What is 'bad faith' in insurance claims handling?

Bad faith is conduct by an insurer that breaches the implied covenant of good faith and fair dealing in every insurance contract. Examples: (1) Denying a clearly covered claim without reasonable basis; (2) Unreasonable delay in investigation or payment; (3) Failure to thoroughly investigate before denying; (4) Misrepresenting policy provisions; (5) Refusing to settle a liability claim within policy limits when liability is clear and the claim could exceed limits (exposing the insured to personal liability); (6) Demanding documentation not required by the policy. Bad faith creates 'extra-contractual' liability — damages beyond the policy limits, often including emotional distress, attorney fees, and punitive damages. State laws vary; some recognize bad faith as a tort, others as a contract breach with extra-contractual damages, some allow only statutory remedies. Bad-faith litigation is a significant area of insurance practice and motivates insurers to handle claims carefully.