Can Claims Handlers Be Held Liable for Claim Denials? (2026 Guide)

Claims disputes are common, and when they escalate, one question surfaces quickly: can the individual claims handler be held personally liable, not just the insurance company?

The answer is not straightforward. Court rulings vary significantly by state, and recent decisions have extended personal liability exposure in ways that directly affect how claims professionals operate. Whether you’re an adjuster, a TPA, a carrier, or a self-insured entity, understanding where the legal lines are drawn, and how to protect your team, is essential.

This guide covers the current legal landscape, the key court rulings that define individual adjuster liability, what constitutes bad faith in claims handling, and the operational practices that reduce risk for everyone involved.

Why Claims Handling Generates So Many Complaints 

The majority of complaints lodged against insurance companies involve the claims process. Data from the National Association of Insurance Commissioners (NAIC) shows that approximately 68% of insurance complaints relate to claims handling. The two most frequent grievances are unsatisfactory settlement offers and claim delays, both of which fall squarely within a claims handler’s sphere of influence.

This isn’t surprising. The claims process is where the insurance contract becomes real for the policyholder. A policy is abstract until a loss occurs. At that moment, the competence, fairness, and timeliness of the claims management system behind the handling determines whether the policyholder feels protected or betrayed.

When policyholders feel betrayed, whether because of a denial they see as unjust, a payout they consider inadequate, or delays that left them financially exposed, lawsuits follow. And increasingly, those lawsuits name not just the insurer, but the individual who handled the claim.

 

What Is Bad Faith in Insurance Claims? 

Every insurance policy contains an implied covenant of good faith and fair dealing. This fundamental obligation applies regardless of the policy type: auto, property, workers’ compensation, or liability. When an insurer (or, in some states, an individual claims professional) violates this covenant, bad faith liability can arise.

Bad faith is not simply a disagreement about the value of a claim, nor is it the result of an honest mistake in judgment. Courts have generally held that bad faith requires something more deliberate. According to established case law, bad faith involves conduct that is arbitrary, reckless, or an intentional disregard of the interests of the policyholder.

Actions that commonly give rise to bad faith claims include:

• Unreasonably denying a valid claim without a legitimate factual or legal basis
• Unreasonably delaying payment to a claimant whose loss is clearly covered
• Misrepresenting policy language to justify a denial or reduced settlement
• Failing to conduct a proper investigation before making a coverage decision
• Requesting excessive or unnecessary documentation as a strategy to delay or discourage claimants
• Making lowball settlement offers without a reasonable basis in the facts or the policy
• Failing to communicate clearly about coverage decisions, including not explaining the basis for a denial
• Failing to document the claim file adequately. In claims handling, if it isn’t in the file, it didn’t happen.

Honest errors of judgment, good-faith denials of debatable claims, and reasonable interpretive differences do not constitute bad faith. The standard requires that the insurer or handler acted without a reasonable basis, and, depending on the jurisdiction, that they knew or should have known they lacked a reasonable basis.

Understanding what crosses the line into bad faith is the first step for any claims professional managing their personal liability exposure. It’s also one of the strongest arguments for using a claims management system that enforces structured workflows, complete documentation, and consistent communication, taking discretionary risk out of the process.

Can a Claims Handler Be Held Personally Liable? 

The short answer: it depends on the state.

In most claims disputes, the insurer is the named defendant. The company, not the individual adjuster, is the party to the insurance contract, and it is the company that authorizes or denies payments. This structure has historically provided individual claims handlers with significant insulation from personal liability.

However, that insulation is not absolute. A growing number of states have interpreted bad faith statutes or common law duties in ways that extend personal liability to individual claims professionals. The cases below illustrate the divergence in how courts have approached this question.

Key Court Rulings by State 

Colorado 

Colorado is the most frequently cited state on this issue, partly because its legislature enacted unusually broad bad faith statutes in 2008 (CRS §§ 10-3-1115 and 10-3-1116) that prohibit “a person engaged in the business of insurance” from unreasonably delaying or denying payment of a claim.

The phrase “person engaged in the business of insurance” left open the question of whether individual adjusters, not just insurers, could be sued personally under the statute. Courts split on the answer, with some federal district courts ruling that individual adjusters could be named in bad faith claims under the statute.

