Question

Insurance policies often contain a covenant of good faith and fair dealing. Even if the clause is not in the policy, often courts will imply it.

Explain the covenant of good faith and fair dealing.
List in bullet point form, the ways that an insurer may violate this covenant.
Provide an example illustrating when an insurance company might breach this covenant.

Answer 1

The covenant of good faith and fair dealing in insurance policies refers to the implied obligation that insurers and insured parties should act in good faith and deal fairly with each other. An insurer may violate this covenant by denying valid claims without proper investigation, delaying payment without reasonable justification, refusing to provide necessary information or guidance, or misrepresenting policy terms or coverage. For example, if an insurer inaccurately denies a claim that should have been covered, they would be breaching this covenant.

Step-by-step explanation:

The covenant of good faith and fair dealing in insurance policies refers to the implied obligation that insurers and insured parties should act in good faith and deal fairly with each other. Here are some ways that an insurer may violate this covenant:

1. Denying a valid claim without conducting a proper investigation.
2. Delaying the payment of a legitimate claim without reasonable justification.
3. Refusing to provide necessary information or guidance to the insured.
4. Misrepresenting policy terms or coverage.

For example, let's say a policyholder files a claim for damage caused by a fire in their house. The insurer conducts a quick investigation and denies the claim, stating that the damage was not covered under the policy. However, it is later discovered that the insurer misinterpreted the policy terms and the damage should have been covered. In this scenario, the insurer breached the covenant of good faith and fair dealing by improperly denying the claim.