Insurance bad faith is a tort that an insurance company commits by violating the "implied covenant of good faith and fair dealing" which automatically exists by operation of law in every insurance contract in the United States. If an insurance company violates the implied covenant, the insured party may file suit against the insurance company making a tort claim(bad faith), and breach of contract claim. Insurance companies owe many duties to its policyholders. Examples of insurance bad faith follow:

• Failing to respond or act promptly with respect to a claim;

• Failing to either approve or deny a claim within a reasonable period of time after the insured has submitted adequate proof of loss;

• Failing to provide prompt written justification for the denial of a claim including the specific language in the policy that supports their position;

• Advising a claimant not to consult with an attorney;

• Compelling the insured to litigate a claim because the insurance company has refused to make an adequate/reasonable settlement offer;

• Failing to settle one part of a claim in order to influence other parts of the claim;

• Refusing to defend a lawsuit against the insured;

• Misrepresenting facts or policy provisions to the insured;

• Failing to pay an agreed upon claim promptly;

• Failing to reasonably and objectively investigate a claim;

• Offering a "Iowball" settlement number that is unreasonably low;

• Interpreting policy language unreasonably against the insured; and

• Misrepresenting what is included in a policy.

The implied covenant of good faith and fair dealing is a general presumption that the parties to a contract, (which includes all insurance policies), will deal with each other honestly, fairly, and in good faith so as not to destroy the right of the other parties to receive the benefits of the contract.

Plaintiffs in insurance bad faith claims may seek punitive damages in addition to all other damages including property damages, loss of use, medical expenses, emotional distress, opportunity costs, and loss of use. Given that most insurance companies are very large, punitive damages can be huge.