The Colorado Supreme Court settled the question in Skillett v. Allstate Fire and Casualty Insurance Co. (March 2022), ruling unanimously that the statutory bad faith provisions do not create personal liability for individual claims handlers. The court reasoned that “because the insurer, not any individual employee, authorizes payment, this language indicates that an action for unreasonable delay or denial of insurance benefits is triggered by a decision of the insurer, not the adjuster.”

For Colorado-based adjusters, this ruling provides meaningful protection from statutory bad faith claims. However, it does not foreclose common law tort claims or claims under other statutes, and it applies only in Colorado.

California 

California courts have taken a broader view of individual adjuster liability. In a case decided by a California appellate court, a homeowner was permitted to pursue a negligent misrepresentation claim against an individual claims professional, not just the insurer.

The claims handler in that case was accused of improperly altering the loss scene before photographing it, misrepresenting coverage by telling the homeowner that cleanup costs weren’t covered, and submitting a false report. The court allowed the case against the individual to proceed, finding that the claims handler’s conduct was sufficiently independent and harmful to give rise to personal liability.

This ruling reflects California’s general willingness to permit claims against individuals when their conduct involves affirmative misrepresentation or fraudulent action, going beyond mere negligent judgment calls.

Texas 

Texas has also seen cases where individual claims handlers faced personal liability exposure. In a 2015 federal court decision, the court found sufficient evidence to support a claim directly against an individual claims handler under the Texas Insurance Code. Among the conduct alleged: the handler refused to respond to the policyholder’s repeated inquiries about claim status and payment.

Texas Insurance Code provisions governing unfair claims settlement practices apply broadly to persons in the business of insurance, and Texas courts have shown a willingness to let individual adjuster claims proceed past the pleading stage. For independent adjuster firms operating in Texas, this is a significant risk factor that shapes how adjusters must document and communicate throughout the claims process.

Washington 

Washington’s Court of Appeals has ruled that good faith obligations under Washington law apply to individual claims professionals, not just the insurer. This ruling has two significant practical consequences: it allows policyholders to name individual adjusters in lawsuits, and it may allow claimants to keep cases in state court rather than federal court (where insurers sometimes prefer to litigate).

For adjusters handling claims in Washington, this ruling places personal conduct under direct legal scrutiny. Every communication, every delay, every documentation decision can be examined as potential evidence in a personal bad faith action.

New York

New York courts have reinforced bad faith principles at the insurer level, with recent decisions making clear that “wait and see” claims handling tactics, delaying a coverage evaluation in hopes that facts might eventually support a denial, can expose an insurer to consequential damages beyond policy limits.

A 2024 decision from New York’s Appellate Division confirmed that an insurer’s duty to investigate and evaluate claims promptly is active and ongoing. Withholding the results of a coverage investigation to pressure an insured, or issuing generic reservations of rights without identifying known coverage issues, can support bad faith liability. While New York’s framework has primarily developed at the insurer level, the conduct at issue always traces back to individual claims handlers making specific decisions.

Good Faith Claims Handling Rules Adjusters Must Follow 

Regardless of jurisdiction, there is a well-established set of good faith practices that every claims professional is expected to follow. Departures from these practices, especially when documented in the claim file, are exactly the kind of evidence that plaintiffs’ attorneys use to build bad faith cases.

Adjusters must:

• Base claim decisions on facts, not speculation, biased information, or insufficient data. Every denial or partial settlement must have a documented factual and policy-based foundation.
• Not misrepresent policy provisions. Insurance policies are contracts of adhesion, courts interpret ambiguous policy language in favor of the insured. Misrepresenting coverage to avoid payment is a direct path to bad faith liability.
• Provide a clear, reasonable explanation for any denial or reduced settlement. Policyholders must be able to understand the basis for a decision well enough to evaluate whether to challenge it. Vague or conclusory denial letters are both a litigation risk and a compliance failure.
• Document the claim file completely. A thorough, timestamped record of all claim activity, every contact, every decision, every document reviewed, is the adjuster’s primary protection. Incomplete files create gaps that are filled by opposing counsel’s narrative.
• Respond promptly to policyholder inquiries. Failure to respond to reasonable requests for status updates has been cited in multiple bad faith cases, including the 2015 Texas federal case referenced above.
• Investigate thoroughly and promptly. A claim cannot be fairly evaluated without adequate investigation. Rushing to denial to close a file, or delaying investigation without cause, both create liability exposure.
• Avoid serial requests for duplicative information. Courts, including in New York’s recent 2024 Rockefeller ruling, have made clear that requesting unnecessary or redundant documentation as a delay tactic is a bad faith indicator.

