GOOD FAITH IN INSURANCE LAW

GOOD FAITH IN INSURANCE LAW

Good Faith: A study

Good faith is required in a wide range of situations, including contracts and business dealings, as well as during mediation, arbitration orsettlement negotiations in a personal injury or similar tort case. The good faith requirement also appears in business law. The officers and directors of a corporation are obligated by their fiduciary duties to act in good faith when dealing on behalf of the corporation.
Although the phrase “good faith” may mean specific things in certain situations, most courts hold defendants to one of two separate standards when determining whether the defendant acted in good faith or in bad faith.
The first standard is based on reasonableness. A person or company may be liable for bad-faith dealing if they refuse to uphold their end of a contract or other bargain for no reason or for a reason that has little to do with the actual situation. For instance, suppose a plaintiff is injured in a car accident. His auto insurance covers medical bills for injuries caused by car accidents, so he files a claim with his insurance company. Instead of paying the benefits it owes him, however, his insurance company refuses to send a check and hangs up on the injured man whenever he calls them about it.
In this case, a court may find that the insurance company is liable for failing to act in good faith because its actions were not reasonable. Not only did the company refuse to pay the benefits it owed the injured policyholder, but it also refused to give any reason why it would not pay.
The second standard also uses reasonableness to determine whether good faith exists, but it also asks about intent. Under this standard, a defendant may be liable for dealing in bad faith if he did not act reasonably and if he knew or should have known there was no reasonable basis to act the way he did.
For instance, in the example above, the insurance company was held liable for not dealing in good faith because it refused either to pay the benefits it owed or to explain why it would not pay them. Under this standard, the insurance company would only be liable for dealing in bad faith if it also knew that there was no reasonable way it could refuse to pay the injured plaintiff’s claims.
Officers and directors of a company are required to deal in good faith when representing the company to anyone, including the company’s own shareholders. However, shareholders who do not feel like the company’s officers or directors are acting in good faith must face an extra obstacle when bringing the directors or officers to court. Known as the business judgment rule, this obstacle states that courts presume a corporation’s officers and directors are acting in good faith, unless the plaintiff can show evidence that indicates they are not, or unless their actions were so unreasonable that no reasonable person would have done the same thing in that situation.

'Doctrine of utmost good faith'

A minimum standard that requires both the buyer and seller in a transaction to act honestly toward each other and to not mislead or withhold critical information from one another. The doctrine of utmost good faith applies to many common financial transactions.

Investopedia explains 'doctrine of utmost good faith'
In the insurance market, the doctrine of utmost good faith requires that the party seeking insurance discloses all relevant personal information. For example, if you are applying for life insurance, you are required to disclose any previous health problems you may have had. Likewise, the insurance agent selling you the coverage must disclose the critical information you need to know about your contract and its terms

The Insurance Company’s Duty of Good Faith to You

At its core, an insurance company has the duty of performing its contractual obligations to you in good faith and not trying to take advantage of vulnerabilities created by the sequential character of contract performance – you are paying your premium now and sometime later the insurance company may have to pay a claim. Every contract, and this includes insurance policies, imposes upon each party a duty of good faith and fair dealing. Good faith is implied in every contract. Although this duty of good faith and fair dealing applies to both parties to a contract, a majority of courts, when looking at an insurance contract, have viewed its requirements as a one-way street in your favor because you need the protection from the insurance company, not the other way around.
The first standard is essentially one of reasonableness. When the insurance company unreasonably withholds or delays payment of your claim, the action may be determined to be in bad faith. Following this approach, a single objective inquiry is made to determine whether a reasonable insurance company, under the circumstances, would have engaged either in the claims practice that led to the decision not to pay your claim or in an unwarranted delay in the payment of your claim.
The second standard provides a stricter standard of liability for bad faith. Under this standard it must be shown that (1) there was no reasonable basis for the insurance company’s denial of benefits under the policy and (2) the insurance company had knowledge of, or a reckless disregard, for the lack of a reasonable basis for denying your claim. This alternative standard requires a determination of the insurance company’s intent, but this intent can be inferred from the actions of the insurance company.
As practiced by many insurance companies, the act of post claim underwriting has the potential to meet either standard of bad faith. When an insurance company, instead of paying your claim, engages in the practice, after the claim is submitted, of looking for any misrepresentation in your application that would allow it to rescind the policy, it may have crossed the line. It may be acting in bad faith. Rather than processing the claim pursuant to the coverage provisions in your policy, the company tries to avoid payment of benefits by undertaking a determination of your eligibility that should have been completed before the policy was issued. The facts in each case will be the deciding factor. Completing your underwriting BEFORE your policy is issued is an act of good faith. Doing it AFTER a claim is filed raises serious questions of bad faith.
Post claim underwriting guarantees that payment of your claim will be delayed, possibly in an unreasonable manner, because of the extra time required to underwrite your policy above and beyond the normal claims processing time. So, even if the company ultimately decides it cannot find enough information to justify rescission of your policy, its after-the-fact efforts will lead to a lengthy delay in the handling of your claim.
If you are subject to an unusually lengthy claim process or your policy has been cancelled, you would be wise to seek out an attorney.

