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New book from Barry Zalma – The Tort of Bad Faith

The implied covenant of good faith and fair dealing is a concept in insurance law that is at least three centuries old. It first appeared in British jurisprudence in a case decided by Lord Mansfield sitting in the House of Lords as the Supreme Court of Great Britain. IN Carter v. Boehm. 3Burrow, 1905, Lord Mansfield explained that insurance is a contract on speculation; the particular facts on which the conditional chance is to be calculated are usually only known to the insured. The surety relies on his representation and assumes that he does not withhold any circumstance within his knowledge, so as to mislead the guarantor into believing that the circumstance does not exist, and induce him to appreciate the risk as if it did not. exist.

Withholding such a circumstance is fraud, and therefore the policy is void. Even if the suppression should be by mistake, without any fraudulent intent, the insurer is still misled and the policy is void; because the risk really differs from the risk that was understood and intended to run, at the time of the contract. [The Chicago v. Thompson, 19 Ill. 578, 1858 WL 5993, 9 Peck 578 (Ill. 1858)] and the insurance contract is based on good faith.

Lord Mansfield stated that the rule is still followed to this day: “Good faith forbids either party by concealing what he privately knows, to draw the other into a finding, from his ignorance of that fact and his belief to the contrary.
The implied covenant declares that no party to an insurance contract should do anything to deprive the other of the benefits of the contract.”

For the insurance to work; for each insurer to properly evaluate the risks presented; for each insurer to obtain the insurance desired; and for each insured and insurer to settle all claims fairly and equitably, they must treat each other with the utmost good faith and do nothing to deprive the other of the benefits of the contract.
Each party to the insurance contract is expected to treat the other fairly in the acquisition and performance of the contract. For example, the prospective insured must answer all questions about the risk he or she is asking the insurer to take and about the person the insurer is being asked to insure. Likewise, the insurer must honestly, clearly and in good faith explain to the insured(s) the risks the insurer is willing to take and the terms and conditions of the insurance contract.

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