Insurance bad faith law comes into picture when an insured sues an insurance company for a wrong doing called a tort claim. Every Insurance company has duty to good faith and fair dealing towards the insured, often referred as “Covenant of good faith and fair dealing”. A tort claim enables an insured, if the charges are proved, to recover a larger amount from the insurance company than the original face value of the insurance policy.
In US, all state has separate regulations governing the Insurance business. Each state has formulated an “insurance code” or something similar which lay down the rules and regulations governing the insurance business and their conduct. Depending on ‘First Party’ or ‘Third Party’, the kind of duties also varies. In case of first party, the bad faith arises out of insurance company’s improper investigation and valuation or denial of proper damage to the insured. In case of third party, bad faith can occur in case of improper refusal to defend a law suit or in case of improper refusal to pay a judgments or settlement. In California State, bad faith also include improper refusal to settle a reasonable clear claim in addition to the two provisions stated above. In California, the plaintiff may also be able to recover some of the attorney charges separately.
Assignment or direct action is also a provision available under bad faith law in some US states wherein the insurance company can be put into trial by the insured who was sued initially by the insurance company itself. This makes the bad faith law more complicated in those US states. Bad faith law suits were not very common in US prior to 2000 but now such law suits have increased considerably with Texas jury awarding a $ 4 million in one of the bad faith law suits.