Bad Faith

The term “bad faith” is used to describe a person’s intent to defraud or deceive. The person may be defrauding or deceiving himself or another person. The concept of bad faith is often associated with “double heartedness,” which essentially means that while a person is acting one way, his intentions are more sinister than they may appear on the surface. To explore this concept, consider the following bad faith definition.

Definition of Bad Faith

Noun

  1. Intentional deception or dishonesty; or intentional failure to meet an obligation.
  2. A person’s intent to defraud or deceive himself or another person.

 

What is Bad Faith

When someone acts in bad faith, he is acting with the intent to defraud or deceive another person. An example of bad faith might occur if a boss makes a promise to an employee, with no intention of ever keeping that promise. Another example of bad faith might occur if an attorney argues a legal position that he knows is false, such as his client’s innocence (or lack thereof). Someone can also practice bad faith against himself. For example, bad faith can be associated with hypochondria, wherein a person tricks himself into believing that he is seriously ill when he, in fact, is not.

Someone who acts in bad faith may enter into an agreement with no intention of ever fulfilling its terms. Or he may misrepresent the quality or value of something that is being bought or sold, such as a car or home, to fool the buyer or seller into going forward with the transaction. Essentially, when someone acts in bad faith, he is attempting to deceive or mislead another person to gain some sort of advantage or benefit. Typically, bad faith attempts are seen in contract negotiations, such as paying out insurance claims, or issuing a cancellation.

Good Faith and Fair Dealings

The implied covenant of good faith and fair dealings is interpreted to mean that it is assumed that the parties to a contract will deal fairly with one another, acting in good faith. It is assumed that they will do their best not to break their word, attempt to squirrel out of their obligations, or deny any terms that are otherwise abundantly clear to the other party.

When parties are assumed to be acting according to the covenant of good faith and fair dealings, then it is accepted that neither party will do anything to destroy the rights of the other party, or attempt to interfere with the benefits the other party is to receive from entering into the contract.

Lawsuits may be filed when the parties to the contract breach the contract by straying from the implied covenant of good faith and fair dealings. One way in which parties to a contract have done this has been to pick out certain specific terms from the contract, and using those to refuse to perform their obligations, despite that which has already been understood and accepted by the parties.

Insurance Bad Faith

Insurance bad faith is a legal term that is exclusive to the United States. The term is used to describe a tort that a policyholder may file against an insurance company for the latter’s acts of bad faith. Within most jurisdictions in the U.S., insurance companies owe a duty of good faith and fair dealings to their policyholders. If an insurance company violates this duty, however, it has committed insurance bad faith. In this case, the policyholder can sue the insurance company on a tort, as well as for breach of contract.

Plaintiffs in insurance bad faith cases may be able to recover a larger amount than the original face value of their insurance policies. This is especially true if the behavior of the insurance company was particularly egregious.

An instance of insurance bad faith might occur if an insurance company intentionally denied a policyholder’s claim by providing the policyholder misleading the policyholder with false information. This can include dishonestly in adjusting the claim, failing to process a claim within a timely fashion, or some other type of intentional misconduct carried out during the claims process. The term “insurance bad faith” can also be used to describe inaction on the insurance company’s part, such as refusing to respond to a claim entirely.

Bad Faith Insurance Claim

Bad faith insurance claims can occur when insurers fail to investigate a claim quickly enough, or as thoroughly as they should. Bad faith insurance claims can also result from an insurer unreasonably delaying a payout, or denying benefits to those who deserve them. Insurers may also create a bad faith insurance claim by translating the language in an insurance policy in such a way as to make it unreasonable. They may also refuse to settle a case, or to reimburse the claimant for the entire amount owed to him.

When an insurance claim is filed, the insurance company owes its customer a duty to act in good faith. This means that the company must not look for ways to avoid fully investigating or paying the claim. Bad faith lawsuits have been filed for both actions and inactions that were performed and not performed by insurance companies, which were acting in bad faith. What follows are some situations wherein insurance companies have been sued for acting in bad faith:

  • Refusal to pay a claim without fully investigating the claim
  • Failure to settle the claim when it is clear who is liable for the claim
  • Failure to respond to a demand within the specified time limit
  • Failure to either deny or pay a claim within a reasonable period
  • Failure to convey important information to the claimant
  • Unjustifiably denying a person coverage

Bad Faith Example Involving an Insurance Claim for Contamination

In July of 1991, the estate of Henry Williamson sued a man by the name of Gordon Vann. Vann had rented property from Williamson from at least 1960 until 1992 for the purposes of operating an auto body repair business. In Williamson’s complaint, he alleged that, while operating the business, Vann had “improperly handled and disposed of oils, solvents and other substances, which [were] hazardous under state and federal law.”

Williamson went on to say that, because of Vann’s alleged misconduct, these substances were released into the dirt on the premises, and threatened to contaminate the local groundwater. Williamson’s complaint stated that this contamination had interfered with his ability to do anything with the property, including using, developing, selling, or renting it. He believed that Vann should have been held liable for the costs involved with removing the contamination from the soil and groundwater, as well as additional related damages.

Travelers insurance company issued policies to Vann between 1980 and 1984. In their policies, they promised to cover any damages that could be “caused by an accident and resulting from garage operations.” However, in this case, Travelers refused to come to Vann’s defense. The parties to the case filed motions for summary judgment, posing the question to the court as to whether Travelers had acted in bad faith, or whether it owed Vann a duty to defend him in this suit.

The trial court awarded summary judgment in Travelers’ favor. The Court found that Travelers was not obligated to come to Vann’s defense because the pollution clause that was written into Vann’s policy had worked to relieve Travelers of its obligation to defend him. The trial court believed that the release of pollutants was over too long of a period to have been considered “sudden,” as defined in Vann’s policy, and therefore the contamination that resulted did not fit the “sudden and accidental” exception to the policy’s pollution exclusion clause.

Vann appealed to the California Court of Appeals. Travelers’ argument was that it was not obligated to defend Vann because of the exclusions that had been written into Vann’s policy, including the pollution exclusion that had ultimately guided the trial court’s decision. The Court of Appeals found that the only way that Travelers could legitimately declare that they did not owe Vann an obligation would be if Travelers could show the Court undisputed facts that could conclusively show that there was no potential for coverage.

The Court went on to discuss the additional evidence that Travelers could produce. If such evidence would not “eliminate the possibility” of potential coverage for Vann, but instead simply dispute whether the exclusions in his policy applied here, then the Court would rule that summary judgment for Travelers had been granted improperly by the trial court.

The Court of Appeals ultimately reversed the decision of the trial court. The court found that “genuine factual disputes” still remained insofar as the cause of the alleged contamination, and the extent of the damage to Williamson’s property. The court held that if more facts were to come to light, then Vann’s actions may have actually fallen outside the scope of the policy’s coverage. Said the Court:

“All that has been decided by this court at this juncture is that there is a possibility of coverage, and that the evidence adduced by Travelers did not eliminate that possibility – thus triggering Travelers’ duty to defend.”

Related Legal Terms and Issues

  • Egregious – Extraordinarily bad.
  • Summary Judgment – A final decision on the case, handed down by the judge on the basis of the statements and evidence presented, without a full trial.
  • Tort – An intentional or negligent act, a civil wrong, as opposed to a criminal act, which causes harm to another.

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