Imagine you’re an engine leasing company. You lease an engine to an operator and require that it be insured against loss on an agreed value basis1. You are sole loss payee and a contract party on the lessee’s policy. The engine is financed so the agreed value is set at or above the outstanding loan amount. Because of where the engine is in its life cycle, that value is higher than its current market value. Lo and behold, the engine ingests a bird on take-off and is declared a total loss. You request payment of the agreed value from the operator’s insurer. They decline. Instead, they offer you the value of a replacement engine in like condition. Because the market value of the lost engine was far less than the agreed value, they say, they should only have to pay for a replacement. You demand payment of the agreed value — after all, why should you accept less than the agree value? Doesn’t the insurer know the difference between insured and agreed values? Shouldn’t they??
In addition to whatever rights may exist under common law, the various states of the U.S. have passed “bad faith” statutes specifically governing the conduct of insurers in the administration, adjustment and settlement of insured claims2. These laws require that insurers act in good faith in the handling and settlement of claims and prohibit insurers from acting solely in their own self-interest. They require insurers to act promptly, respond quickly and settle claims fairly. While these statutes among the states are not uniform in language, they are uniform in purpose with the goal of ensuring that insurers don’t unreasonably delay settlements and insureds receive the full benefit of their bargain under their insurance contracts.
Refusing to settle a claim is not, in itself, bad faith. An insurer could contest liability or coverage. The insured may be acting in bad faith by attempting to “set up” the insurer for a bad faith claim (by setting unreasonable deadlines or excessive demands). The existence of bad faith must therefore be determined on a case by case basis. An insurer will be found to be acting in bad faith when (1) not attempting in good faith to settle claims when, under all the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for her or his interests; or (2) failing to promptly settle claims, when the obligation to settle a claim has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage3.
Following the engine leasing example above, the insured has a strong argument that the insurer was acting in bad faith. The insured, the lessor, had an agreed value policy with the insurer for which a premium was paid. The insurer was bound by contract to pay this value on a total loss. As liability was not questioned, the only issue was the payment amount. The insurer was trying to bind the insured to a replacement value settlement, notwithstanding an agreed value payment obligation. It appears that the insurer was simply trying to minimize its exposure in the hope the insured didn’t know better. Bad faith can also exist where an insurer delays or is careless in the investigation and adjustment of a claim. A good illustration is when an aircraft is damaged and the insurer fails or refuses to account for all elements of the repair that is called for by the manufacturer, the insured’s maintenance program and/or good industry practice.
Recoverable damages for bad faith are provided by statute. The State of Georgia, for example, permits the recovery of the greater of one-half the total liability or $5,000 plus attorneys fees. The State of Florida contemplates the potential award of punitive damages as well as cumulative damages permitted under other statutes or common law4. There is no prohibition on damages exceeding policy coverage limits.
Outside the U.S., an insurer’s liability for bad faith, if any, will be determined by the governing law of the policy and possibly also where the bad faith activities are alleged to have occurred or where the insured is located. Within the U.S., however, there is ample common law, case law and statutory support compelling both insurers and their insureds to act cooperatively.
The “golden rule”5 should not apply to insurance contracts. With the balance of power preserved on an equal footing, insureds can have faith that their legitimate claims will be handled professionally, promptly and fairly. And yes, the engine leasing example really happened.
An “agreed value” is a value for an item of equipment agreed by contract with the insurers. By contrast, an “insured value” is a stipulated value for an item of equipment, but which is not fixed and permits the insurer to pay less depending on market value of like equipment at the time of loss. ↩
e.g. O.C.G.A. §33-4-6; 33-6-34 (Unfair Claims Settlement Practices Act); Fla. Stat. §624.155; ↩
Fla. Stat. §624.155(1)(b)1 and 3 ↩
Fla. Stat. §624.155(5) and (8) ↩
Otherwise stated as, “he/she who has the gold makes the rules…” ↩