INsurer liability and claim settlement failures: Evidence from the United States
| Autor | Sharon Tennyson |
| Páginas | 421-443 |
421
19 .
INS U R E R L I A B I L I T Y A N D C L A I M
SE T T L E M E N T F A I L U R E S : E V I D E N C E F R O M
TH E U N I T E D S T A T E S
1
Sharon Tennyson
INTRODUCTION
This paper explores the evolution of the civil liability regime for insurance
claims settlement disputes in the United States (US), and the ways in
which it has affected the incidence of disputes and litigation of insurance claims.
US insurance law requires providers to deal fairly, thoroughly, and promptly in
settling insurance claims with policyholders. Breach of this duty constitutes bad
faith behavior in contracting. Policyholders who dispute the value of a claim can
sue their insurer for lack of payment or underpayment, and also for bad faith in
settling the claim. The charge of insurer bad faith is a secondary issue that may be
added to a policyholder’s lawsuit over a disputed claim. In deciding the case, the
courts must rule on the disputed claim and on the separate question of whether
the insurer’s behavior warrants a finding of bad faith.
The legal standards of bad faith liability in the US have evolved over time as
court decisions change precedents for the extent of liability and for evidentiary
standards of bad faith. Over time, some individual states in the US have moved
to recognizing insurer bad faith as a tort, instead of treating such acts as a con-
tract dispute. This system of liability for bad faith in contracting applies speci-
fically to insurance, on the rationale that insurance policies are ‘peace of mind’
contracts – entered into by the policyholder not for financial gain but due to the
1 This chapter draws on unpublished and published research conducted with Danial Asmat. His contribu-
tions to the ideas and results reported herein, included with his permission, are gratefully acknowledged.
Direito_do_Seguro_Contemporaneo_TOMO-I_(MIOLO)_PROVA-5.indd 421Direito_do_Seguro_Contemporaneo_TOMO-I_(MIOLO)_PROVA-5.indd 421 14/05/2021 16:27:4314/05/2021 16:27:43
SH A R O N T E N N Y S O N
422
insurer’s pledge to provide payment of losses. In the context of US law the dis-
tinction between treating insurer violations as a contractual breach or a wrong-
ful act amounting to a tort is highly consequential. One important implication is
that tort liability holds the defendant liable for non-economic costs and emotio-
nal suffering – allowing “extra-contractual” or multiple damages – while contract
actions do not.
A tort liability regime thereby increases the expected financial penalties
facing an insurer in the event of a bad faith ruling by the court. This should reduce
insurers’ incentives to deny ‘reasonably disputable’ claims,2 and will increase the
policyholder’s bargaining power over settlement amounts.3 Greater bargaining
power for policyholders arises directly from the threat of higher damages awards
if the policyholder alleges bad faith. Higher damages available also gives the poli-
cyholder a higher incentive to file a suit alleging bad faith. Thus, adjudicating insu-
rer bad faith as a tort can lead either an increase or a decrease in bad faith lawsuits
– depending on whether insurers’ incentives to reduce settlement disputes is grea-
ter than policyholders’ incentives to pursue allegations of bad faith. Because of the
high (public and private) costs of lawsuits and trials, a failure by disputing parties
to voluntarily settle their differences leads to inefficient use of resources. Thus, the
propensity for claim settlement failures must be part of the evaluation of social
welfare implications of bad faith liability regimes.
This paper takes up that question, examining the effect of a change in tort
liability on the likelihood of litigation between disputing parties by making use of
over-time and cross-state differences in insurance bad faith regimes in US states.
The paper first surveys the history of insurance bad faith legal doctrine in the US,
and discusses the predicted impacts of this doctrine from economic theory. The
empirical study makes use of a large sample of automobile insurance claims sett-
led in 42 US states over the 25 year period in which insurance bad faith doctrine
was evolving in the US states. The paper concludes that changing bad faith stan-
dards initially led to increases in insurance claim settlement failures, as indicated
by higher rates of litigated claims and higher incidence of litigation proceeding
to trial. But, as the law matured, declining uncertainty about bad faith tort law
eventually reduced the scope for disagreement in settlements, ultimately reducing
claim settlement failures in first-party auto insurance claims.
2 Abraham, 1994.
3 Asmat and Tennyson, 2014.
Direito_do_Seguro_Contemporaneo_TOMO-I_(MIOLO)_PROVA-5.indd 422Direito_do_Seguro_Contemporaneo_TOMO-I_(MIOLO)_PROVA-5.indd 422 14/05/2021 16:27:4314/05/2021 16:27:43
Para continuar a ler
PEÇA SUA AVALIAÇÃO