Michael Sean Quinn, Ph.D, J.D., Etc.
SOME PHILOSOPHICAL FOUNDATONS
An insurer and an insured are parties to a contract, usually
called an insurance policy. Each of them has rights, and each of them have
duties.
If the insurer breaches the contract of insurance by denying
coverage erroneously, then the insured has a suit, and it can win. Sometimes this is just an action for breach
of the contract, in some situations \the insured may have more than just a
breach of contract case.
Many jurisdictions have a type of law suit named “negligent
breach of contract”; others do not. Many
jurisdictions have an action especially for insureds against insurers called
“insurer bad faith.” I am going to talk about bad faith.
INSURANCE BAD FAITH LAW
ACTIONS
These suits may be
based on the common law, namely, rules created by courts which are often a part
of legal tradition, or they may be based on statutes, viz. laws passed by
legislatures designed to keep insurers on the “straight and narrow.” Common law actions are more attractive to
some lawyers in some ways than actions based upon statutes.
The reader should remember that, almost always, insurance bad
faith actions (IBFs) hinge on the existence of a breach of contract in the
determination of coverage and the payment of a claim. No breach, no IBF case.
GENERAL CONCEPT
Now, given the full nickname, “Insurer Violation of Its Duty
of Good Faith and Fair Dealing,” the ideas of good faith and fair
dealing are central, and that is the topic here. Some of what I say is established truth; some
of it is conjecture; and some of it has its main value in giving lawyers a few
thoughts about how to think when controlling this kind of law suit.
When the law uses two terms or phrases conjoined to each
other, they should be thought of as having at least slightly different meaning. As a habitual matter, this principle is not
always observed, but it can be used as a way to think and as a way to construct
new ideas.
When that principle is applied to “good faith” and “fair
dealing,” one must begin with the proposition that they have different
meanings, convey different ideas, and can be used in different ways. Thus, what
I shall say here is based on this kind of conceptual separation.
GOOD FAITH
This idea is as old as contract law itself, although it does
not always pop up under that name, and it has a lot of different dimensions.
Fraud is not thought
of as a breach of the duty of good faith and fair dealing found in contracts,
though it is indicative of a lack of good faith. All swindlers act in bad
faith. The reason is the theory of
recovery for fraud—the remedy—isn’t usually the enforcement of the contract and
then some. Fraud destroys the very existence of the contract, or prevents it
from ever really existing, and then justifies awarding the defrauded person
appropriate damages, often including punitive or exemplary damages.
A “bad faith” breach of contract involves a breach of
contract of a particular kind, as specified under the applicable law. This may include doing something to prevent
the other party from performing its obligations under the contract. It might involve getting a third person to
accomplish this goal.
In the case of a contract of insurance, it might be trying to
get the insured to give up on its claim because the insurer is being so
obstructionist, dragging its feet for so long, discouraging the insured,
keeping the insured in the dark about the adjustment/settlement process, making
life miserable so that the party to the insurance contract will go away or
settle for less.
This list goes on and on. All of them are examples of a lack
of good faith, or a repudiation of good faith, or something of that ilk.
An insurer’s setting out to screw the insured in the
settlement process is a paradigm of insurer bad faith. People and companies
have insurance because they will need money in case of a loss. They are entitled to it. They may need the
money quickly, or relatively quickly, and that can be to the insurer’s
advantage from the point of view of its own self interest, i.e., which is
profit margin. It must not do any such
thing, ever. This is exactly the kind of
screw job I’m talking about.
Most insurance companies know this, uniformly usually agree
with what I have just said, and mostly believe they are bound by several
factors to avoid what I have described.
Among their reasons are these:
·
Doing
otherwise would violate the purpose of insurance,
·
It
would be contrary to the spirit of the enterprise,
· It
would betray the role of insurance as being one of the foundations of modern
economies,
·
And
therefore modern civilization,
·
It
would be dishonest,
·
It
would be dishonorable,
·
and
more.
Of course, there are rogue adjusters and rogue claims
managers, and rogues of all sorts when the going for the insurer get tough. (Of
course, this should not happen given the existence and availability of
reinsurance.)
Another set of problems arises from the nature of claims. If
an insured wants more than an amount to which he is entitled, he may fudge the
claim. The spirit of the insured may be overly
aggressive as to his-her-its entitled amount, and it gets more aggressive, to
the extent he believes that the insurer is trying to avoid payment.
The problem for insurance companies is to suspect that an
inflexible policy holder is being just contrary to the contract, and then tries
and cut it off by blocking recovery or reducing its size.
This can happen even when the insurer is not sure that it is
facing fraud and doesn’t have the evidence to prove its view, even to itself.
The temptation to cut a possible fraudster off “at the pass” can be very
intense, claims executives tend not to be forgiving of their subordinates
missing instances of it.
The idea of good faith is to prevent this sort of
behavior. One of the key ways it does
this is to say that INSURERS MUST
TREAT THE INTERESTS OF THEIR INSUREDS AT A LEVEL AT LEAST EQUAL TO THEIR OWN. This is an essence of good faith when it
comes to insurers considered as parties to contracts of insurance.
This is a very dramatic rule.
It entails that insurer cannot do things ordinary merchants and ordinary
parties to contracts are permitted to do.
There are sharp limitations on an insurer’s rights as a creature of
commerce. That results from the kind of “product”
it is selling. At the same time the rule does not make insurers fiduciaries of
insureds.
FAIR DEALING
The idea of a duty of fair dealing is different from the idea
of good faith, though they overlap to some degree. Part of the idea of fair
dealing is that an insurer must treat like cases alike.
You start from
the idea that some forms of conduct are forbidden completely. There are some acts and omissions that an
insurer is prohibited from performing in connection with any of its
insureds. These are criminal conduct,
conduct prohibited by statutes other than criminal codes, e.g., insurance
codes, and those acts which are ruled out by the duty of good faith.
On top of that, an insurer may not treat one insured
different than it treats another. It may
not treat one insured the way it treat lots of others similarly situated. And
so forth. This is the very meaning of “fair”
and the very nature of fairness. (Or one of them, anyway.)
AN OVERLAP
In addition, the idea of fairness has another implication. If
insurers are required to treat the interests of their insureds as at least
equal to their own, fairness requires that they view themselves as on the same
level as their insureds, although their roles in the process are in some sense
opposite. Thus, it becomes unfair for an
insurer to favor itself. Through this
rule the playing field is thereby leveled.
No other mass commercial relationship is anything like this.
I sometimes wonder if the "Look for coverage" axiom isn't actually an axiom, in the sense that it so fundamental that it is not derivative from some other principle--presumably a "real" axiom. The reasoning for this may be too simplistic.
If an insurer needed coverage for itself, wouldn't it insist that its carrier look and see if there were injuries or damages it missed when it reported the claim? If so, then if that insurer must treat the interests of its insured as at least as significant to it as its own, it must look for coverage for its insured.
I sometimes wonder if the "Look for coverage" axiom isn't actually an axiom, in the sense that it so fundamental that it is not derivative from some other principle--presumably a "real" axiom. The reasoning for this may be too simplistic.
If an insurer needed coverage for itself, wouldn't it insist that its carrier look and see if there were injuries or damages it missed when it reported the claim? If so, then if that insurer must treat the interests of its insured as at least as significant to it as its own, it must look for coverage for its insured.
No comments:
Post a Comment