Comment by R.B. Graves III
Over the past two decades, courts have increasingly awarded punitive damages against insurers for tortious bad-faith refusal to pay benefits due under insurance contracts. In a typical case, an insurance adjuster might fail to investigate an insured's claim properly, and wrongfully deny payment as a result. In such a case, a court may find some form of “malice”' or gross negligence on the part of the insurance company, and grant a multimillion-dollar recovery of punitive damages. This Comment assumes that punitive damages are necessary to deter insurers from denying payment wrongfully. The bad-faith cause of action as currently applied, however, does not achieve this end efficiently because it focuses upon the wrongs of the employee, but punishes the employer. Such vicarious liability in the insurance, bad-faith context creates an inconsistency between the deterrence rationale for punitive damages and the application of the deterrent effect of those damages to specific institutional behavior that should be deterred.
To correct this inconsistency, this Comment will advocate a shift in the focus of the bad-faith cause of action from the conduct of the employee to the incentives and policies created by the employer, and from the facts of an individual claims decision to the insurer's course of conduct during a relevant span of time. By focusing on the actions and policies of the insurer, courts will be able to determine whether refusal to pay an insured's claims reflects institutional bad faith rather than individual malice or negligence. Punitive damages should be awarded only in cases in which such institutional wrongfulness is present. This standard will give insurers a strong incentive to respect the insured's rights throughout the claims process, and will act as a counter-weight to the profitability of systematic insurer wrongdoing.
Furthermore, the current ad hoc inquiry approach, which determines punitive liability by examining both the nature of the insurance contract giving rise to the action and the claims adjuster's state of mind, is inappropriate. Instead, the contract and tort causes of action inherent in the bad-faith claim should be bifurcated. The contract action should precede the tort claim, involve only an individual plaintiff, and rely on the facts of the particular transaction giving rise to the claim. The tort component should be a collective action, preferably in the form of a class action suit against the insurer. This action should commence as soon as the initial contract litigation identifies an appropriate lead plaintiff.
If the bad-faith action is changed to accommodate these suggestions, punitive damage awards will more effectively deter insurers from setting policy to the detriment of their insureds. Assignment of specific burdens of proof to the various levels of damage awards will create a sliding scale of risk exposure for insurers, ensuring that higher regard for insureds' interests becomes cost effective for the insurer. Finally, restructuring the current punitive damage scheme will serve both partners in the insurance relation by guaranteeing that punitive damages are awarded less frequently but to greater effect, and by causing such awards to serve as a compensatory fund for those harmed by wrongful insurance practices.
About the Author
R.B. Graves III.
Citation
65 Tul. L. Rev. 395 (1990)