Insurance Coverage Disputes & Bad Faith Claims

When an insurance company denies your claim or refuses to defend you in litigation, you have more than one battle. You must pursue your underlying loss and also challenge the insurer's bad faith conduct. Pennsylvania law, through 42 Pa.C.S. § 8371, provides strong remedies for policyholders, including punitive damages and attorney fees.

Coverage Disputes: Duty to Defend vs. Duty to Indemnify

Every insurance policy creates two core duties on the insurer: the duty to defend and the duty to indemnify. These are distinct.

Duty to defend: When you are sued and the suit is covered by your insurance policy, the insurer must pay for your legal defense. This obligation is triggered by the complaint filed against you, not by the ultimate outcome of the case. The insurer's obligation to defend is broader than its obligation to indemnify. For example, if you have homeowner's insurance and someone is injured on your property, you notify the insurer, and they must provide (and pay for) a defense even if they later deny the claim on coverage grounds.

Duty to indemnify: After judgment, the insurer must pay the judgment up to the policy limit if the claim falls within the policy's coverage. This obligation is narrower and arises only after loss is established.

Disputes commonly arise when an insurer denies the duty to defend based on an exclusion in the policy. If the insurer wrongly denies coverage and refuses to defend you, you may face not only the underlying lawsuit but also the cost of your own defense. This is grounds for a bad faith claim.

Bad Faith Under 42 Pa.C.S. § 8371

Pennsylvania law provides that when an insurer acts in bad faith toward a policyholder, the court may award punitive damages, pre-judgment and post-judgment interest at prime + 3%, and the policyholder's reasonable attorney fees and costs.

What constitutes bad faith? The insurer must have acted without a reasonable basis for denying benefits and either knew the denial lacked a reasonable basis or acted with reckless disregard for whether a reasonable basis existed. Bad faith is not mere negligence or breach of contract; it requires a level of dishonesty, recklessness, or conscious wrongdoing.

Remedies for bad faith (§ 8371):

• Punitive damages (the court may award in an amount deemed appropriate)
• Pre-judgment interest at prime + 3% (from the date the claim was wrongly denied)
• Post-judgment interest at prime + 3%
• Attorney fees and costs incurred in prosecuting the bad faith claim
• In some cases, damages for emotional distress or harm to reputation

These remedies are available only if you prove bad faith by clear and convincing evidence, a higher standard than the normal civil preponderance standard.

The Terletsky Two-Part Test

Pennsylvania courts apply the Terletsky test to determine whether an insurer's conduct constitutes bad faith. Under this framework, the insurer's conduct is bad faith if:

Part 1: No reasonable basis for denial. The insurer lacked a reasonable basis for denying the claim. A "reasonable basis" means the insurer investigated the claim, reviewed the policy language and relevant facts, and applied a reasonable interpretation of the policy to those facts. If the policy language is ambiguous, it is interpreted in favor of the insured (the policyholder).

Part 2: Knowledge or reckless disregard. The insurer either knew there was no reasonable basis for denial, or acted with reckless disregard as to whether a reasonable basis existed. This means the insurer cannot hide behind gross negligence or carelessness; the bad faith must be deliberate or reckless.

The combination of these two elements, denying a claim for which there is no reasonable basis, done knowingly or recklessly, constitutes bad faith.

Common Coverage Disputes

UIM/UM claims (Uninsured/Underinsured Motorist): Your own insurer refuses to pay UIM/UM benefits when you are injured by a hit-and-run driver or a driver with inadequate insurance. Common bad faith scenarios: the insurer delays investigation, demands unreasonable proof of the other driver's identity, denies coverage based on a stale policy language, or fails to communicate with you about the claims process.

Homeowner's claims: Your homeowner's insurer denies coverage for water damage, wind damage, or theft, citing policy exclusions. Bad faith arises when the insurer fails to conduct a reasonable investigation, ignores evidence supporting coverage, misinterprets policy language, or denies a claim based on an ambiguity that should be interpreted in your favor.

Commercial liability claims: Your business liability insurer denies coverage for a claim arising from alleged defective products, injuries on your premises, or contractual liability. Disputes often center on whether the claim falls within the definition of "occurrence" or whether an exclusion applies.

