Good Faith (Insurance)
The legal obligation requiring insurance companies to deal fairly and honestly with policyholders when investigating claims, making coverage decisions, and settling disputes. This includes prompt claim handling, reasonable investigation, and fair settlement offers based on policy terms.
Example
“When the insurance company delayed her claim for six months without explanation, Linda filed a bad faith lawsuit for violating their good faith obligations.”
Memory Tip
Good faith means 'Good Friends' - insurers should treat policyholders like good friends, fairly and honestly.
Why It Matters
Good faith protections prevent insurance companies from unfairly denying valid claims or using their power advantage to underpay settlements. When insurers violate good faith duties, you may be entitled to additional damages beyond your original claim amount.
Common Misconception
Many people think insurance companies can deny claims for any reason or that slow claim processing is normal business practice. However, insurers have strict good faith obligations and unreasonable delays or denials can result in bad faith lawsuits with punitive damages.
In Practice
After Tom's house fire causes $200,000 in damage, his insurer takes 8 months to investigate and offers only $100,000 without explanation. Tom's attorney files a bad faith lawsuit proving the insurer failed to conduct a reasonable investigation. The court awards Tom the full $200,000 claim plus $150,000 in punitive damages and $50,000 in attorney fees, totaling $400,000 for the insurer's good faith violation.
Etymology
The concept derives from ancient legal principles of 'bona fides' (Latin for 'good faith'), applied to insurance contracts in the 19th century to prevent unfair practices by insurers holding superior bargaining power.
Common Misspellings
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