INSURANCE

Insurance bad faith refers to a claim that an insured person has against an insurance company for bad acts. Under the law of nearly every U.S. jurisdiction, Insurance companies owe a duty of good faith in dealing with the persons they insure. If they violate that obligation, many states allow the insured person (or "policyholder") to sue the insurance company.

HISTORICAL BACKGROUND

Most laws regulating the insurance industry in the U.S. are state-specific. Beginning in the 1973 with Gruenberg v. Aenta Ins. Co., 510 P.2d 1032 in California, courts began to hold that policyholders could sue insurance companies that acted in bad faith by denying them of coverage without reasonable basis. Other states began to follow, holding that a tort claim exists for policy holders that can establish bad faith on the part of insurance carriers. In some cases, the legislatures of the states became involved and passed legislation that permitted bad faith claims.

WHAT IS BAD FAITH

An insurance company has many duties to its policyholders. One, it usually has a duty to defend a claim (or lawsuit) even if some or most of the lawsuit is not covered by the insurance policy. Two, it has a duty of indemnification, which is the duty to pay a judgment against the policyholder, up to the limit of coverage, but only if the judgment is for a covered act or omission. As a result, most insurance companies exercise a great deal of control over litigation.

Bad faith is a fluid concept and is defined primarily in case law. Examples of bad faith include undue delay in handling claims, inadequate investigation, refusal to defend a lawsuit, threats against an insured, refusing to make a reasonable settlement offer, or making unreasonable interpretations of an insurance policy. The policyholder must be damaged, for example, if an insurance company refuses to make a reasonable settlement offer which the policyholder wants, and the policyholder is later subject to a judgment in excess of the policy limits, that is damage.

In some cases, the tort or the governing state statute allows punitive damages against insurance companies as a mechanism to prevent future behavior.

REFERENCES

The following states have their own bad faith claim statutes:

Cal., Cal. ins. Code. Sec. 790.03(h) Col., Col. Rev. Stat. Secs. 5-12-102(1) and 12-21-101(1), Conn., Conn Gen. Stat., 38a-321, Secs. 7.02, 7.04, 7.05 Del., 18 Del. Code Sec. 2304(16) Fl., Fla. Stat. Sec.624.155 Ga., Ga. Code. Ann. Secs. 33-6-34 and OGCA Sec. 33-4-6 Haw., HRS Sec. 431: 13-102 Ill., 215 Ill. Comp. Stat. Sec. 5/155 Iowa, Iowa Code Ann. Sec. 516.1 Mass., Mass. Gen. Law. Ann. Ch93A, Sec. 9 and Ch. 1760, Sec. 3. MO, Mo. Rev. Stat. Sec. 375.420 Mont., Nopt. Code. Ann. Sec. 33-18-242 Pa., 42 Pa.C.S.A. Sec. 8371 RI, RI Gen Laws, Sec.9-1-33 Tenn., Tenn Code. Ann. Sec. 56-7-105 TX, Texas Ins. Code. Ann, art. 21.21 and 21.55 Wisc., Wisc. Admin. Code. Sec. 6.11, Wisc. Stat. Ann. Sec. 632.22

States that have not passed statutes recognizing bad faith claims may recognize the claim under the state's common law. According to the 1997 edition of Stehpen Ashley's "Bad Faith Actions" (2nd Ed., 1997), Sec. 2.08, states that have recognized common law actions include: Alaska, Arizona, Conn., Ill., Iowa, Kansas, Kentucky, Miss., Mont., Nebraska, Nevada, New Jersey, New York, North Dakota, Oklahoma, South Carolina, and Wyoming. Maryland recently enacted legislation that creates a first-party bad faith remedy (effect late 2006) but this has not been tested.

A person has an "insurable interest" in something when loss or damage to it would cause that person to suffer a financial loss or certain other kinds of losses. For example, if the house you own is damaged by fire, the value of your house has been reduced, and whether you pay to have the house rebuilt or sell it at a reduced price, you have suffered a financial loss resulting from the fire.

By contrast, if your neighbor's house, which you do not own, is damaged by fire, you may feel sympathy for your neighbor and you may be emotionally upset, but you have not suffered a financial loss from the fire.

You have an insurable interest in your own house, but in this example you do not have an insurable interest in your neighbor's house.

A basic requirement for all types of insurance is the person who buys a policy must have an insurable interest in the subject of the insurance. You have an insurable interest in any property you own or which is in your possession.

For purposes of life insurance, everyone is considered to have an insurable interest in their own lives as well as the lives of their spouses and dependents. Business partners or another individual with whom you own property would also qualify. You may insure someone that you are financially dependent upon regardless of blood relationship.

For property and casualty insurance, the insurable interest must exist both at the time the insurance is purchased and at the time a loss occurs. For life insurance, the insurable interest only needs to exist at the time the policy is purchased.

In the UK this aspect of law depends on statute law: see the Life Assurance Act 1774 which renders such contracts illegal, and the Marine Insurance Act 1906, s.4 which renders such contracts void.