Law Commission proposals
The Law Commission published its draft bill for the reform of pre-contractual disclosure on the 15th December 2009. The Bill only applies to consumer insurance contracts and concerns only what a consumer must tell an insurer before a contract is formed. The central tenet is the abolishment of the previous duty to disclose based on what the prudent insurer would regard to be material in favor of an obligation on the assured ‘to take reasonable care not to make a misrepresentation’.[xxxvii] Where an insurer has been mislead by a misrepresentation, the remedy open to them will depend on the nature of the misrepresentation and the state of the consumer’s mind. The draft Bill identifies three degrees of culpability:
(i) An ‘honest and reasonable’ misrepresentation: the insurer must pay the claim. The applicant is expected to exercise the standard of care of a reasonable consumer with particular attention paid to the type of policy and the clarity of the question.
(ii) A ‘careless’ misrepresentation: the insurer may take advantage of a compensatory remedy based on what the insurer would have done had the consumer taken care to answer the question accurately and completely.
(iii) A ‘deliberate or reckless’ misrepresentation: the insurer may take advantage of the remedy of avoidance. The insurer would also be entitled to retain the premium, unless there was a good reason why the premium should be returned.
The draft Bill goes on to define a ‘deliberate or reckless’ misrepresentation as one where, on the balance of probabilities, the consumer: (i) knew that the statement was untrue or misleading, or did not care whether it was or not; and (ii) knew that the matter was relevant to the insurer, or did not care whether it was or not.
In light of these proposals the debate must move on to question whether there remains any residual role for the duty of good faith and whether the Law Commission reforms do in fact go far enough.
Any residual role for the duty of good faith (in the context of any kind of reform)?
If the Law Commission proposals were to be incorporated into law, the primary function of the duty of good faith (as the legal basis from which the duty to disclose is derived) would no longer exist. For Butcher, ‘potential arguments in favour of the retention of the doctrine (of good faith) ... are unpersuasive’. He goes on to highlight the three primary reasons for retention. The first concerns the operation of the doctrine in the post-contractual period. The scope of the operation of the doctrine was established in The Aegeon where it was held that the duty operated at a lower level in the post-contractual period. The duty was not one of material disclosure but a duty not to make representations. In the context of this lesser duty, the relevance of the duty in this regard would seem to be diminished. This is compounded by the availability of the usage of contractual provisions to account for continuing duties.
The second argument identified by Butcher suggests that the duty should be retained ‘to cater for the unexpected’. This seems to be a rather thread-bare justification. In respect of the pre-contractual period the limitations of the duty are well documented and the Law Commission proposals fully take account of them. Similarly in situations which might be regarded as unusual, insurers can take steps to protect themselves through asking specific questions.
The final argument for retaining the duty of good faith is that it allows for inappropriate behavior on the part of the insurer to be accounted for. On a brief inspection, the duty of good faith seems attractively even handed, however, the duty fails to account for the fact that in very few circumstances will the assured wish to avoid the policy. In circumstances where the insurer has acted in bad faith, the assured will want damages not avoidance. However in Bank of Nova Scotia v Hellenic Mutual War risk Association (Burmuda) Ltd (The God Luck) and Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd, the Court of Appeal held that English Law does not provide a remedy in damages. For Butcher, ‘the superficial even-handedness of the doctrine is an illusion’.
Legh-Jones et al. provide a reasoned discussion concerning the positive and negative aspects of the duty of good faith. Whilst finding manifold faults they conclude that it is not completely otiose. They state that the generally accepted justification for ‘the doctrine is that the assured expects the insurer to run the risk of becoming liable to pay substantial sums in the event of loss in return for a premium which is small in comparison’. However, they go on to note that today the position of the assured has moved away from that occupied when Lord Mansfield set out the duty in Carter v Boehm. Instead of absolutely relying on the assured’s comments (as was necessary in the eighteenth century), the insurer will provide a document with a list of questions which expert staff and experience have taught him are of particular relevance. They conclude by saying that ‘scientific data and actuarial statistics are available to assist insurers with evaluating risk’. In other words, the circumstances which existed at its inception bear little resemblance to those today.
However, they go on to highlight that ‘it is wrong to assume that the insurer’s knowledge is always either adequate or easily obtainable’. This is because interim cover is often obtainable from minimal amounts of data and there are always extrinsic factors which a proposal form will be unable to account for. Further to this, in certain industries, such as marine and reinsurance, business is conducted without the use of proposal forms. The natural equilibrium which exists in the premium markets may also be affected should the duty to disclose be removed. Premiums are kept competitive by the imposition of the duty, ‘allowing the insurer to process acceptance of risks more cheaply and expeditiously than if he had to find out everything about the risk’.