NAMIC’s purpose in disseminating this paper on unfair claims practices complaints lodged against insurance companies is to reiterate that the, at times, antiquated concept still thrives in many U.S. jurisdictions and its employment continues to grow in others. General acceptance and complacency concerning these allegations should not stifle a continuing debate as to the efficacy of such causes of action, which are in many cases redundant to state insurance regulation.

It is not the intention of NAMIC to call into question legitimate claimants who are routinely and efficiently paid by insurers on a timely basis. The paper merely seeks to point out that as “bad-faith” claims have developed over the last century, some of the rationale for their existence is no longer operative. Put simply, bad faith is a disruptor to insurance marketplaces where there already exist adequate guardrails from regulators, reputational risk, competitive risk, and other market forces. It is our contention that the paradigm of court regulation of insurers should be revisited and abated, or at least reexamined for the redundancies and excessive issues that exist.

This paper contains an elementary overview of many of the issues facing insurers in the current climate, which will suggest there is a shrinking rational justification for widespread utilization of the bad-faith concept. The discussion that follows will cover the following topics:

  • The evolution of statutory claims from common law notions
  • First- and third-party differentials
  • The pitfalls associated with such schemes
  • The duplication of state-based regulation and court regulation
  • Market destabilization effects in state legislative activity
  • Sample judicial verdicts for context
  • Causes and effects to the marketplace
  • The road forward

Further, the intent of this paper is not to suggest a one-size-fits-all mentality – there are no simple solutions to these problems. For public policymakers who consider reintroduction or expansion of the bad-faith environment, there should be a cost/benefit analysis conducted to determine whether intended goals will be achieved and at what cost to insurance markets and policyholders. We must proceed carefully in considering the relative utility of bad-faith claims so that we do not crash upon the rocks of the law of unintended consequences. It is likely many of the stakeholders in this debate believe they are correcting perceived misdeeds and therefore righting a wrong. Unfortunately, in many instances, there is an exacerbation of a non-existent problem that only adversely affects the insurance consuming public by allowing a costly second lawsuit or proverbial “bite at the apple.” Inordinate and unwarranted costs and expenses to insurance operations inevitably must be considered. This ultimately concerns all who participate in insurance marketplaces and, in particular, insurance consumers.

Resource Details

Publish Date

December 12, 2019

Topics

  • Legal System Abuse