thechristchurchfiasco

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‘Utmost good faith’ (Uberrimae Fidei)….Yeah Right!

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How many of you out there are wondering what ‘good faith’ is? I certainly am. In New Zealand law, all contracts are required to be executed within this doctrine we call ‘good faith’.

Courtesy of Micah Richardson, “feels-so-good-to-be-back-home”

However insurance contracts are held to an even higher standard. The law is said to require utmost good faith between the parties i.e. because within the nature of an insurance agreement, each party needs – and is legally entitled – to rely upon the representations and declarations of the other. So the insurer is required to observe and honour the contract conditions and the customer is required to disclose to the insurer all material facts that could affect the risk. Each party must have a reasonable expectation that the other party is not attempting to defraud, mislead, or conceal information and is indeed conducting themselves in ‘good faith’. But what is good faith? On a practical level the doctrine is not easily defined and provides no clear guidance in New Zealand legal precedent as to what is not good faith. What can a policyholder expect of their insurer in relation to their contractual obligations toward them. Good faith is subject to a huge degree of personal interpretation which may explain why the New Zealand judiciary has a tendency to steer away from using the concept as a cause of action, because of its difficulty to define, preferring instead to find other more tangible causes of action upon which to base their judgments. Good faith has been famously defined by His honour Judge Summers as the absence of bad faith conduct ….. which presumably refers to cooperation, honesty and reasonableness, having regard to the reasonable expectations of the parties. Case law in New Zealand relating to the doctrine of good faith is very sparse. Yet the Christchurch earthquakes and subsequent dealings with private insurers bring into stark relief the need for the appellate courts in this country to address the issue of what exactly good faith is – particularly in relation to insurance contracts which are still not honoured more than two years after the event.

Insurance policyholders need to be able to have confidence in the knowledge that the contracts which they have entered into – in good faith – have some tangible meaning and substance behind them. Herein lies the problem but, bear with me, there is no apparent definition of good faith that can prescribe the necessary conduct required in each particular case to satisfy the good faith standard.

A doctrine with such ambiguity is not of much use to the desperate policyholder. Or even the Courts. A more tangible concept is called for. Under usual contractual relations the wording of the contract would provide enough basis upon which to determine the requisite conduct to discharge good faith obligations. The more complete and explicit the contract, in terms of what to expect from each party, the less likely issues are to arise.

However, the insurance contract is a different kind of beast- it contains very little ‘real’ information about what is it to be expected from the parties, certainly in the way of particular actions e.g. performing within reasonable timeframes and not delaying unduly, assessing the value of remediation work needed honestly and fairly and transparency in all dealings (without the need to access the Privacy Commissioner to obtain information about what is really going on with your claim).  There is an undeniable lack of clarity around what does or does not constitute ‘good faith’.

In the U.S. on the other hand the ‘Bad faith’ doctrine seems to provide more clarity. It describes a tort (i.e. negligence) claim that an insured person may have against an insurance company for its bad acts. New Zealand has no such notion. Each of the States has variations on this theme with each state having statutes or regulations which expressly govern the handling of claims under insurance policies. E.g. misrepresenting the coverage provisions of the policy; failing to undertake prompt investigation of a claim under the policy; and failing to settle claims where liability has become reasonably clear; invoking policy exclusions whose application is not fairly debatable either on the facts or in law; unjustified refusing or delaying the payment of certain elements of the loss which should have been acknowledged; invoking ‘breaches’, such as alleging arson or misrepresentation to void coverage on flimsy evidence or inadequate investigation;  unreasonable refusal to settle a case within liability policy limits, resulting in excess-of-limits verdicts against the insured.

Within the variation of terms amongst the American states there are certain acts to which insurance companies are obliged to adhere, e.g. insurance companies are required to ‘willingly’ pay claims properly and promptly in “Good Faith”. It is illegal to ‘willingly’ not pay, discount-lowball, delay, deny payment of legitimate claims in “Bad Faith”. In the U.S. if an insurance company violates that covenant, the policyholder can sue the company in tort (negligence) in addition to a standard breach of the contract claim (i.e. for damages). In the U.S. suing in tort allows the court to award punitive or exemplary damages which would normally be unavailable for mere contract claims. In this way the courts are able to send a very clear message to the offending insurers that their behaviors are unacceptable.  Yet again, this obvious remedy is unavailable in New Zealand.

The result of this situation in the U.S. is that a plaintiff in an insurance bad faith case has the ability to recover an amount larger than the original face value of the policy, if the insurance company’s conduct was particularly egregious. In New Jersey for instance, bad faith is established by showing “no debatable reasons existed for denial of the insurance benefits.” In applying the standard, the New Jersey Supreme Court has stated that the insurer must have no valid reason to delay processing the claim and must have known or recklessly disregarded that it had no reasonable basis for denying the claim.  In Indiana, the standard requires proof that the insurer acted with knowledge that it did not have a reasonable basis for its position. In Hawaii “a reasonableness standard governs bad faith claims,” (Guajardo v. AIG Hawai’i Ins. Co., Inc.,118 Hawai’i 196, 206, 187 P.3d 580, 590 (2008.). This standard is applied to the insurer, not the insured (it is the lay insured whose reasonable expectations are kept in mind in interpreting the meaning of the policy, but it is the insurer’s acts that must be unreasonable to constitute a tort): Bearing in mind that insurance policies must be interpreted in accordance with the “reasonable expectations of a layperson.”

All of these definitions are far more tangible than our nebulous concepts of ‘good faith’ on which the Courts will not rely.

Interestingly, more than half of the bad faith claims against insurers in the U.S. succeed. The average awards for compensatory damages range from $600,000 to $1 million, the average punitive damage award is ten times that figure, from nearly $7 million to $10 million. Bad faith findings on third party liability policies account for the highest damage awards; but claims on first party policies account for most of the volume in bad faith litigation. (see http://www.cwilson.com/publications/insurance/insurer-bad-faith-damages.pdf).

In Campbell V State Farm (2001 UT 89 (2001, S.C.U.) the Supreme Court of Utah awarded US$145 million for punitive damages.

According to http://www.badfaithinsurance.org/, in the US more than 85-95% of insurers have proven to be bad faith insurers that repeatedly and consistently break the law and there is a said to be a covert revolving door between the insurance industry employees and state regulator employees which contributes to the status quo of claims resolutions by state regulators being 99.9% anti-claimants and pro-insurers.

As a policyholder I would find it far more useful and empowering if I knew exactly what ‘good faith’ referred to, in relation to my insurance contract. It would enable me to be able to point to a particular bad insurer behavior and know that I was protected in law for their failing.  If it can be achieved in the U.S., why not here?

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Resources
http://www.interest.co.nz/insurance/50570/utmost-good-faith-old-mantra-archaic-concept

Author: Sarah-Alice Miles

I believe in the enormous power of the human spirit and the power within each of us to effect major change. "The only triumph over evil is for good men [and women] to do nothing". Trained as a lawyer, psychotherapist and mediator. My goal is to make my voice heard for the causes in which I believe so as to improve and contribute to a more sustainable and equitable society. https://thechristchurchfiasco.wordpress.com/

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