Insurer’s Duty of Good Faith and Fair Dealing in Handling Claims of Insureds and Third Parties
If an insured does not think that his insurer handled his claim properly, he may have some recourse. Every contract contains an implied covenant of good faith and fair dealing that neither party will hinder the right of the other to receive the benefits of the contract. The duty imposed by this covenant applies to insurers and insureds. Some courts go so far as to hold the insurer to be a fiduciary to the insured.
Duties of insurer
An insurer is required to exercise good faith and fair dealing in handling its own insured’s claims properly, defending the insured in a third-party action, and settling a third-party action when necessary.
Who owes the duty
Generally, the duty of good faith and fair dealing is imposed only on a party to a contract. Thus, it mainly applies to the insurer and the insured. However, the duty may also apply to a separate management organization that handles an insurer’s administrative functions, such as claims adjusting, even though it is not a party to the insurance contract.
Who receives the benefit of the duty
Determining who is entitled to the benefit of the duty does not depend on whether a person or entity is a party to the insurance contract. Therefore, those who may receive the benefit include the insurer, the named insureds, and unnamed insureds. For example, automobile insurance policies often provide that family members of the named insured or drivers using the insured vehicle with the permission of the named insured are covered under the policy. All such persons are owed the duty of good faith and fair dealing.
Breach of duty
A breach of the duty of good faith and fair dealing is considered bad faith. An insured must show that the insurer consciously committed a wrong because of a dishonest purpose, moral obliquity, or ill will. Bad faith is not proven by showing that the insurer merely exercised bad judgment or acted negligently.
An insured may bring an action against an insurer if it breaches the duty of good faith and fair dealing in handling the following types of actions:
- first-party cases, involving the insurer’s conduct in handling claims by its insured; and
- third-party cases, involving the insurer’s handling of claims filed by third parties against its insured.
To determine if the insurer breached its duty to properly handle its own insured’s claim, courts will consider whether the insurer acted reasonably.
To determine if the insurer breached its duty to settle a third party’s claim against the insured, most courts consider whether the insurer acted in bad faith and failed to sufficiently consider the insured’s interests. Other courts determine whether the insurer acted negligently and failed to exercise a standard of care at least equal to what a reasonable person would exercise in managing his own affairs.
To determine if the insurer breached its duty to defend the insured against a third party’s claim, courts will look to the language of the policy and the language of the complaint to ascertain whether the facts alleged fall within the scope of coverage of the policy.
Depending on the jurisdiction, a breach of the duty of good faith and fair dealing may be a tort action, a contract action, or both. Characterizing the action as falling under either tort or contract may affect the remedies that are available for the insured, the statute of limitations that is applicable to the action, and the insurer’s defenses to the action.
Because state laws regarding bad faith claims differ greatly, an insured should contact an attorney about how to pursue such a claim.
Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.