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Bad Faith – Hard to Define – But You Know It If You See It

IRMI’s Fundamental of Insurance Law:

Insurance pertains to a transaction in which one party (the insured) is in particular possession of facts unknown to the other party at the time the contract is negotiated. For this reason, the insured is required to complete the application in a truthful manner. Insurance also involves one party (the insurer) making a promise to cover an insured event that may or may not happen in the future.  As a result, a higher standard of honesty is imposed on both parties to an insurance transaction than is imposed on regular commercial contracts.

Although the above IRMI definition is correct, it seems to limit the concept to the process of purchasing an insurance policy, when in today’s modern insurance industry, the process is broader and more complex, and must be expanded to the entire process of risk management (of which insurance is, albeit a big part, is not the only part). I would also expand the concept to all practitioners within the industry, regardless of their role – be it as an agent, a broker, an underwriter, a claims adjuster, including their supervisors and management and, of course, the policyholder or purchaser of services within the industry.  They all must operate within the concept of “Utmost Good-Faith”.

David L. Stegall

Principal Consultant

Risk Consulting & Expert Services