If your insurance provider denies a claim, you might assume it’s a simple breach of contract. However, some denials cross into more serious territory. Breach of contract and bad faith are distinct legal concepts. Understanding the difference helps you better evaluate your options when dealing with an insurer.
Breach of contract involves failure to honor terms
Insurance policies are legally binding contracts. You agree to pay premiums, and in return, the insurer agrees to cover specific types of losses. When an insurer fails to fulfill these obligations without justification, it constitutes a breach of contract. For instance, if your policy includes fire damage coverage and your home burns down, your insurer must compensate you. If they refuse without valid cause, they’ve likely breached the agreement.
In a breach of contract case, you can seek compensatory damages—the exact amount the insurer should have paid under the terms of the policy.
Bad faith involves intentional misconduct
Bad faith is more serious because it implies intentional or reckless misconduct. It refers to actions by the insurance company that are dishonest, unreasonable, or misleading. Examples include unjustified claim denials, unnecessary delays, or failure to conduct a proper investigation.
California law obligates insurers to treat policyholders fairly and process claims in good faith. When they don’t, you may have grounds to sue not only for contract damages but also for emotional distress and, in some cases, punitive damages designed to penalize wrongful conduct.
Some cases qualify as both
A single situation can involve both breach of contract and bad faith. If your insurer denies a valid claim without explanation and disregards proper procedures, it may be liable for both. In such instances, your legal claim can include both theories of liability.
Recognizing the difference between bad faith and breach of contract empowers you to respond strategically. If your insurer fails to honor the policy or acts deceptively, you may have stronger legal remedies available.
