"Bad faith" refers to unreasonable or unfair conduct by an insurance company. If a company fails to investigate a claim they may be acting in bad faith. Insurance companies, we assume, act in "good faith." Meaning we trust them to do what they're supposed to do. What they say they will do in their policies.
But sometimes that trust is misplaced. Insurance companies are businesses. They have to take in more money than they spend or they fail to make a profit, and this has led some of them to a dispiriting practice: insurance companies have discovered that they can make more money by simply paying out less. Insurance companies will often unreasonably deny or delay payment of benefits, fail to provide coverage, or fail to settle a case within the limits of the insurance policy.
Even without this tactic business is extraordinarily good: The U.S. insurance industry takes in over $1 trillion in premiums annually. The average American salary circa 2012 was 50,000 a year. It would take an average American worker 20 million years to save that much.
Much like too-big-to-fail banks, insurance companies have tied this money up in investments. Insurance companies are well-known for delaying the release of settlement funds to individuals because they understand these people generally cannot afford to legally press for the speedy release of these funds.
Even if they are required to pay a settlement, they will hold the money as long as legally possible in a leveraged effort to increase their own profits through the interest they earn on their investments.