insurance

Good Faith (Insurance)

The legal obligation for insurance companies to deal honestly and fairly with policyholders, particularly when investigating claims, making coverage decisions, and settling claims promptly and fairly. This includes not unreasonably denying claims or delaying payments.

Example

“The insurance company violated their duty of good faith when they denied the claim without properly investigating the damage or providing a reasonable explanation for the denial.”

Memory Tip

Good Faith = Good behavior by insurance companies - they must act honestly and fairly, just like a good friend would.

Why It Matters

Good faith requirements protect consumers from unfair insurance practices and ensure that insurers honor their contractual obligations. When insurers violate good faith duties, policyholders may be entitled to additional damages beyond their original claim.

Common Misconception

Many people think good faith only applies to claim denials, but it actually governs all aspects of the insurer-policyholder relationship, including policy issuance, premium collection, policy renewals, and communication. Insurers can breach good faith even when ultimately paying a claim if they handle it improperly.

In Practice

Sarah files a $25,000 homeowner's claim for water damage. Her insurer takes 8 months to investigate a straightforward claim, repeatedly requests unnecessary documentation, and offers only $8,000 without proper justification. A court finds the insurer violated good faith duties and awards Sarah the full $25,000 claim amount plus $50,000 in punitive damages and $15,000 in attorney fees, totaling $90,000 - far more than if they had handled the claim properly from the start.

Etymology

The concept originates from ancient Roman law's 'bona fides' and was incorporated into modern insurance law in the early 1900s as courts recognized the unequal relationship between insurers and policyholders.

Common Misspellings

good faith insurencegud faith insurancegood fath insurancegood faith insuranse

Related Terms

Breach of Contract Punitive Damages

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