All the insurance policies, including the car insurance policies would contain an obligation that is not specified but implied. Under this obligation, the insurance company should act in ‘good faith’ and have a ‘fair dealing’ with the insured person. When the policyholder presents a claim, under this implied obligation, the insurance company should not look for reasons to avoid payment. On the other hand, the insurer should conduct a thorough and fair investigation of the claim. The insurer should take into consideration all the circumstances and the reasons that would support the claim. The insurer should consider equally the financial interests of the insured person and the insurance company.
When an insurance company refuses the settlement of a claim or tries to pay less than what the claim would be worth, particularly when the insurance company had not conducted proper investigation of the claim, then the situation is known as ‘bad faith’ against that particular insurance company. This condition would arise when the insurer had knowingly breached the implied obligation of ‘good faith and fair dealing’. The insured person could file a lawsuit against the insurance company as ‘bad faith’ lawsuit. Under the circumstances, the insured person would be entitled to all the damages resulting from such an action. This would include certain types of damages, which would not normally be available for general breach of contract. If the judge determines that there had been outrageous or extreme misconduct on the part of the insurance company, the insured person could be awarded punitive damages also.