The Law of Unintended Consequences
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The law of unintended consequences is not statutory. No state or federal government has enacted it into law. No executive has signed the law. It is, rather, a law of the nature of people. It is an adage or idiomatic warning that an intervention in a complex system always creates unanticipated and often undesirable outcomes.
Science and general observation allows the statement that actions of people, especially of governments, will always have effects that are unanticipated or unintended. Economists and other social scientists have heeded its power for centuries. Regardless, for just as long, politicians, insurers and popular opinion have largely ignored it to their detriment.
INSURANCE AS A NECESSITY
Neither the courts nor the governmental agencies seem to be aware that in a modern, capitalistic society, insurance is a necessity. No prudent person would take the risk of starting a business, buying a home, or driving a car without insurance. The risk of losing everything would be too great. By using insurance to spread the risk, taking the risk to start a business, buy a home, or drive a car becomes possible.
Bad Faith Causes Bad Behavior
In the 1950s, the California Supreme Court created a tort new to U.S. jurisprudence: the tort of bad faith.
A tort is a civil wrong from which one person can receive damages from another for multiple injuries. The tort of bad faith was created because an insurer failed to treat an insured fairly, and the court felt that the traditional contract damages were insufficient to properly compensate the insured. The court allowed the insured to receive, in addition to the contract damages that the insured was entitled to receive under the contract had the insurer treated the insured fairly, damages for emotional distress and punitive damages to punish the insurer for its wrongful acts. Insureds, lawyers for insureds, regulators, and courts across the United States cheered the action of the California Supreme Court, for providing a fair remedy to abused insureds. Most of the states adopted the tort created by the California Supreme Court either by statute or court decision.
The law of unintended consequences struck the insurance industry and the insurance buying public. Rather than deter wrongful actions the law of unintended consequences resulted in punishing the honest and correct insurers, honoring the insurers who acted in bad faith with profit, and allowed many frauds to succeed.