Up until 1944, insurance was not considered "commerce" and not subject to state or Federal regulation. But, because of some key cases, including United States v. South-Eastern Underwriters Association, Congress passed acts that provided the power to states to regulate and control the insurance businesses. While state insurance statutes override most Federal laws, some portions of federal law (like Federal tax laws) are always commanding. State laws govern the "business of insurance," while federal laws govern the peripherals of the industry (e.g., labor, tax, securities, etc.). Insurance Law encompasses the state statutes and Federal laws governing the insurance business and the peripherals of the industry.
What is Insurance?
While there are a lot of types of policies with varying regulations and benefits, the purpose of insurance is all the same: to allocate the risks of a loss from the individual to a great number of people. In the absence of insurance, three possible parties bear the burden of an economic loss; the individual suffering the loss; the individual or entity causing the loss via negligence or unlawful conduct; or a particular party that has been allocated the burden by the legislature, (e.g., employers under workers' compensation laws and statutes). With insurance, individuals pay a "premium" into a pool, from which losses are paid out. Insurance companies are generally considered the safe keepers of this pool of premiums and they are the ones who pay the claims of the individual losses.
What is Insurance Bad Faith?
If an insurance company violates principles or regulations governing insurance law, it may constitute bad faith in denying a claim, stalling in making a decision on a claim, or requiring unreasonable actions or documentation by the insured to prove a claim. *
* Definition courtesy of http://statelawyers.com/