“Insurance policies are a unique product that requires the policyholder perform first—by paying insurance premiums—while the insurance company’s performance—the payment of the claim amount—is delayed until the insurance company determines to do so.”

Abstract: Policyholder counsel see claims that an insurer violated its duty of good faith and fair dealing is an essential tool in leveling the playing field in policyholder–insurer disputes, especially in high-stakes litigation. Insurance companies write the policies, employ lobbyists, exchange information with each other, and, of course, have more experience handling claims. So, the author writes, bad faith allegations bring more balance to the relationship and provide a disincentive to “the profitable breach of the insurance promise.” He discusses above-policy limits risks for insurers, as well as attorneys’ fees, interest on unpaid claims, punitive damages, and more.

Introduction: Bad faith insurance litigation presents high-stakes risks for insurance companies in the unbalanced battle between insurance companies and their policyholders. The asymmetric nature of the insurance claims process—insurance companies draft the insurance policies, lobby legislatures as an industry repeat litigant, exchange superior information among themselves, and have more experience with claims than any policyholder—means that policyholders need a counterbalance. Insurance company liability for bad faith and related above-policy limits liabilities can act as that counterbalance. Insurance company bad faith and related doctrines prove useful because of the claims-handling calculus used to attempt to avoid coverage for a claim.

Without more an insurance company denying a claim faces what it did at the outset—the amount of the covered claim. Insurance companies thus engage in the profitable breach of the insurance promise. Most purchasers of the insurance product would think of their insurance company as a fiduciary or trustee from whom one can expect scrupulous candor. At claims time many policyholders do not receive what they expect. Still, hornbook contract law tells policyholders that every insurance policy contains within it a duty of good faith and fair dealing enforcing that duty of good faith and fair dealing helps level the insurance claim playing field . . . .