Insurance bad faith is a situation in which an insurance company does not deal fairly with a customer. When customers and insurers enter into a contract, it is done with the understanding that both parties do so in good faith and that they will deal fairly with each other for the duration of the contract. When the insurance company fails to adhere to this standard, it is insurance bad faith, and a breach of contract which can expose it to legal liability.
Numerous activities could be considered insurance bad faith. Generally speaking, it involves any denial of a claim or delay in processing a claim which is not reasonable. For example, if an insurer refuses to investigate a claim at all, this is insurance bad faith. Likewise, if a claim for something which is demonstrably covered in the contract is denied, the insurance company is acting with bad faith.
Insurers may deliberately make an offer to settle at an unreasonably low cost in the hopes of avoiding the need to pay a claim in full. They can also manipulate consumers by doing things like refusing to settle a claim until a prior claim is resolved, misleading people about the terms of their contracts, or abusing an aspect of an insurance contract. All of these situations are cases of insurance bad faith; the insurer is not dealing reasonably with the insured party.
If an insured person believes that an insurance company is acting in bad faith, the insurer can be taken to court in an attempt to recover damages. Evidence is presented to the court and the court rules on the basis of the information. If insurance bad faith is demonstrated, in addition to being forced to pay the claim in question, the insurer may also be required to pay additional damages. For example, if someone's car was totaled and that person had to rent a car while wrangling with the insurance company, the insurance company would be obliged to pay for the rental.
Insurance contracts can be very difficult to understand. The language is complex and may be deliberately structured to be hard to comprehend. This can make insurance bad faith challenging to prove, as the insurance company may argue that its interpretation of a clause is entirely legal and reasonable. A lawyer who specializes in insurance law is a very valuable member of the legal team in a bad faith case, as he or she can review the contract with a fine toothed comb to look for evidence of bad faith on the insurer's part.