XI. Conclusion

XI. Conclusion

The gravity of insurance company misconduct seems to be lost on some insurance companies. A group of pro-insurance industry associations recently proclaimed:

While the number of times insurers have actually been held liable for punitive damages is quite limited, thousands of punitive damage claims are brought against insurers, imposing an enormous burden on the insurers and their policyholders and the court system, until such claims are disposed of in pre-trial or trial proceedings or on appeal.

The statement ignores the outrageous insurance company bad faith which has been proven, time and again, in courts across the country. Such conduct imposes enormous burdens on policyholders. One court scathingly summarized the recent bad faith misconduct of one insurance company, perhaps capturing the essence of bad faith:

[T]he [insurance company] really didn't look into this very deeply. I get the distinct impression in reading these papers and the papers are voluminous, [the insurance company] was looking for a way to deny coverage in this particular case because of the large claims in these environmental cases because it appears as though they sent this letter out with total reckless disregard of their internal memos and what they knew to be the facts.

The court held that the insurance company's denial of coverage was contrary to its insurance policies, contrary to the understanding of the insurance company employees, contrary to memoranda that were submitted, and contrary to the investigation that was conducted by the insurance company. But it denied coverage anyway.

Bad faith claims and punitive damages are necessary to deter bad faith by insurance companies but should not obscure the compensatory damages. Insurance company grumblings and assaults over the legitimacy of bad faith and punitive damage claims by policyholders are undermined by the frequency of insurance company refusals to honor claims for insurance coverage from policyholders made in good faith.

The recent Supreme Court decision in BMW clarifies the situations in which punitive damages are appropriate. In traditional contract situations, where the harm caused by the breach is mainly an economic harm, punitive damages have been restricted. But BMW was not meant to restrict all large punitive awards. Where the defendant's conduct is deemed reprehensible, punitive damages remain an appropriate remedy. For bad faith insurance claims, where insurance companies dispute valid claims in order to earn investment income, punitive awards are particularly suitable.

Trickery and deceit remain more reprehensible than negligence.

BAD FAITH IN INSURANCE COVERAGE DISPUTES AND THE PUBLIC NATURE OF INSURANCE -- UNDERSTANDING THE RECOVERY TOOLS AVAILABLE TO POLICYHOLDERS

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last modified Dec 29, 2003 / 12:53 AM, GMT