Duty to defend disputes: The insurer refuses to provide a defense in a lawsuit, arguing the claim is not covered. Even if the insurer ultimately wins the coverage dispute, if it wrongly denied the initial duty to defend without a reasonable basis, the insurer may be liable for bad faith. The cost of defending the underlying lawsuit without the insurer's help can be substantial, making bad faith claims leverage powerful settlements.

Investigation, Discovery & Timeline

Notice and reporting: Under your insurance policy, you must provide notice of a claim within a specified time (typically 30 days, but review your policy). Failure to provide timely notice may relieve the insurer of its duties, though in some cases, notice that is late but received before substantial prejudice may still be acceptable. Always notify your insurer in writing (certified mail) with copies of all relevant documents.

Investigation: Once notified, the insurer has a reasonable time to investigate. The insurer may request documents, take statements, hire experts, and review medical records. You are required to cooperate, but the insurer cannot make unreasonable demands or delay investigation indefinitely.

Claim determination: The insurer must make a claim determination (approve or deny) within a reasonable time. If the insurer delays decision for weeks or months without explanation, this may support a bad faith claim.

Appeals process: If your claim is denied, most policies provide an appeals or reconsideration process. Request a written explanation of the denial and appeal within the policy's time limits.

Statute of limitations: A bad faith claim must be filed within 42 Pa.C.S. § 5524's two-year statute of limitations, measured from when you discovered (or should have discovered) the bad faith. This is distinct from the time limit for filing the underlying claim under the policy.

Discovery in bad faith litigation: Once a bad faith lawsuit is filed, you will conduct discovery from the insurer, including:

• All documents related to the claim file (investigation reports, internal memos, expert reports)
• Internal guidelines, policies, and training materials on claim handling
• Testimony (depositions) of claims adjusters, management, and other decision-makers
• Comparative evidence (how the insurer handled similar claims for other policyholders)

Practical: Steps When Your Claim Is Denied

Step 1: Request a written explanation. If your claim is denied verbally or by brief letter, demand a detailed written explanation. The explanation should identify the policy provision that allegedly excludes coverage, explain how the insurer applied that provision to the facts of your claim, and cite any investigation results that support the denial.

Step 2: Review the policy carefully. Do not rely on the insurer's interpretation. Read the policy language yourself. Look for ambiguities. If the policy is unclear, Pennsylvania law requires that ambiguities be interpreted in favor of the policyholder.

Step 3: Gather supporting documentation. Collect all evidence supporting your claim: photographs, repair estimates, medical records, testimony from witnesses, expert reports. Document the timeline of events.

Step 4: Send a detailed written appeal. Within the policy's appeal deadline, send a detailed letter to the insurer explaining why you believe the claim should be covered. Reference specific policy language. Cite case law if appropriate. Provide copies of all supporting documentation.

Step 5: Consult an attorney before litigation. If the appeal is denied, do not delay. A bad faith claim must be filed within two years. An attorney can evaluate whether the denial has a reasonable basis and whether you have grounds for a bad faith claim. Many claims settle once an insurer realizes an attorney is involved and a bad faith claim is imminent.

Step 6: Document communications. Keep detailed records of all communications with the insurer. Save all letters, emails, and notes of telephone conversations. This evidence is critical in proving bad faith, delays, inconsistencies, or contradictions in the insurer's position support a claim that the denial lacked reasonable basis or was made recklessly.

Special Considerations

Excess carriers and defense costs: If your claim exceeds the limits of your primary insurance, an excess carrier may be involved. Disputes can arise about which carrier pays and whether the primary carrier is exhausted. These disputes can delay your recovery significantly.

Appraisal clauses: Some policies include appraisal provisions allowing either party to demand appraisal of certain types of claims (commonly property damage). Appraisal bypasses litigation and requires a neutral appraiser to determine the loss amount. Refusing to submit to appraisal when required by the policy may waive coverage, so consult an attorney about whether to invoke or oppose appraisal.

Reservation of rights: An insurer may provide a defense "under a reservation of rights," meaning they defend you but reserve the right to later deny coverage on grounds unrelated to the underlying facts. This is legally permissible but is a red flag that coverage may be disputed later.

Statutory content on this page was last verified against Pennsylvania statutes (42 Pa.C.S.) and Rules of Civil Procedure: March 2026 . If you are reading this significantly after that date, confirm key provisions with current statute text or contact our office.

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