These are not just legal requirements, they are the operational baseline of professional claims management. Organizations that build these practices into structured, technology-supported workflows reduce exposure for both the company and the individual adjuster.

How to Protect Yourself and Your Organization 

The legal risk picture for claims handlers is clear: while Colorado’s Supreme Court ruling offered some relief, courts in California, Texas, Washington, and elsewhere have allowed personal liability claims to proceed. Litigation is expensive and disruptive regardless of outcome.

The most effective risk mitigation strategies focus on process, documentation, and consistency.

1. Follow a structured claims workflow Standardized workflows ensure that every claim receives the same baseline level of investigation, documentation, communication, and decision-making. Unstructured, ad hoc handling is where gaps appear and bad faith arguments take root. Carriers, TPAs, and independent adjuster firms that implement structured claims management software remove discretion from the process in ways that protect both the adjuster and the organization.
2. Document everything, contemporaneously The claim file is the adjuster’s legal record. Notes added after the fact carry far less weight than timestamped real-time entries. Every site visit, every phone call, every coverage determination, every communication with the policyholder should be in the file as it happens.
3. Communicate proactively with policyholders Bad faith cases routinely arise when policyholders feel ignored. Proactive status updates, even when there is nothing definitive to report—signal that the claim is being actively handled. Policyholder self-service tools that give claimants real-time access to their claim status can significantly reduce the perception of neglect that triggers complaints and lawsuits.
4. Provide written explanations for all denials Every denial letter should clearly state the policy provision(s) relied upon and the factual basis for the decision. Boilerplate or conclusory denials are both a litigation risk and a compliance failure. Documenting the reasoning in the file, not just the letter, is equally important.
5. Respond promptly to all claimant communications As the Texas federal court case illustrated, failure to respond to reasonable inquiries is one of the most cited bad faith indicators. Build response time standards into your claims workflow and use claim tracking software to flag aging communications.
6. Maintain proper licensing Claims adjusters are required to be licensed in most states. Practicing without a proper license, or allowing a license to lapse while handling claims, can independently expose an adjuster to personal liability and regulatory sanctions.
7. Know your state’s specific statutes Bad faith law is highly state-specific. The statutes and common law standards in Colorado, California, Texas, Washington, New York, and every other state where you adjust claims may differ materially. Work with legal counsel familiar with the jurisdictions in which you operate, and stay current on legislative changes and new case law. The national bad faith survey published annually is a useful reference for 50-state coverage of applicable standards and damages.

The Role of Claims Management Software in Reducing Liability 

One of the most effective and underappreciated tools for reducing bad faith exposure is a purpose-built claims management system. Here’s why:

Structured workflows eliminate inconsistency. When every claim follows the same intake, investigation, and communication workflow, the probability of a coverage decision being made on insufficient information drops significantly. VCA’s claims management software enforces workflow steps that ensure no required action is skipped.

Automatic documentation creates a defensible file. Modern claims management software timestamps every action, captures every communication, and maintains a complete audit trail from FNOL intake through settlement. This audit trail is invaluable in litigation, it demonstrates that the handler investigated thoroughly, communicated promptly, and made decisions based on documented facts.

Real-time claim tracking reduces communication failures. Giving policyholders visibility into their claim status through a policyholder app or a claim tracking portal addresses one of the most common complaints, the feeling of being ignored. When policyholders can see what’s happening, they’re less likely to feel that the claim is being mishandled, and less likely to file complaints or retain counsel.

Digital payments reduce delay liability. Digital claims payment tools accelerate settlement disbursement once a claim is approved, reducing the period during which a claimant might argue that payment was unreasonably delayed.

