Research Handbooks in Financial Law series
Edited by Julian Burling and Kevin Lazarus
Chapter 6: Claims: An Overview of the US Tort of ‘Bad Faith’ – A Common Law Approach to Regulating Insurer Claims Handling and Settlements
Suzanne Midlige, Robert Re and William Hoffman 1. INTRODUCTION In the United States, ‘bad faith’ claims frequently arise not only in disputes between insureds and insurers but also in disputes between insurers. Bad faith claims are signiﬁcant to insurers because they potentially expose them to ‘extracontractual’ types of damages and even punitive damages. That is, a ﬁnding of bad faith potentially exposes an insurer to liability beyond the policy limits originally bargained for in the insurance contract. This chapter provides an overview of the bad faith cause of action in the US, beginning with its origins in the early twentieth century, and a comparison of the bad faith cause of action to concepts such as uberrima ﬁdes, or utmost good faith, familiar to English and European markets. Also discussed are the contexts in which bad faith claims may arise, the damages available to a successful bad faith claimant and the various standards that US courts may apply in deciding a bad faith claim. In particular, this chapter discusses, and provides examples of, some of the most common categories of bad faith, including bad faith claims that arise when an insurer wrongfully refuses to defend an insured or wrongfully refuses to settle a covered claim within policy limits. The assertion of bad faith claims by insureds is on the rise in the US. Not surprisingly, bad faith came of age in the 1960s, 1970s and 1980s, at a time when other types of tort litigation – for example, environmental, products liability...
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