Around Our Town...Legally Speaking
When an Insurance Company Breaches Its Contract
09/01/2005 - Insurance is basically a contract between you and your insurance company. Insurance companies are your friend, so long as all you to is pay your premiums faithfully.
If you file just one or two claims for losses under your contract of insurance, so long as they are small, most insurance companies will remain your friend, although some will raise rates or cancel your contract immediately.
Sometimes an insurance company will attempt to refuse coverage on the ground the policy does not cover the claim. Denial can be a breach of your insurance contract, which brings into play several legal issues.
Rules of Interpretation
Under insurance law any ambiguity or uncertainty in the wording of a policy is resolved in favor of the policyholder and against the insurer.
Clear and explicit policy language will be enforced according to its plain meaning. A plain meaning is one which an ordinary person would attach to such words, not the meaning which might be utilized by an insurance company executive or an attorney.
Because they often result in denying coverage, exclusions and limitations in a policy, must be in clear and unmistakable language. If unclear, the clause will be interpreted in favor of the insured.
If a policyholder's lack of knowledge could result in the loss of benefits under a policy, the insurer is required to make sure the insured understands. Unfortunately, an insurance agent is not obligated to advise a policyholder on the adequacy of the limits of coverage selected by the policyholder.
Insurance contracts are basically one-sided. Policyholders must accept the terms of the policy or the insurance company will not provide coverage. The terms are non-negotiable.
So, if insurance policy provisions are decidedly in favor of the company, courts find that the contract term was "unconscionable" at the time it was made. If so, the court may refuse to enforce that provision. The basic question is, are the clauses involved so one-sided as to be unconscionable under the circumstances existing at the time the contract was made.
It is not actionable for agent to "puff" or exclaim the virtue of a policy. However, if an agent assumes additional duties, has a special relationship of trust with the buyer, or claims special expertise, then a special duty arises. If an insurance agent assures there is proper coverage which prove to be false, the agent will be liable for negligent misrepresentation.
Duty to Deal Fairly
Every insurance contract contains an unwritten term referred to as the "promise of good faith and fair dealing." This promise is implied by law and requires insurance companies to always act fairly in handling claims.
Insurers must meet the reasonable expectations of the policyholder. An insurer is required to give as much consideration to the financial interests of its insureds as it does to its own.
In bad faith cases a jury is asked whether the carrier acted reasonably in the circumstances. Benefit denials, payment delays and payments for less than due are examples of bad faith. Insurance companies are obligated to thoroughly and promptly investigate all claims fairly and reasonably.
In a bad faith action an insurer's business practices are admissible to show motive, opportunity, intent, plan, knowledge or absence of mistake. It is not necessary to show the intent to cause harm. The policyholder must only show the insurer failed to honor the policy and lacked cause to refuse payment under the contract.
Damages that can be Collected
If a policyholder shows an insurer breached the covenant of good faith and fair dealing, the insured can recover all damages caused by the breach. This includes all consequential losses, loss of use of the insurance proceeds, general damages, attorneys' fees and in cases of outrageous behavior, punitive damages.