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The effect of the tort of Bad Faith on the United States



See the full video at https://rumble.com/v17jc3v-the-effect-of-the-tort-of-bad-faith-on-the-usa.html and at https://youtu.be/I- YF0EeL5CU

It is undeniable that in the 1950s, 1960s and 1970s, the insurance industry abused some insured persons to avoid paying legitimate claims. Without objective grounds, the insured were accused of arson or other variations on insurance fraud. Damages were refused on the thinnest excuse. Humans were found to have diseases that only horses could catch. Disability benefits were denied because an insured person was wheeled into his wheelchair to church one day and therefore was not completely confined to the home. Insured persons were declared bankrupt when reasonable claims within the insurance limits were refused.

To stop this abuse, the courts in the state of California invented bad faith. It took a universal fine and decided that the breach of an insurance contract without, what the court judged to be valid, genuine or even quite debatable reasons, was transferred from a breach of contract to a new breach of damages. Many other states have followed the lead.

Until the invention of damages in bad faith, all that an insured could collect from an insurer that incorrectly denied a claim was the benefits to be paid under the insurance. After the creation of the damages in bad faith, the courts allowed the insured to also collect the entire amount of damages, including punitive damages.

It worked. The insurance companies treated the insured better. The threat of punitive damages meant that the insurance companies were cautious about rejecting all claims. The creation of damages in bad faith was in many ways a good thing for insurers and insured persons. What the courts that created bad faith did not realize was that it was also the key to Pandora’s box of abusive lawyers who found that it was a new profit center for their business.

The law on unintended consequences struck with force. Lawyers flocked to all available courthouses to take advantage of the new tort law.

Although a claim against an insured is rather debatable, an insurer is still obliged to participate in conciliation discussions in an attempt to relieve the insured of the burden and expense of litigation. [Summit Ins. Co. v. Stricklett, 199 A.3d 523 (R.I. 2019)] Therefore, insurers must understand that even if the lack of coverage is quite debatable or if there is a real dispute, it can still be considered to protect the insured regardless of the lack of an obligation to defend or resolve. A decision by Rhode Island and other states that use bad faith to force insurance companies to provide benefits that the policy did not promise to provide.

As Judge Kaus of the California Supreme Court noted as early as 1985:

The problem is not so much the theory of evil beliefs, but its application. It seems to me that lawyers who handle insurance claims against insurance companies are no longer interested in collecting on these claims, but spend their intelligence and energy on trying to maneuver the insurance companies to commit acts that the insured can later initiate as evidence of bad faith. . [White v. Western Title Ins. Co., 40 Cal. 3d 870, 710 P.2d 309, 221 Cal. Rptr. 509 (Cal. 12/31/1985)]

When an insurer is sued, it can be accused of bad faith for having taken what the plaintiff and a court considered were too many deposits, failed motions for summary judgment or failure to offer an appropriate amount at a conciliation conference. It is now important, before conciliation negotiations begin, directly or in a conciliation conference or mediation, as a result of White v. Western Title Ins. Co. decision to waive all decisions of the Supreme Court in White v. Western Title Ins. Co. before the negotiations began.

The decision in White v. Western Title Ins. Co. has proved the saying that “the road to hell is lined with good intentions.” Although the court had the obvious good intentions of protecting an insured from what it saw as misconduct by an insurer, it destroyed the insurance companies’ ability to defend themselves against unfounded lawsuits in bad faith and encouraged more disputes in bad faith.

Critic of White and opponents of the recognition of litigation as evidence of bad faith raise four arguments.

  1. Adequate existing protection: The trial judge, the rules of civil procedure and ethical rules protect the insured from inappropriate procedure in insurance litigation.
  2. Relevance: The legal disputes of an insurer’s lawyer are only marginally evident for the insurer’s claims handling; in addition, the prejudice arising from the presentation of legal proceedings before a jury significantly outweighs the probative value of such evidence.
  3. Cooling effect: The possibility that an insurer’s litigation can be recognized as evidence of bad faith has a “cooling effect” on an insurer’s defense.
  4. Lawyer Compromise: Lawyers for insurance companies will be unreasonably limited in their advocacy and will need to continually evaluate whether they will be lawyers or witnesses at the trial.

I JB Aguerre, Inc. v. American Guarantee & Liability Ins. Co. (1997) 59 Cal.App.4th 6, 68 Cal.Rptr.2d 837, the Court of Appeal upheld a judgment of termination of liability, as a liability insurer did not act unreasonably in law when he refused to meet the plaintiff’s $ 2 million settlement claim, despite the alleged risk of subjecting the insured to unprotected criminal liability. The insured’s alleged fear of his punitive exposure forced him to contribute to a settlement of coercion.

Looking through the form of the transaction, the California Court of Appeal realized that, given its “economic substance,” Judge Neal found:

What we have here, at the bottom, is an effort of [the insured] to create a statement in bad faith of whole fabric… with ‘ingenious help of advice’. … [The insured] has tried to position itself to pursue a goal in bad faith with high effort and demand punitive damages, from which one hopes to be able to get out not only with [underlying] the claim is disposed of free of charge [the insured]but also a gain in the form of damages obtained from [the insurer]. Disputes in bad faith are not a game where insured persons are free to make claims for recovery. Each judgment against an insurer potentially increases the amounts that other citizens have to pay for their insurance premiums. (my italics) [See also, Dynamic Concepts, Inc. v. Truck Ins. Exchange, 71 Cal.Rptr.2d 882, 61 Cal.App.4th 999 (Cal.App. 4 Dist., 1998)]

The logarithmic increase in insurance fraud in the state of California and other states that have allowed damages for bad faith breaches of insurance contracts can be directly traced, in part, to the legal creation of damages in bad faith. Prior to damages in bad faith, insurers with reasonable belief that an insured presented a fraudulent claim would refuse to pay it and file a suspected fraudulent claim with the Department of Insurance Fraud Division or Fraud Bureau. People who commit the fraud would in most cases accept the refusal as a cost of doing business and proceed to the next fraudulent claim.

After admitting the crime in bad faith, those who committed fraudulent insurance claims were denied to lawyers instead. Costumes of bad faith appeared like wild flowers in the desert after a rainstorm.

Juries, outraged by insurance companies that accused their insured of fraud, punished the insurance companies with multi-million dollar fines. After each verdict, hundreds of cases (even if no money was owed) were decided for fear of falling victim to the same uncontrolled juries. Fraud units that had been set up in the 1970s were disbanded in the late 1980s due to fears of damages judgments and were reintroduced only after states adopted statutes requiring insurance companies to have units for investigating insurance fraud.

Insurance companies need to realize that since the 1950s, when bad faith damages were created, courts more often, recognizing the abuse of bad faith damages, have found that it is a “rather debatable” legal issue as the application of a private limitation of action in a policy will counteract both a breach of contract and a claim in bad faith.


(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 zalma@zalma.com.

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