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 and provide an example illustrating when an insurance company might breach this covenant.

Question

What will be an ideal response?

Answer 1

This covenant requires the insurance company to act in good faith in investigating, representing, and paying legitimate claims on behalf of its client, the insured. If a court determines that the covenant is intentionally breached, the court may order punitive damages in addition to compensatory damages. Examples include refusing to pay a valid claim or "low balling" with an unreasonably low offer to settle. An insurer might also breach this covenant by wrongfully refusing to settle a claim of a third party. If the rejection of a reasonable offer to settle means that the insured ends up paying much more than the limits of the policy, the insurer may have some liability for a breach of good faith and fair dealing. Fraudulently inducing someone to buy a policy is another example of breach of the covenant of good faith and fair dealing.