What is "Bad Faith" in the context of insurance?

"Bad Faith" in the context of insurance refers specifically to when an insurer unjustly challenges or delays payment of a legitimate claim. This concept arises from the requirement that insurers act in good faith and deal fairly with policyholders. When an insurer fails to process a claim promptly or disputes valid claims without reasonable cause, it can be seen as a breach of this obligation. This behavior can lead to legal repercussions for the insurer, as it undermines the trust and reliability foundational to the insurance relationship.

In contrast to this correct understanding, other options describe scenarios that do not accurately encapsulate what "Bad Faith" means. Providing additional coverage or denying all claims for cost-cutting purposes does not inherently imply bad faith; these actions can fall within the normal operational discretion of an insurance company depending on the policy terms. Misrepresenting facts by a policyholder, while potentially leading to claims issues, pertains more to fraud rather than the insurer's obligation to act in good faith. Therefore, the focus on unjust challenges or delays in legitimate claims payment is the essence of "Bad Faith" in insurance.