CHAPTER 16 IS IT TIME TO END THE TORT OF BAD FAITH AND ITS RIGHT TO SEEK PUNITIVE DAMAGES?

• Jurisdiction: United States
• Publication year: 2018

United States law was first organized based on English common law. If a contract was breached only contract damages could be recovered. Tort damages were limited to tortious conduct and the two categories of damages were considered mutually exclusive.

The primary purpose of damages for breach of a contract is to protect the promisee's expectation interest in the promisor's performance. Damages should put the plaintiff in as good a position as if the defendant had fully performed as required by the contract.

Insurance, like all parts of modern society, is subject to the deprivations of the law of unintended consequences. The law can be defined as:

the understanding that actions of people and especially of government or the courts always have effects that are unanticipated or unintended. Insurance is controlled by the courts, through appellate decisions, and by governmental agencies through statute and regulation. Compliance with the appellate decisions, statutes and regulations different in the various states is exceedingly difficult and expensive.

In the United States alone, people pay to insurers more than $561 billion in property and casualty insurance premiums and insurers pay out in claims as much or more than they take in. Profit margins are small because competition is fierce and a year's profits can be lost to a single firestorm, earthquake, hurricane, or flood.

An insurer, whether an individual or a corporate entity, takes contributions (premiums) from many and holds the money to pay those few who lose their property from some calamity, like fire. The agreement, a written contract to pay indemnity to another in case a certain problem, calamity, or damage occurs by accident, is called insurance.

In a modern industrial society, almost everyone is involved in or with the business of insurance. Insurers provide protection against the risks of:

• Becoming ill,

• Losing a car in an accident,

• Losing business due to fire,

• Losing a home and its contents,

• Becoming disabled,

• Losing one's life,

• Losing a home due to flood or earthquake, or

• Being sued for accidentally causing injury to another.

The persons insured are dependent on their insurer to take the risk the insureds are not willing to take alone.

Insurance contracts can be simple or exceedingly complex, depending upon the risks taken by the insurer. Regardless, insurance is only a contract whose terms are agreed to by the parties to the contract.

Over the last few centuries almost every word and phrase used in insurance contracts has been interpreted and applied by one court or another. Ambiguity in contract language became certain. However, the average person saw the insurance contract as incomprehensible and impossible to understand. Ostensibly to protect the public, insurance regulators decided to require that insurers write their policies in easy to read language.

The attempts by the regulators and courts to control insurers and protect consumers were made with the best of intentions. The judges and regulators found it necessary to protect the innocent against what they perceived to be the rich and powerful insurers.

In 1958, the California Supreme Court created a tort new to U.S. jurisprudence when it decided Comunale v. Traders & General Ins. Co., 50 Cal. 2d 654, 328 P.2d 198 (1958), reproduced in Chapter 2. A tort is a civil wrong from which one person can receive damages from another for multiple injuries. The tort was called the tort of bad faith and 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 and most of the states...