Insurance bad faith: what it means for a homeowners claim

What bad faith means

Every insurer owes you a duty to handle your claim fairly. State law calls the opposite of this duty bad faith. Bad faith happens when an insurer handles your claim in a way that state law or regulation treats as unfair, not just in a way that disappoints you.

The National Association of Insurance Commissioners (NAIC) wrote a model act that most states use as the base for their own law. The act states its purpose this way: "The purpose of this Act is to set forth standards for the investigation and disposition of claims arising under policies or certificates of insurance issued to residents of [insert state]." ^[1]

The model act also says it does not by itself give you the right to sue. It states: "Nothing herein shall be construed to create or imply a private cause of action for violation of this Act." ^[1] Your state may have added that right in its own version of the law. Read your state's statute or ask your state insurance department.

Practices regulators treat as unfair

The NAIC model act lists specific acts that count as an unfair claims practice when an insurer commits them often enough, or flagrantly enough, to show a pattern. The list includes these items, quoted from the model act:

• "Knowingly misrepresenting to claimants and insureds relevant facts or policy provisions relating to coverages at issue." ^[1]
• "Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies." ^[1]
• "Failing to adopt and implement reasonable standards for the prompt investigation and settlement of claims arising under its policies." ^[1]
• "Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear." ^[1]
• "Refusing to pay claims without conducting a reasonable investigation." ^[1]
• "Failing in the case of claims denials or offers of compromise settlement to promptly provide a reasonable and accurate explanation of the basis for such actions." ^[1]

Texas adopted its own version of this list in the Texas Insurance Code. Section 541.060(a) states it is unlawful "to engage in the following unfair settlement practices with respect to a claim by an insured or beneficiary," and lists acts such as "failing to attempt in good faith to effectuate a prompt, fair, and equitable settlement" of a claim where liability is reasonably clear, and "refusing to pay a claim without conducting a reasonable investigation with respect to the claim." ^[2]

California's Fair Claims Settlement Practices Regulations set minimum standards under Insurance Code Section 790.03(h). The regulations state their purpose includes "to delineate certain minimum standards for the settlement of claims" and "to promote the good faith, prompt, efficient and equitable settlement of claims on a cost effective basis." ^[3]

A denial or a low offer is not automatically bad faith

An insurer can deny your claim or offer less than you expected and still act within the law. Coverage disputes happen. A policy may exclude the cause of loss, or the adjuster may value the damage differently than you do.

Bad faith is about how the insurer reached its decision, not only about the dollar amount. The NAIC model act and the state laws built on it point to conduct such as skipping a reasonable investigation, misrepresenting the policy, or not explaining the denial. ^{[1] [2]} If the insurer investigated your claim, applied the policy language as written, and gave you a clear reason in writing, a low offer or a denial alone does not meet the bar most states set for bad faith.

Florida's civil remedy statute illustrates how one state sets this bar. Florida Statutes Section 624.155(1) allows a person to bring a civil action against an insurer "when such person is damaged" by specific statutory violations, including a failure to settle in good faith when the insurer could and should have done so. ^[4] The statute requires the claimant to give the state insurance department and the insurer 60 days' written notice of the violation before filing suit. ^[4]

First-party claims and third-party claims

A first-party claim is a claim you file under your own homeowners policy, for your own loss. A third-party claim is a claim someone else files against your liability coverage, for a loss you may have caused them.

Bad faith rules can differ between the two. Texas Insurance Code Chapter 542, Subchapter B, the Prompt Payment of Claims Act, sets deadlines for insurers handling first-party claims. Under this subchapter, an insurer that fails to comply with the deadlines is liable for the claim amount "in addition to the amount of the claim, interest on the amount of the claim at the rate of 18 percent a year as damages," together with "reasonable and necessary attorney's fees." ^[5] The 18 percent rate has an exception. Subsection (c) of the same section says that in an action covered by Chapter 542A, which covers many property damage claims, the interest is "simple interest on the amount of the claim as damages each year at the rate determined on the date of judgment by adding five percent to the interest rate determined under Section 304.003" of the Texas Finance Code. ^[5] This subchapter covers first-party claims. A third-party claim, such as a liability claim against your policy, follows a different set of rules.

Ask your state insurance department or a licensed attorney which category your claim falls into and which rules apply.

The rules differ by state

Bad faith law is state law. There is no single federal bad faith standard for a homeowners claim. The practices listed above come from three different states' statutes and regulations, and each state wrote its own version.

If you live in a different state, read that state's own insurance code or ask that state's insurance department for its claims-practices rule. Do not assume a rule from one state applies in another.

What to document on your own claim

Good records support any claim, complaint, or legal consultation. Keep these items.

• Your policy, including the declarations page and all endorsements.
• Every written communication with the insurer, including emails, letters, and portal messages, with dates.
• Notes from phone calls, with the date, the name of the person you spoke with, and what was said.
• The denial letter or the settlement offer, in writing, with the stated reason.
• Photos and video of the damage, dated and organized by room or area.
• Repair estimates, invoices, and receipts.
• A simple log of how long each step of your claim took, from the date you reported the loss.

If the insurer gives you a reason for a denial or a low offer only by phone, ask for the reason in writing. The NAIC model act lists "failing in the case of claims denials or offers of compromise settlement to promptly provide a reasonable and accurate explanation" as an unfair practice, so a written explanation is a reasonable thing to request. ^[1]

How to file a complaint with your state insurance department

Every state has an insurance department that takes consumer complaints about how an insurer handled a claim. The department is not a court, and it does not decide who wins a lawsuit, but it can review the file and press the insurer for a response.

1. Put your dispute in writing to your insurer first, and ask for a written reply, if you have not already.
2. Gather your policy number, claim number, and the documents listed above.
3. Go to your state insurance department's website and use its online complaint form.
4. Submit the form with your supporting documents attached.
5. Keep the complaint or file number the department gives you, and follow up if you do not hear back in a reasonable time.

The Texas Department of Insurance accepts complaints online, by email, by mail, and by fax, and states it "will take appropriate enforcement action when evidence of unfair claim settlement practices or other statutory violations is demonstrated." ^[6] The California Department of Insurance recommends filing online, stating "we recommend using the electronic complaint forms" and that "use of non-electronic complaint forms may delay the process." ^[7]

When to talk to a licensed attorney

This guide explains what regulators and state statutes say about unfair claim practices. It is not legal advice, and it cannot tell you whether your specific claim meets your state's bad faith standard.

Consider talking to a licensed attorney in your state if the insurer denied your claim without an explanation you can verify, delayed your claim well past the deadlines your state sets, or if you believe the insurer misrepresented your policy. An attorney licensed in your state can read your policy, your state's statute, and your claim file together, and tell you what options you have and whether a deadline applies to your situation.

Florida's statute requires 60 days' written notice to the insurer and the state before a bad faith lawsuit can proceed under that law. ^[4] Other states set their own notice periods and deadlines. An attorney or your state insurance department can tell you the deadline that applies where you live.

Questions