Research Handbook on the Economics of Insurance Law

Research Handbook on the Economics of Insurance Law

Research Handbooks in Law and Economics series

Edited by Daniel Schwarcz and Peter Siegelman

Insurance law and insurance economics each have long and distinguished scholarly histories, but participants in the two disciplines have not always communicated well across academic silos. The Handbook encourages more policy-relevant insurance economics scholarship and more economically sophisticated legal scholarship by bringing together original contributions from leading scholars in insurance law and insurance economics on a range of issues involving insurance law and regulation.

Chapter 12: The law and economics of insurance bad faith liability

Danial Asmat and Sharon Tennyson

Subjects: law - academic, commercial law, insurance law, law and economics

Extract

In the US and many other countries, the law of contracts holds that parties have a general duty of good faith in the performance of contracts. Performance in good faith is notoriously difficult to define, but according to one broad definition constitutes ‘honesty in fact and the observance of reasonable commercial standards of fair dealing’ (Uniform Commercial Code (UCC) 1-201). The law’s recognition of this general duty is often viewed as filling gaps in incomplete contractual language, and is aimed at preventing a contracting party from gaining unfair advantage through overly-strict interpretation of this language (see, e.g., Dubroff 2006; Cooter and Ulen 2008). In insurance contracting, under US law the duty of good faith explicitly extends for the duration of the insurance contract and includes an insurer’s actions in settling claims. The idea is that the insurer implicitly undertook a duty to promptly investigate claims and fully pay those claims that are covered under the terms of the policy, even if no specific contractual language defines exactly what those duties consist of in practice.

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