When Bad Faith Threatens Good Business: Third Circuit Developments in Insurer Bad-Faith Claims

Insurer bad-faith liability &mdash; that is, any liability beyond the coverage or other benefits expressly provided for in the insurance contract &mdash; has been litigated for about a century. For most of that time, judges and jurors applied it sparingly in egregious cases of blatant abuse by insurers. However, the tort of bad faith, by proscribing (among other things) 'unfounded' denials of coverage motivated by 'self-interest,' has always existed in tension with insurers' fundamental duty to maximize enterprise value by, for instance, paying claims only when contractually required. This tension, rarely explicit in the early cases, increasingly is laid bare as policyholders aggressively (if understandably) press doctrinal boundaries in the hope of recovering tort damages in suits on insurance contracts. Two recent cases involving disability benefits from courts within the Third Circuit &mdash; <i>Northwestern Mut. Life Ins. Co. v. Babayan</i>, 430 F.3d 121 (3d Cir. 2005), and <i>Saldi v. Paul Revere Life Ins.</i>, 224 F.R.D. 169 (E.D. Pa. 2004) &mdash; illustrate this tension and suggest a need for judicial management to harmonize insurers' conflicting duties.

34 minute read March 29, 2006 at 11:08 AM
By
Robert D. Goodman and Steve Vaccaro
When Bad Faith Threatens Good Business: Third Circuit Developments in Insurer Bad-Faith Claims

Insurer bad-faith liability ' that is, any liability beyond the coverage or other benefits expressly provided for in the insurance contract ' has been litigated for about a century. For most of that time, judges and jurors applied it sparingly in egregious cases of blatant abuse by insurers.

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