Bad Faith

Every insurance contract carries an implied duty of good faith and fair dealing. Bad faith is the breach of that duty — when an insurer handles a claim unreasonably, for example by denying a clearly covered loss, dragging out the investigation, lowballing a settlement, or failing to defend when it should. The key legal test is reasonableness: an insurer that investigates fairly and has a genuine, well-founded basis to dispute a claim is not in bad faith even if it turns out to be wrong. Bad faith requires conduct with no reasonable justification.

This matters enormously to a small-business buyer because the ordinary remedy for a wrongful denial is only the amount that should have been paid — but a proven bad-faith claim can unlock extra-contractual damages such as consequential business losses, emotional distress, attorney fees, and in egregious cases punitive damages. Those extra-contractual obligations can exceed the policy limit many times over, which is precisely why the doctrine exists: it pressures carriers to treat their own insureds fairly. In the third-party context, bad faith often arises when an insurer unreasonably refuses a settlement within limits and then exposes the insured to an excess verdict.

A practical nuance: bad faith is not simply losing a coverage dispute. Insurers routinely and legitimately issue a coverage denial or investigate under a reservation of rights when the facts are genuinely unclear. To build a bad-faith case you generally need evidence the carrier ignored favorable facts, misapplied its own policy, or delayed without cause — so document every call, keep your proof of loss and correspondence, and note deadlines. If a claim you believe is covered stalls or is denied without a clear reasoned explanation, that documentation becomes the backbone of any later bad-faith argument.