V. The Duty of Good Faith Continues Through Insurance Coverage Litigation

V. The Duty of Good Faith Continues Through Insurance Coverage Litigation

Q: Does the [insurance company's] duty of good faith and fair dealing continue after a claim is denied?

A: It always continues from the carrier's perspective.

Q: Does it ever end?

A: Never ends.

The above testimony was given in an Oklahoma case by the general counsel of the Travelers Insurance Company, one of the largest insurance conglomerates in the country. The testimony accurately states insurance industry custom and practice. Articles written in support of the insurance industry acknowledge that the duty of good faith and fair dealing extends through litigation.

One insurance company adopted the Restatement (Second) of Contracts:

The obligation of good faith and fair dealing extends to the assertion, settlement and litigation of contract claims and defenses. . . The obligation is violated by dishonest conduct such as conjuring up a pretended dispute, asserting an interpretation contrary to one's own understanding, or falsification of facts.

Another insurance company has acknowledged that:

[I]f the controversy is based on a frivolous contention as to noncoverage, the insurer in bringing the action is breaching its duties to its insured under the policy, . . . subject[ing] the insurer to liability."

Like the insurance companies, the majority of courts to consider the issue have held that the duty of good faith between an insurance company and its policyholder continues through litigation over insurance coverage: To do otherwise renders the duty too easily avoidable:

[I]t is not unusual for an insurance company to provide policy benefits, such as the defense of a litigation, while itself instituting suit to determine whether and to what extent it must provide those benefits. It could not reasonably be argued under such circumstances either that the insurer no longer owes any contractual duties to the insured, or that it need not perform those duties fairly and in good faith.

In jurisdictions which recognize that the duty of good faith and fair dealing continues into litigation, policyholders bringing a bad faith claim are often allowed to review insurance company litigation practices, including settlement offers and attorney behavior.

Simply put, "that the contractual duties of the parties to an insurance contract do not `terminate with commencement of litigation'. . . is not particularly controversial."

BAD FAITH IN INSURANCE COVERAGE DISPUTES AND THE PUBLIC NATURE OF INSURANCE -- UNDERSTANDING THE RECOVERY TOOLS AVAILABLE TO POLICYHOLDERS

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last modified Dec 29, 2003 / 12:53 AM, GMT