5 Mistakes That Can Lead to Bad Faith Claims

Every claims professional knows the goal: investigate thoroughly, document everything, and resolve claims fairly. But in practice, the pressure of high caseloads, tight deadlines, and complex claims can cause even experienced claims teams to cut corners without realizing it.

The problem is that shortcuts do not just create operational headaches. They can create the kind of claim file that later looks unreasonable, incomplete, or unfair. Bad faith claims usually do not start with one dramatic mistake. More often, they build slowly through poor communication, weak documentation, delayed decisions, one-sided investigations, or claim handling that looks unfair from the outside.

Claims handling issues consistently account for a large share of insurance complaints, with delays and settlement disputes frequently ranking among the most common concerns reported by regulators.

Bad faith laws vary by state, and not every mistake equals bad faith. In Florida, for example, courts have generally held that mere negligence is not enough to establish bad faith. Still, repeated or unreasonable claim handling mistakes can create real exposure, especially when the claim file shows delay, poor investigation, unclear reasoning, or lack of a fair process.

1. Failing to Investigate Promptly

This is one of the most common and most avoidable bad faith risks. Acknowledging a claim is not the same thing as investigating it. A claims team may send the initial letter, open the file, and assign an adjuster, but then the file goes quiet. This leaves the claimant unaware of what is unfolding while coverage questions remain unresolved.

The NAIC Unfair Claims Settlement Practices Model Act identifies failure to adopt and implement reasonable standards for the prompt investigation and settlement of claims as an unfair claims practice. It also flags refusing to pay claims without conducting a reasonable investigation based on all available information.

Some claims are complicated and require more time. The risk is when the delay is not explained, documented, or supported by actual investigative activity.

A good claim file should show what was done, when it was done, what information was still needed, and why more time was necessary. If the file cannot answer those questions, a delay can start to look like neglect.

2. Conducting a One-Sided Investigation

One of the clearest warning signs in a bad faith claim is a file that only includes evidence supporting a single outcome. For example, an adjuster may focus on inconsistencies while overlooking medical records that support the injury, or the claim team may highlight an unfavorable expert opinion without addressing competing evidence. In some cases, the file documents reasons to deny the claim but contains little to no discussion of facts supporting payment.

That kind of file is dangerous because it can make the decision appear predetermined. A strong investigation should follow the evidence wherever it leads, not just search for facts that support a preferred outcome. Claims professionals should document evidence supporting the claimant’s position, not just evidence supporting denial.

This does not mean every disputed claim must be paid. It means the file should reflect that the claims team considered both sides of the evidence before reaching a decision.

3. Poor File Documentation

In claim handling, a common principle applies: if it is not documented in the file, it is treated as if it did not happen.

That may sound strict, but it reflects how claim files are reviewed later in litigation or regulatory audits. A claims professional may have made calls, spoken with a supervisor, reviewed expert opinions, or weighed competing evidence. However, if those actions are not recorded, they carry little weight after the fact.

The NAIC’s Unfair Property/Casualty Claims Settlement Practices Model Regulation reinforces this expectation. It requires that claim files contain enough documentation and work papers to allow a reviewer to reconstruct how the claim was handled.

In other words, the file should clearly tell the full story without requiring additional explanation.

Common gaps in documentation include:

• Phone calls that are not summarized in the file
• Denial reasons that are vague or incomplete
• Expert opinions that are referenced but not properly preserved
• Settlement authority or valuation decisions without explanation
• Missing notes explaining why records were requested or discounted

A strong claim file should be built with the assumption that it may be reviewed in detail later in litigation or an audit.

4. Unreasonable Delays in Communication or Payment

Delay is one of the easiest bad faith theories to understand because it is visible.

A claimant does not need to understand complex policy language to know they have not received an answer. Long periods of silence, repeated requests for the same documents, unexplained review periods, and slow payment after coverage is established can all create frustration and suspicion.

The NAIC model identifies several delay-related practices as unfair, including failing to acknowledge communications promptly, failing to affirm or deny coverage within a reasonable time after proof of loss requirements are complete, and not attempting in good faith to make prompt, fair, and equitable settlements when liability has become reasonably clear.

The issue is not always the length of time by itself. A complex claim may legitimately take longer to resolve. The issue is whether the delay is reasonable, documented, and communicated.

For example, if a claims team needs additional medical records, expert review, surveillance, legal analysis, or coverage review, the file should show that. The claimant should also be told what is outstanding and why it matters.

5. Denying Claims Without a Clear, Reasonable Basis

Every denial needs a real explanation. It should explain the specific policy language, the relevant facts, and how the evidence supports the decision.

The NAIC model identifies misrepresenting policy provisions, refusing to pay claims without a reasonable investigation, and failing to provide a reasonable explanation for a denial or compromise settlement offer as unfair claims practices.

This is where many claim files become vulnerable. The investigation may have been reasonable, but the denial letter does not reflect that. In some cases, the denial letter cites policy language but does not tie it to the facts of the claim. In others, the file contains a conclusion without explaining the reasoning behind it.

There is also an important distinction here: a claim decision does not have to be perfect to be reasonable. A carrier can investigate a claim, evaluate the evidence, and reach a defensible position that a court later disagrees with. That is not automatically bad faith. The risk increases when the decision is unsupported, unexplained, or based on an incomplete investigation.

Final Thoughts

Bad faith risk is often created by patterns: slow responses, one-sided investigations, thin documentation, unexplained delays, and vague claim decisions.

The best protection is a claim file that tells a clear story. It should show that the claims team communicated consistently, investigated fairly, considered the evidence, documented its reasoning, and made decisions based on the facts and policy language.

Bad faith is not just about whether a claim was paid or denied. It is about whether the process was reasonable, documented, and fair.

A strong claim file should answer the questions that matter most:

• Was the claim investigated promptly?
• Was all relevant evidence considered?
• Were communications documented?
• Were delays explained?
• Was the final decision clearly supported?

If the answer is yes, the claim is in a much stronger position.

Looking for strong investigations that reduce bad faith risk? Connect with our team today.

Check out our sources:

Claims Journal. “Claims Handling Accounts for Large Share of Insurance Complaints, Poll Shows.” Claims Journal, 20 Feb. 2025. https://www.claimsjournal.com/news/national/2025/02/20/329022.htm

Florida Legislature. “Section 624.155, Florida Statutes.” Online Sunshine. https://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699%2F0624%2FSections%2F0624.155.html

National Association of Insurance Commissioners. “Unfair Claims Settlement Practices Act, Model 900.” NAIC Model Laws, Regulations, Guidelines and Other Resources. https://content.naic.org/sites/default/files/model-law-900.pdf

National Association of Insurance Commissioners. “Unfair Property/Casualty Claims Settlement Practices Model Regulation, Model 902.” NAIC Model Laws, Regulations, Guidelines and Other Resources. https://content.naic.org/sites/default/files/model-law-902.pdf