It is the time of the year when I reflect on my performance over the past year and set new goals for 2012. I also find myself studying trends in insurance to help anticipate how they may impact my legal practice and clients. While doing this, I came across an excellent study in a comparative law analysis of an insurer’s good faith obligations and remedies for the breach of that obligation in Damages for Late Payment and the Insurer’s Duty of Good Faith, published by the Scottish Law Commission earlier this year.
I practice in a number of different jurisdictions. The insurance law and regulations of the various states are different. I found it interesting in the Scottish Law Commission’s comparative study how they noted the various concepts of "good faith" developed differently in England, Wales and Scotland. Still, their studied view seems quite reasonable and needed by both parties to an insurance contract:
The insurer’s duty to act in good faith underpins the insurance contract. Where an insurer acts in bad faith it is right that the law should provide the insured with an appropriate remedy. In this paper, we are considering cases in which an insurer deliberately refuses to investigate, or advances spurious defenses, or deliberately delays payment on a claim it knows to be valid. This may cause foreseeable loss to the insured, and we think the law should provide compensation for this loss."
Contracts of insurance are ultimately contracts based on trust. One party pays money to another not in return for goods or services but against a promise to pay should an agreed event occur. The insurer has to be confident that the policyholder has provided a fair presentation of the risk. The policyholder has to be confident that the insurer will investigate and consider its claim fairly, free from bias and prejudice. Mutual duties of good faith reinforce the parties’ contractual arrangements.
Interestingly, their law also has simple and straightforward regulation of claims handling:
The Financial Services Authority (FSA) has an important influence on the approach taken by insurers to handling and paying claims. Detailed rules are contained in the Insurance Conduct of Business Sourcebook (ICOBS). In particular, Rule 8.1.1 states that an insurer must:
(1) handle claims properly and fairly;
(2) provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress;
(3) not unreasonably reject a claim (including by terminating or avoiding a policy); and
(4) settle claims promptly once settlement terms are agreed.
The Scottish Law Commission also found that the concept and obligation of "good faith" was recognized in most countries:
Australia, Canada and the United States all recognize that both parties to a contract of insurance are bound by a duty of good faith, both before and after the formation of the contract. It has been held that the insurer’s post-contract duty of good faith includes obligations to pay valid claims promptly and to act in good faith throughout the claims-handling process.
In Australia, for example, “prompt admission of liability to meet a sound claim for indemnity and prompt payment” is said to be part of the insurer’s duty of good faith. In Canada, the courts have characterised an insurer’s duty of good faith as including an obligation both “to act with reasonable promptness during each step of the claims process” (including paying “in a timely manner”) and “to deal with its insured’s claim fairly”. In the United States, an influential judgment declared that:
… the implied obligation of good faith contemplates, at the very least, that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim.
Good faith is also a pervasive doctrine of contract law in civil law jurisdictions, including Germany, Italy and Spain." (citations omitted)
In Wrongful Claims Practices Provide Cheating Insurers with a Short Term Market Advantage, I noted that honest insurers should be concerned with having a reputable insurance industry and should be in the vanguard for laws obligating good faith and punishing those that fail to follow those rules:
My impression is that the insurance industry is so competitive that many have an incentive to cheat and not fully act in good faith because of competitive reasons. I sometimes view my role of obtaining a bad faith settlement from the insurer as a cop giving a cheap speeding ticket to one out of ten thousand speeders and the driving is not getting any slower. I am certain that my clients view their slow or non-paying insurers as thieves.
It does not take much experience to learn that most of my clients purchase insurance on price alone. Therefore, insurance companies that continue to underpay or delay payment as inexpensively as possible, and not get caught at too great a price, will be in a better competitive position than honest insurers that promptly pay, pay fully, and provide excellent customer service. Does anybody dispute this– other than the insurance defense counsel when my claims practice experts provide this opinion?
Interestingly, the Scottish Law Commission came to the same conclusion:
Most insurers do pay claims fairly and within a reasonable time because there are strong commercial pressures to do so. Above all, insurers wish to preserve their reputations.
However, where an insurer is in run off, for example, it may no longer feel the need to preserve its reputation. Here a rogue insurer may decide that the profits to be made from withholding money may be greater than the consequences of delay in paying claims (such as being required to pay interest). Alternatively, claims handlers may lose perspective on the merits of a case and refuse the claim in a biased and unjustified way.
These rare cases damage the reputation of the industry as a whole. It is in the interest of all insurers that the law should provide suitable disincentives to deter behaviour of this sort. (emphasis added)
It is a bit alarming that with all this logical and academic reflection demonstrating that enforcement of rules underlying insurer good faith are paramount, Florida’s newly elected governor and many members of Florida’s legislature are publicly supporting, speaking at and receiving awards from Florida’s insurance lobby that wants to take away these protections. Insurance consumers are voters and they need to be informed about this trend.