THE LAW OF INSURANCE CLAIM PRACTICES: BEYOND BAD FAITH

This article provides a fresh perspective on the law of bad faith in first-party insurance cases. In these cases, the company is alleged to have failed to pay a valid claim submitted by the policyholder, delayed payment of a claim, or forced litigation to obtain what the policyholder is owed. A basic premise of the article is that "bad faith" is an ill-advised term for this area. The primary focus in these cases should be whether the company has honored its obligation to observe fair claim practices. "Bad faith," as that term is normally understood, plays a part, but it is a secondary part, prohibiting opportunism by the company. Therefore, this area should be understood simply as the law of claim practices. The article first describes the development and present state of the law providing a cause of action for the failure to observe fair claim practices. That development rests on the obligation of good faith implied in every contract, including insurance contracts. It explains more fully that obligation and how it relates to claim practices, and it draws the implications of that explanation to state and apply the appropriate rule for evaluating a company's claim practices: the company may not act opportunistically, and it must promptly, fairly, and objectively process, investigate, evaluate, and resolve the claim. Finally, the article explains the damages that should be available to a policyholder for violation of this rule. The analysis in the article provides a basis for reexamining the law of first-party claim practices generally. It has its greatest application, however, in two groups of jurisdictions that together comprise the large majority of American jurisdictions. One group does not recognize a cause of action for violation of claim practices, and the other permits an action only where the company not only lacked a reasonable basis for its action in delaying or denying a claim, but also knew of or recklessly disregarded its lack of a reasonable basis. Both of these positions fail to apply properly the obligation of good faith in light of the relationship between an insurance company and its policyholder.