Insurance bad faith: first-party and third-party claims

An insurance company acts in bad faith when it handles a claim unreasonably, not merely when it says no. A denial, a low offer or a delay can all be legitimate if the policy, the facts or a missing document supports them. Bad faith claims ask a harder question: did the insurer act without a proper reason, in a way that cost the person it owed a duty to? How that question is framed depends on whose claim it is and on the state whose law applies.

First-party and third-party bad faith

First-party claims involve your own insurer paying you for your own loss: a storm-damaged roof, a stolen car, a disability or life benefit. The dispute is about whether the company paid what the policy owed, on time, after a fair look at the claim.

Third-party claims involve liability insurance. Someone sues or makes a claim against you, and your insurer defends and may settle on your behalf. The classic third-party bad faith problem is a failure to settle within limits. California’s official civil jury instruction on this, CACI No. 2334, lists the elements: the injured person made a reasonable demand to settle for an amount within policy limits, the insurer failed to accept it, the failure resulted from unreasonable conduct, and either a judgment above the limits followed or the refusal was a substantial factor in harming the policyholder (CACI No. 2334, 2026 edition). Under that instruction, a demand within limits is reasonable if the insurer knew or should have known that a judgment was likely to exceed it. That is California’s rule; other states frame third-party claims differently.

The implied covenant of good faith and fair dealing

Much of bad faith law grows out of a duty implied into the insurance contract. In California, CACI No. 2330 tells jurors that every insurance policy carries an implied obligation that neither side will injure the other’s right to receive the benefits of the agreement. To meet that obligation, the insurer “must give at least as much consideration to the interests of the insured as it gives to its own interests” (CACI No. 2330).

The same California instruction draws a line between bad faith and simple carelessness. To breach the obligation, the insurer must act or fail to act unreasonably, meaning without proper cause; it is “not a mere failure to exercise reasonable care.” The insurer does not need to intend to deprive the policyholder of benefits. For a first-party claim of unreasonable nonpayment or delay, CACI No. 2331 adds that jurors consider only what the insurer knew or reasonably should have known at the time. A claim that the insurer simply owes more under the policy is a breach of contract question, covered in our breach of contract guide.

Unfair claims settlement practices statutes

States also regulate claim handling by statute. The National Association of Insurance Commissioners (NAIC) adopted a model Unfair Claims Settlement Practices Act in 1990 as a template states may adopt or adapt. Its list of unfair practices includes not attempting in good faith to settle claims promptly and fairly once liability has become reasonably clear, refusing to pay without a reasonable investigation, and failing to explain the basis for a denial (NAIC Model Law 900). The model act is enforced by the state insurance regulator, and it says it does not create a private right to sue.

States split on that last point. The NAIC’s state-by-state chart reports that Texas permits private actions under its statute, while California courts have held that California Insurance Code section 790.03 gives no private right of action, though a common law bad faith claim remains available to policyholders (NAIC chart MC-55). Check the specific rule in your state.

Texas as an example: chapters 541 and 542

Texas Insurance Code section 541.060 lists unfair settlement practices on a claim by an insured or beneficiary. They include failing to attempt in good faith a prompt, fair and equitable settlement once liability is reasonably clear, failing to promptly give a reasonable explanation of the basis for a denial or compromise offer, failing to affirm or deny coverage within a reasonable time, and refusing to pay without a reasonable investigation (Tex. Ins. Code ch. 541). In Texas, that list does not give a cause of action to a third party asserting claims against the insured.

Under the same Texas chapter, a person who sustains actual damages may sue. Remedies include actual damages, court costs and reasonable attorney’s fees, and up to three times actual damages if the trier of fact finds the insurer acted knowingly. Before filing, the person generally must give written notice at least 61 days ahead, stating the specific complaint and the amount claimed. Texas sets a two-year limitations period, measured from when the practice occurred or when the person discovered it or reasonably should have.

Texas also sets claim-handling deadlines for first-party claims in chapter 542 (Tex. Ins. Code ch. 542). In general, within 15 days of receiving notice of a claim, an insurer must acknowledge it, start investigating and request the items it needs. It must then accept or reject the claim in writing within 15 business days after receiving those items, stating its reasons for any rejection, or explain why it needs more time and decide within 45 days. Payment is due within five business days after notice that it will pay. If an insurer that is liable for the claim misses these rules, Texas adds interest as damages plus attorney’s fees. Different timelines apply to surplus lines insurers and suspected arson, and a different interest rule applies in actions governed by chapter 542A.

A regulator complaint is not a bad-faith lawsuit

A state complaint asks the regulator to review the insurer’s conduct. The Texas Department of Insurance (TDI) says it can check that companies are following the law and ask a company to justify what it is paying, but “TDI can’t make a company pay more than your policy allows” (TDI: ways we can help). For Texas auto claims, TDI adds that it cannot decide who was at fault and usually cannot help with a complaint against another person’s insurer (TDI: auto insurance complaints).

A bad faith lawsuit is a court case seeking damages, with notice rules and filing deadlines of its own. Nothing in TDI’s complaint guidance says a complaint pauses the Texas deadlines above. Our insurance disputes guide walks through the complaint path step by step.

Records that matter

Bad faith claims are built on timing and explanations, so the claim file is the evidence. The Texas deadlines run from dates such as notice of the claim and receipt of requested items, and the California first-party instruction looks at what the insurer knew at the time it acted. Keep:

• Save every letter. Keep acknowledgments, information requests, denials and payment explanations exactly as received.
• Log the dates. Record when you reported the loss, sent each document and received each response.
• Ask for the basis in writing. Request the policy provision and facts behind any denial or partial payment.
• Keep the full policy. Include the declarations page, endorsements and any reservation of rights letter.
• Preserve settlement demands. If you are being sued, keep every demand and your insurer’s response to it.
• Check deadlines separately. Notice periods and limitations periods are set by state law and the policy.

For a claim under your own auto policy after a crash with an uninsured or underinsured driver, see uninsured and underinsured motorist coverage.

This guide is general legal information, not legal advice. Bad faith rules, remedies and deadlines differ by state and depend on the facts; consult a lawyer licensed in the relevant jurisdiction about a specific claim.