In law, bad faith is a term used to describe behavior where people engage in activities with malicious or harmful motives, such as intent to deceive. When it can be shown that someone acted in bad faith, this may have legal repercussions. Generally speaking, people do not engage in bad faith by accident and inadvertently harmful behavior is not the same thing.
In a simple example of bad faith, a person could believe that a health problem has the possibility of being very serious and apply for health insurance, lying about symptoms. This person is deceiving the insurance company intentionally for the purpose of getting coverage. If the insurance company discovers this, it can suspend the policy and may be able to collect damages if it paid out on behalf of the client. Conversely, someone who decided to buy health insurance with no known health problems and had cancer diagnosed shortly after the policy went into effect would be acting in good faith, because the person didn't know.
Bad faith often comes up in the context of contracts where one party conceals information, attempts to deceive the other, or goes into a contract without intending to abide by it. If the other party finds evidence of the bad faith, the offending party can be taken to court to claim damages. These can include punitive, as well as compensatory damages, where the person is repaid for any expenses incurred and is provided with a bonus with the goal of penalizing the person who broke the law.
This legal concept can be slippery and it is not always easy to prove. Different legal systems may apply varying standards to determine whether people are acting in bad or good faith. Cases involving accusations of bad faith can drag on for months as people attempt to muster evidence or work towards an out of court settlement. In instances where people are accusing insurance companies and financial institutions, the case can also be very expensive, as the respondent to the suit has deep pockets for defense.
People entering into transactions or contracts that do not feel right may want to evaluate the situation to see if bad faith could be an issue. For instance, someone buying a luxury watch from a man on the street could have a reasonable concern about theft and runs the risk of having the watch taken back by the rightful owner. Buying the same watch from a jewelry dealer who handles secondhand merchandise is safer, as people generally assume that salespeople have done their due diligence and have a right to sell the item in question. If a dispute over ownership arose, the jewelry dealer would be responsible for providing documentation, as the client bought the item in good faith.