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Thursday, May 7, 2015

‘Uberrima fidei ’ - contract of Utmost Goodfaith and .... ' bad faith ' !!!

Since ages, we have read and have been teaching ‘Principles of Insurance’.  Insurance is a Contract – and fundamentally, it is a contract of good faith, in fact – “Utmost Goodfaith”.  Known by the Latin phrase ‘Uberrima fidei ’, a legal doctrine that  governs insurance contracts. This means that all parties to an insurance contract must deal in good faith,  declaring letting know  of all material facts in the insurance proposal. This contrasts with the legal doctrine caveat emptor (let the buyer beware).

Underwriting is all about analysing the risk proposed, weighing it carefully interlacing past experience, probability and empirical data – to decide on whether it is a risk that is insurable, if so, on what terms and if yes, at which rate.   The proposer must reveal the exact nature and potential of the risks that he transfers to the insurer, while  the insurer must make sure that the potential contract fits the needs of, and benefits, the insured. So there should be ‘consensus ad idem’.  In Insurance contract, a  higher duty is expected from parties that  of  disclosure of all material facts so that the contract may accurately reflect the actual risk being undertaken.   Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.

If something is ‘Good’- there has to be something ‘Bad’ too !! – ever heard of ‘Bad faith’  as a term of art in diverse areas involving feminism,  racial supremacy,  political negotiation, existentialism,  law  ~ and .... Insurance !! 

Bad faith (Latin: mala fides) is double mindedness or double heartedness in duplicity, fraud, or deception.   It may involve intentional deceit of others, or self-deception. In the 1913 Webster’s Dictionary, bad faith was equated with being double hearted, "of two hearts", or "a sustained form of deception which consists in entertaining or pretending to entertain one set of feelings, and acting as if influenced by another".  The concept is similar to perfidy, or being "without faith", in which deception is achieved when one side in a conflict promises to act in good faith (e.g. by raising a flag of surrender) with the intention of breaking that promise once the enemy has exposed himself.   Some examples of bad faith include: a company representative who negotiates with union workers while having no intent of compromising;  a prosecutor who argues a legal position that he knows to be false;  an insurer who uses language and reasoning which are deliberately misleading in order to deny a claim.

If you have not missed out the last line – yes,  Insurer deliberately using  misleading language and reasoning in order to repudiate a claim is ‘bad faith’.  Not all losses are paid by Insurer.  In general circumstances, those involved would try to argue stating that  it is a ‘genuine claim’, and hence must be paid.  There could be fraudulent claims, exaggerated losses and losses – occurrence of which is not denied.  Going by the Policy of Insurance, its insuring terms, specifically the  ‘perils insured’, exceptions, conditions of coverage – even a genuine claim might fall outside the purview of the policy and hence get repudiated.  When a claim is repudiated, extra care needs to be taken in appropriately conveying the reasons for such decision. 

As it does not happen in India,  many of us are not aware that such repudiation could lead to a ‘tort claim’ by the claimant against the Insurer,  questioning the decision or wrong logic leading to such decision.  Insurance bad faith is a legal term of art unique to the law of the United States (but with parallels elsewhere, particularly Canada) that describes a tort claim that an insured person may have against an insurance company for its bad acts. Under the law of most jurisdictions in the United States, Insurance companies owe a duty of good faith and fair dealing to the persons they insure. This duty is often referred to as the "implied covenant of good faith and fair dealing" which automatically exists by operation of law in every insurance contract.

 If an insurance company violates that covenant, the insured person (or "policyholder") may sue the company on a tort claim in addition to a standard breach of contract claim. The contract-tort distinction is significant because as a matter of public policy, punitive or exemplary damages are unavailable for contract claims, but are available for tort claims. In addition, consequential damages for breach of contract are traditionally subject to certain constraints not applicable to tort actions.   The result is that a plaintiff in an insurance bad faith case may be able to recover an amount larger than the original face value of the policy, if the insurance company's conduct was particularly egregious.

The term “bad faith” might imply that the claim was denied in order to advance the insurance company’s interests at the expense of the driver’s interests, that is not always a requirement in successful bad faith cases.  However, an Insurer denying a claim simply due to a mistake or error in assessment, but has a reasonable basis for having made the mistake, would  not qualify as bad faith. In some states, the policy owner must prove that the insurance company failed to make a thorough investigation before denying the claim. In other states, the policy owner must show more, i.e. that the insurance company missed or ignored obvious facts and information that would have proven the claim to be valid.

The exact nature of a bad faith lawsuit varies from state to state of United States of America, but a common theme  is that the facts and circumstances at the time of the claim denial matter most. If the policy owner can show there are good reasons to guess the claim investigation was sloppy for a reason, the bad faith lawsuit is more likely to succeed !

The foregoing at best could just be an introduction of the concept of ‘bad faith’as against the ‘utmost good faith’[Uberrima fidei ] that we have all along been discussing about in all Insurance forums.  Will try to write something more on this ‘bad faith’.......  meantime, await your views !

With regards – S. Sampathkumar

7th May 2015.

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