![]() There are exceedingly few Commonwealth cases on the doctrine of the duty of good faith and fair dealing. The American development of the bad faith doctrine in insurance litigation has not been embraced by most Common Law jurisdictions. The development of bad faith litigation, especially in the State of California, grew out of a desire to make insurers play fairly. The idea was to impose a consequence on insurers who acted improperly that was more significant than the mere licensing fee involved in paying the claim. In an attempt to level the playing field, insureds began to formulate alternative damage theories in order to expose insurers to more significant damage awards. ![]() Insurers could act in this manner with impunity because American law at the time limited an insured’s recovery to the amount owing under the policy plus interest. When claims were made, insurers were able to use near limitless resources to resist payment or force grossly inadequate settlements. Without bad faith claims, there was little incentive for insurance companies to adjust claims fairly and promptly. The development of the doctrine of bad faith as a tort in the United States grew out of the recognition that viewing unreasonable, abusive and coercive tactics by insurance companies as simple breaches of contract was inadequate. While these categories seem straightforward, there is considerable debate with respect to what conduct constitutes bad faith and what does not. Unreasonable withholding of benefits generally falls into one of three categories: wrongful denial of coverage, failure to pay the full value of the claim, or unreasonable delay in the investigation or payment of a claim. First party bad faith deals with the unreasonable withholding of benefits payable to the insured rather than to another party. įirst party bad faith was not recognized until 16 years later in the seminal decision of Gruenberg v. This risk should properly be borne by the insurance company that gambled on getting a judgment below policy limits rather than the insured who would almost certainly have instructed his insurance company to settle within the policy limits if his opinion had been sought. By not settling within the policy limits, the insurance company has unreasonably exposed its insured to the risk of any excess judgment. If the trial judge finds damages greater than $500,000, there is a very good chance that any excess will be the responsibility of the insurance company rather than the insurer. The injured Plaintiff sues and offers to settle within the policy limits, but the insurance company refuses the offer and takes the case to trial. ![]() Third party bad faith is best illustrated by an example: consider the case where an insured has a $500,000 automobile insurance policy when he negligently rear-ends another car causing the driver catastrophic injuries. In fact, the first third party bad faith case dates back to 1957. Bad faith is a much more developed doctrine in the U.S. The key thing to remember about bad faith, however, is that regardless of whether it is contractual or tortuous, it is a separate actionable wrong that may cause increased damages under the more traditional heads of damages: general damages, consequential damages, aggravated damages, and in come cases, punitive damages.īad faith litigation originated in the United States. To make matters more complicated the line between tort and contract law continues to blur. The distinction may be significant when it comes to calculating damages. Debate continues as to whether bad faith damages flow from breach of contract or in tort. In Canada, we are still struggling to develop a clear definition of the doctrine of bad faith.
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