tactic is a classic bad faith pattern.

Misrepresenting coverage: telling a claimant a loss isn't covered when it clearly is.

Failing to investigate: settling without reasonable investigation or denying without proper investigation.

Lowballing: making settlement offers the insurer knows are far below the actual value of the claim without reasonable justification.

Failing to settle within policy limits: when a case clearly exceeds policy limits and a settlement demand is made within limits, failure to settle can expose the insurer to an excess judgment against the insured (bad faith toward the insured).

Refusing to communicate: ignoring calls and correspondence.

Threats and coercion: pressuring claimants to accept inadequate settlements.

Not bad faith:

Requesting additional records: legitimate investigation is expected and required.

Negotiating: offering less than demanded, if based on reasonable evaluation.

Denying for a valid exclusion: with a clear, written, policy-supported explanation.

Bad faith consequences: insurance companies can be liable for: the original claim amount; consequential damages (beyond the policy limit in some cases); attorney's fees; PUNITIVE DAMAGES (in egregious cases, potentially multiples of actual damages); regulatory action and license consequences.

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.

Bad faith refers to an insurer's or adjuster's unreasonable or unfair conduct in handling a claim, breaching the implied duty of good faith and fair dealing owed to the insured. Examples include denying a valid claim without a reasonable basis, unreasonably delaying investigation or payment, failing to conduct a proper investigation, misrepresenting policy provisions, or making lowball offers not supported by the facts. Bad-faith conduct can expose the insurer to damages beyond the policy limits, including in some cases punitive damages. Proper, prompt, fair, and well-documented claims handling avoids bad faith. Understanding what constitutes bad faith is critical content for the adjuster exam.

State Unfair Claims Settlement Practices Acts (often based on an NAIC model) define and prohibit a list of unfair practices in the handling of insurance claims, in order to protect policyholders and claimants. Prohibited practices commonly include misrepresenting pertinent facts or policy provisions, failing to acknowledge and act promptly on communications, failing to adopt reasonable standards for prompt investigation, not attempting good-faith settlement of clear claims, and compelling insureds to litigate by offering far less than is owed. Violations can lead to regulatory penalties. Adjusters must know and follow these standards. Understanding the purpose of these acts is essential bad-faith/regulatory content for the adjuster exam.