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Neither the courts nor the state authorities seem to be aware that insurance is a necessity in a modern, capitalist society. No wise person would take the risk of starting a business, buying a home or driving a car without insurance. The risk of losing everything would be too great. By using insurance to spread the risk, it becomes possible to take the risk of starting a business, buying a home or driving a car.
Insurance has existed since a group of Sumerian farmers, more than 5,000 years ago, scrapped an agreement on a clay tablet that if one of them lost his harvest to storms, the others would pay part of their income to the injured. During the eons, the insurance has become more sophisticated, but the deal is basically the same. An insurer, whether it is a private individual or a business entity, takes contributions (premiums) from many and keeps the money to pay the few who lose their property from any disaster, such as fire. The agreement, a written agreement to pay compensation to another in the event of a particular problem, accident or injury that is random, that is, occurs by chance, is called insurance.
In a modern industrial society, almost everyone is involved in or with insurance business. They insure against the risk of getting sick, losing a car in an accident, losing business due to fire, becoming disabled, losing their life, losing a home due to flood or earthquake or being sued for causing other damage by mistake. The insurers, insured or persons injured by the insured are dependent on each other.
In a country where human interactions are governed solely by the terms of written agreements, insurance would be an easy way to spread risks and provide compensation based on promises made in the insurance contract. But in this real world, insurance contracts are governed by laws that are supposed to protect the consumer from insurance, regulations that impose obligations on insurers’ conduct, and court and appellate court decisions that interpret insurance contracts.
A simple insurance contract between two parties can say: “I insure you against the risk of losing your engagement ring valued at $ 15,000 with all risks of direct physical loss excluding wear and tear for a premium you pay of $ 15.00.” Anyone who could read would understand that contract. If something happens to damage, destroy or drop the ring, the insurer will pay you $ 15,000.00. However, insurers can not sign such a simple contract because the state requires many conditions that complicate the insurance wording and confuse the average person. The states and courts that did so had nothing but good intentions to protect the consumer from the insurer and control the insurer’s actions.
EXAMPLES OF ACCIDENTAL CONSEQUENCES & INSURANCE
Simplified wording causes ambiguity
Insurance contracts can be simple or extremely complicated, depending on the risks the insurer takes. Regardless of which, insurance is neither more nor less than an agreement whose terms are agreed upon by the parties to the agreement. In recent centuries, almost every word and phrase used in insurance contracts has been interpreted and applied by one or another court. The ambiguity in the contract language became certain. But the average person saw the insurance contract as incomprehensible and impossible to understand.
Courts struggling to understand insurance policies contributed to legislators’ concerns:
As said in Insurance Company of North America v. Electronic
Purification Company, 67 Kal. 2d 679, 689, 63 Cal. Rptr. 382, 433 (1967), the insurance company provided the insured coverage in a relatively simple language that can be easily understood by the average man in the market, but tried to remove some of the same coverage in paragraphs and languages as even a lawyer, whether he from Philadelphia or Bungy, would have a hard time understanding. [Hays v. Pacific Indemnity Group,8 Cal. App. 3d. 158, 80 Cal. Rptr. 815 (1970).]
Apparently to protect the public, to save lawyers’ concerns like the one quoted above, insurance regulators and legislators decided to require insurers to write their insurance policies in “easy-to-read” language. Because they were required to do so by law, insurers changed the wording of their contracts to a language that fourth-graders could understand. Exact language interpreted by hundreds of years of court decisions was discarded and replaced with an imprecise, easy-to-read language. For examples of “easy to read” or “simple English statutes” go to Appendix 1.
The law on unintended consequences came in. Instead of protecting the consumer, the imprecise language resulted in thousands of lawsuits that were determined to impose sanctions on insurers for trying to enforce ambiguous “easy-to-read” language. The lawsuits cost insurers and their insured millions of dollars to obtain court statements that interpret the language and reformulate their “easy-to-read” policies to comply with court decisions. For more than 30 years, the law on unintended consequences struck the insurance industry which found that a law designed to avoid litigation resulted in the exact opposite.
Attempts by regulators and courts to control insurance companies and protect consumers were made with the best of intentions. The judges and regulators found it necessary to protect the innocent from what they perceived to be rich and powerful insurers. Unfortunately, the simple English statutes had the opposite effect. But of course, even after it became clear that easy-to-read policies cause more problems than they cure, laws and regulations have not changed.
Bad faith causes bad behavior
In the 1950s, California’s Supreme Court created a new tort law in U.S. case law: bad faith.
Damages are a civil error from which one person can receive damages from another for several damages to a person or property. The tort in bad faith was created because an insurer failed to treat an insured fairly, and the court held that the traditional contractual damages were insufficient to properly compensate the insured. The court allowed the insured to, in addition to the contractual damages that the insured was entitled to receive under the contract, if the insurer had treated the insured fairly, damages for emotional suffering and punitive damages to punish the insurer for its wrongdoing.
Insured, insured attorneys, regulators, and courts across the United States applauded the California Supreme Court’s action for providing a fair remedy to battered insureds. Most of the states imitated California’s Supreme Court and adopted the tort law created by California’s Supreme Court either by law or by court order.
The insurance companies that treated their insured badly did in fact benefit from the fact that they continued with their wrongful acts and were only obliged to pay the few insured who sued. Those who did not sue increased the insurance companies’ profit margins. Honest insurers paid scams and claims that they were not owed and found that they needed to raise premiums to cover the extra cost. The increased premium that the insured paid to cover the extra cost was a clear example of the law’s effect of unintended consequences. The honest insurance companies that treated them as they insured in good faith and fair treatment as paid fraudsters and paid revealed claims to avoid lawsuits in bad faith needed to charge more than the insurance companies in bad faith who disputed with their insured.
The law on unintended consequences hit the insurance industry and the general public for insurance buyers. Instead of deterring wrongdoing by applying damages in bad faith, the law of unintended consequences resulted in punishing the honest and correct insurers, honoring insurers who acted in bad faith with profit and allowing many frauds to succeed.
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(c) 2022 Barry Zalma & ClaimSchool, Inc.
Barry Zalma, Esq., CFE, now limits his internship to the position of insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry. He is available at http://www.zalma.com and firstname.lastname@example.org.
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