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The good faith association



Watch the full video at https://rumble.com/v23vf4m-the-covenant-of-good-faith.html and at https://youtu.be/l78_6KG5Wsk

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. 3 Burrow, 1905, explained to Lord Mansfield 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 deceived 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 bargain, from his ignorance of this fact and his belief to the contrary.

THE DUTY TO ACT IN GOOD FAITH

The implied covenant states that neither 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.

THE CREATION OF THE DAMAGE OF BAD FAITH

A tort is a civil wrong from which one person can recover damages from another for multiple injuries to person or property. Insurance, from its inception, was always a contract whose breach was remedied by traditional contractual torts.

Since the first insurance was written on a clay tablet three to five thousand years ago, if the insurer failed to pay a claim, the insured could sue and receive only the compensation promised in the insurance contract and nothing more than prejudgment or postmortem interest. Moreover, since the idea of ​​insurance started, its practitioners and the insured have perceived insurance as a business of utmost good faith.

The covenant was declared by Lord Mansfield in the British House of Lords, which served as a supreme court, in 1766 i Carter v. Boehm (1766) 3 Burrow, 1905, 97 Eng. Rope. 1162, 1164 (KB).

Such a requirement was rooted in practical wisdom, which recognized that an insurer often lacked the ability to verify the insured’s representations before issuing a policy. This practical wisdom still applies when applied to marine insurance – an industry where, for example, a policy may need to be issued in London, on a time-sensitive basis, for a ship halfway across the globe.

American courts first recognized the doctrine of uberrimae fidei (utmost good faith) in connection with marine insurance contracts in the early nineteenth century.

The US Supreme Court upheld the strict disclosure requirements that the doctrine placed on an insured in Sun Mut. ins. Co. v. Ocean Ins. Co., 107 U.S. 485, 510-11, 1 S. Ct. 582, 27 L.Ed. 337 (1883).

The legal basis for the creation of the tort of bad faith was justified because the court concluded, from the evidence presented, that the insurer failed to treat an insured fairly and in good faith. The court held that the traditional contract damages were insufficient to properly compensate the insured.

In doing so, courts accepting the existence of a tort of bad faith overturned centuries of insurance jurisprudence and allowed the insured to receive, in addition to the contract damages to which the insured was entitled under the contract if the insurer had treated the insured fairly, damages to punish the insurer for its wrongful acts .

Insureds, advocates for insureds, regulatory agencies and courts across the United States cheered the action of the California Supreme Court for providing a fair remedy to abused insureds. Most of the states emulated the California Supreme Court and adopted the tort law created by the California Supreme Court either by statute or court decision.

If an insurer and an insured disagreed about the application of the policy to the actual situation, after the creation of the bad faith tort, the tort was no longer limited to contractual damages as in other commercial relationships. If the court finds the insurer at fault, it can order an insurer to pay the contract amount plus damages for emotional distress, pain, suffering, punitive damages, attorneys’ fees and any other damages the insured and the court can think of to deter other insurers from treating their badly insured. The good intentions of the courts and regulators led to thousands of lawsuits that they believed would deter the wrongful behavior.

The courts and legislatures that adopted bad faith torts hoped that bad faith would have a beneficial effect on the insurance industry and compel insurance companies to treat their insureds fairly. But contrary to the court’s honest and good intent, that good intent was contradicted by intelligent attorneys who caused the denial of a $40 wrongfully denied claim, resulting in $5 million judgments.

Juries, unaware of the cause and operation of the policy, decided that insurers who did not pay out were evil and that they signed contracts, so they never had to pay.

The jurors were convinced that it was appropriate to punish insurers severely even when the insurer’s conduct was proper and proper under the terms of its contract.

The jurors and judges were not informed that over the centuries insurance companies paid out more in damages and costs than they took in premiums, they only profited by wisely investing the premiums they had in reserve to pay claims,

The massive verdicts were made public and many insurance companies decided it was too expensive to fight their insureds in court, no matter how correct their position was in the contract. They found it cheaper to pay than to fight just as shopkeepers threatened by the mob decided it was better to pay protection to the mob rather than fight.

Most of the massive sentences were overturned or reduced on appeal. The bad actors raised their premiums and lost some business. Other insurance companies, faced with the massive judgments, let fear rule reason and paid claims that were inappropriate or fraudulent. The additional cost was passed on to all insurance consumers. The insurers who acted wrongly were punished less than honest insurers who were threatened with damages.

The insurance companies that treated their insureds poorly actually profited by continuing their wrongdoing and were only required to pay the few insureds that sued. Those who did not sue increased insurance company profit margins. Honest insurers paid fraud and claims they weren’t responsible for and found they needed to raise premiums to cover the extra cost. The increased premium paid by the insured to cover the extra cost was a clear example of the law’s effect of unintended consequences. The honest insurers who treated their insureds with good faith and fair dealing who paid fraudsters and paid disclosed claims to avoid bad faith lawsuits needed to charge more than the bad faith insurers who litigated their insureds.

When I was a young law student we were taught to either sue in damages and waive assumsit (contract) if you had the facts and law available to do so. It is no longer the law when it comes to insurance contracts but not when it comes to other contracts.

What Every Insurance Professional, Every Insurance Attorney, Every Bad Faith Claimant’s Attorney, and Every Person With an Insurance Claim Needs to Know About Bad Faith Torts

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.

Adapted from my book Bad faith damages Available as hardcover Available as paperback Available as Kindle book.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and zalma@zalma.com

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