Mobile access supports field adjusters. Mobile claims management allows field adjusters to document site visits, capture photographs, and update the file in real time, rather than reconstructing notes hours later. This contemporaneous documentation is far more credible in a dispute.

For property and casualty claims, auto claims, property claims, CAT claims, and complex enterprise claims, the documentation discipline enforced by a structured claims management system is one of the most reliable defenses against bad faith allegations.

Organizations managing large claim volumes, including self-insured entities, captive insurers, and government claims programs, face particular exposure because their claims professionals operate outside the direct supervision structures of traditional carriers. A robust claims management system provides the guardrails that make consistent, defensible handling achievable at scale.

The business case is straightforward: the cost of implementing strong claims management software is a fraction of the cost of a single bad faith judgment. See VCA’s cost savings analysis for data on how claims technology reduces both operational costs and legal exposure.

Frequently Asked Questions 

Can an insurance adjuster be personally sued for bad faith? Yes, in some states. Colorado’s Supreme Court ruled in 2022 that individual adjusters cannot be held personally liable under Colorado’s statutory bad faith provisions. But courts in California, Texas, and Washington have allowed personal liability claims against individual claims handlers in circumstances involving misrepresentation, failure to respond to policyholder inquiries, or violations of state insurance codes. The legal landscape varies significantly by jurisdiction.

What’s the difference between bad faith and a good-faith dispute? A good-faith dispute involves a legitimate disagreement about coverage, claim value, or the facts of a loss, situations where reasonable claims professionals could reach different conclusions. Bad faith requires more: it involves conduct that is arbitrary, reckless, or deliberately indifferent to the policyholder’s interests. Simple mistakes or honest differences of opinion do not constitute bad faith, even if the policyholder is dissatisfied with the outcome.

What actions most commonly lead to bad faith findings against claims handlers? Courts have most frequently found bad faith where a claims handler refused to respond to policyholder inquiries about claim status, misrepresented policy language to justify a denial, failed to conduct an adequate investigation before denying a claim, submitted false or altered evidence, or systematically delayed payment without justification. Documentation failures, claim files that don’t reflect the basis for key decisions, are frequently cited as evidence supporting bad faith allegations.

Does a claims adjuster need to be licensed to handle claims? Yes, most states require claims adjusters to hold a valid license for the states in which they handle claims. Handling claims without proper licensure can independently create personal liability exposure and regulatory sanctions, separate from any bad faith allegations.

How does claims management software reduce bad faith risk? A structured claims management system enforces consistent workflows, creates timestamped documentation of every claim action, and ensures policyholders receive timely communications and status updates. These features directly address the most common sources of bad faith exposure: inadequate investigation, poor documentation, and failure to communicate. See VCA’s claims journey overview for a walkthrough of how structured claims workflows reduce risk at every stage.

What should a denial letter include to reduce bad faith risk? Every denial letter should clearly identify the specific policy provision(s) that support the denial, explain the factual basis for the decision, and inform the policyholder of any applicable appeal or dispute resolution process. Vague, conclusory denial letters that don’t explain the reasoning are a significant litigation risk. The underlying analysis and documentation supporting the denial must also be preserved in the claim file.

Where can I learn more about compliance in claims handling? VCA’s resources on compliance in insurance cover the regulatory obligations that apply to carriers, TPAs, and IA firms across different jurisdictions. Additional guidance is available in VCA’s claims software training program and white paper on managing claims to achieve profitability.

Bottom Line

The question of whether claims handlers can be held personally liable for claim denials does not have a single national answer, it depends on the state, the statute, and the specific conduct at issue. Colorado’s Supreme Court provided meaningful relief for adjusters in that state, but courts elsewhere have shown a clear willingness to allow personal liability claims to proceed.

For claims professionals and the organizations that employ them, the practical response is the same regardless of jurisdiction: handle every claim with transparency, document every decision thoroughly, communicate proactively with policyholders, and build those practices into a structured workflow supported by technology.

A purpose-built claims management system is the most reliable tool for making that standard of practice achievable at scale, protecting both the organization and the individuals within it.

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