Bad Faith Defined

• To say that a contract was not executed in good faith is not the same as claiming a bad faith cause of action. Bad faith is narrowly defined and, though the definition differs between states, generally requires an intentional or knowing breach of a contractual obligation when such a breach is unreasonable or without cause. Thus, what may be construed as failing to execute a contract in good faith does not amount to a bad faith breach unless a particular obligation is broken.
  
  

Bad Faith as Tort

• Many states, such as Texas and California, regard a bad faith breach as a tort rather than a breach of contract claim. The difference is significant, as limits to recovery in breach of contract cases prohibit the assignment of punitive damages. Thus, a plaintiff in a tort state may sometimes be able to recover significantly more than the policy claim at issue, even if such recovery is prohibited under the state's breach of contract laws. On the other hand, proving a tort claim is often more difficult and expensive than proving a breach of contract claim.
  
  

Tort vs. Breach of Contract

• Even if a state does not recognize bad faith as a tortuous cause of action, a bad faith claim may still be used to prove a breach of contract. In contract law, acting in bad faith or breaching the covenant of a contract can be used either as a claim or a defense to a claim. For example, a buyer who refuses to fulfill a purchasing contract may claim that it was made in bad faith by exaggerating the qualities of a product at the time the contract was made. Unlike tort claims, the recovery of bad faith breach of contract claims is usually limited to immediate costs and damages resulting from the breach.
  
  

Limits on Bad Faith Tort Claims

• In tort law, bad faith claims are largely limited to insurance contracts. The California Supreme Court was the first to recognize that bad faith by an insurer could result in both breach of contract and tort claims. Comunale v. Traders & General Ins. Co., 50 Cal. 2d 654, 328 P.2d 198, 68 A.L.R.2d 883 (1958), the landmark case for tortuous bad faith causes of action, established the fact that an insurer's bad faith could result in damages beyond those set by an insurance agreement, and that such damages should be recoverable by the insured. Whereas insurance agreements have long been recognized as required special good faith execution beyond that of the average contract, the Comunale logic has not been widely applied to other types of contractual agreement.