The Duty of the Insured
The purpose of the implied covenant of good faith and fair dealing is to protect the reasonable expectations of both parties to the contract. The duty to act in good faith is a mutual duty imposed on both the insured and the insurer. However, regardless of the clear statements of the law that the duty is mutual, in practice it requires the insured to deal only with a modicum of fairness toward the insurer while the insurer must deal with its insured with the utmost good faith.
In Washington, a statute provides:
The business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception, and practice honesty and equity in all insurance matters. Upon the insurer, the insured, their providers, and their representatives rests the duty of preserving inviolate the integrity of insurance. [RCW 48.01.030
Even if an insured is found to have treated his insurer maliciously, and with bad faith, the insurer can only recover actual contract damages and may not, in California, recover punitive damages from its insured. The courts will allow the insurer to offset the bad faith damages it owes to an insured by a percentage the jury attributes to the bad faith of the insured.
This statement of the law may seem unreasonable: if an insured is entitled to tort damages for the bad faith conduct of the insurer, the law should fairly and equitably allow the insurer to recover tort damages as a result of the bad faith conduct of the insured. At present this is not the case.
Examples of bad faith conduct by the insured include:
- presentation of a fraudulent claim;
- misrepresentation of material facts, which if known by the insurer, would have caused the insurer to refuse the insurance; and
- willful refusal to attend trial.
Since the insurer’s obligation is “absolute and independent,” such bad faith conduct would not bar the insured’s action. It could result in a comparative bad faith analysis by the trier of fact and the reduction of any award the insured might have otherwise received. It would not, however, result in a reduction of punitive damages based upon an insurer’s malicious, oppressive, or fraudulent behavior.
An insurer argued to the Sixth Circuit that the Court should recognize a cause of action of reverse bad faith in the insurance context and award the insurer damages associated with Plaintiff’s fraudulent claim. Defendants maintained that there is a strong public policy against allowing insureds to profit from their own wrongdoing while simultaneously subjecting insurers to inordinate increased costs for investigation, defense, and litigation.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts