Insurer bad faith

An insurer that handles a claim unreasonably may be liable beyond the policy limits.

First-party bad faith. Unreasonable delay or denial of a claim by the insured’s own insurer. Standards vary from a fairly debatable test, protecting insurers where a genuine dispute exists, to a broader reasonableness standard.

Third-party bad faith. The more significant exposure. An insurer that unreasonably refuses to settle within limits, exposing the insured to an excess judgment, may be liable for the entire judgment. The insured’s assignment of that claim to the plaintiff, combined with a covenant not to execute, is the standard mechanism by which these claims reach court.

Setting up bad faith. Time-limited demands within limits, with the information the insurer needs to evaluate. Insurers respond with documented evaluations and prompt communication with the insured about exposure above limits.

Duty to inform. The insurer must advise the insured of settlement demands and of exposure beyond limits, and give the insured the opportunity to contribute.

Remedies. The excess judgment, consequential damages, emotional distress in some states, punitive damages, and attorney fees where a statute provides.

Statutory claims practices acts with their own standards and remedies.