The following is a brief summary of the general law in the United States. By definition this explanation is flawed because there is no such thing as the general law of the United States. The law differs from state to state, but there are similarities. American law is driven by different fact patterns. Change one or two facts in a common fact pattern and the results may be different. In virtually all states the laws applying to the interpretation of the enforcement of insurance contracts follow common public policy themes, but there are variations. As a result this is only a general outline of what the law may be in any particular state.
Insurance companies have years of legal experience litigating the terms of their contracts -- contracts written by skilled lawyers which have been carefully upgraded as new decisions are handed down by appellate court. Coverage attorneys incorporate new case law into policies and regularly re-write their contract. Terms that may appear to a consumer to be simple English may have their origin in a legal opinion and may have been given a special interpretation. Because companies make it their business to know how standard terms have been defined by judges, carriers have the upper hand in drafting policies and selecting the language they find most advantageous for making a profit.
Rules of Interpretation
Insurance law routinely provides that should there be an ambiguity or uncertainty in a policy, an uncertainty in choice of wording or ambiguity in meaning would be resolved in favor of the policyholder and against the insurer. In the absence of a misrepresentation regarding coverage or exclusions, if the language of the policy is clear and explicit, the clear meaning will be enforced.
Insurance contracts are interpreted by judges and courts to effectuate only the objectively reasonable expectations of the insured. Any personal, or subjective, expectation of a policyholder which cannot be reasonably supported by the language of the contract is unenforceable.
It matters not what the policyholder/customer truly and honestly believes in his or her own mind. That subjective opinion is never in issue in a court of law. The real contest is to decide what the words of the policy mean to an objective person or a disinterested, common reader.
The guiding public policy routinely followed by our courts is that judges will seek to find and enforce coverage in case of a loss rather than defeat coverage. In other words, if there is a fair and honest interpretation that will result in the policyholder enjoying the benefit of the bargain, then so be it. Courts do not leaned over backwards to interpret a contract to create losses for policyholders. So, when reading an insurance policy, the words selected by the insurance company are to be interpreted by judges according to their plain meaning. A plain meaning is one which an ordinary person would attach to such words, not the meaning which might be utilized by an insurance company executive or an attorney.
Exclusions and limitations in a policy, because they often result in denying coverage when there is a loss, must be in clear and unmistakable language. It is for this reason that exclusions and limitations are always narrowly, or strictly, construed. If there is more than one meaning to be given to an exclusion or a limitation, the narrowest interpretation will be adopted by the court. Any exclusionary clause that is not clear and conspicuous will be interpreted in the interests of the insured.
In cases where a policyholder's lack of knowledge could result in the loss of benefits or the forfeiture of rights under a policy, an insurer is required to bring such facts to the insured's attention and to provide relevant information to enable the insured to take action to secure rights provided by the policy. Unfortunately, an insurance agent is not obligated to advise a policyholder on the adequacy of the limits of coverage selected by the policyholder. The term "limits" refers to the amount of insurance coverage.
When an insurance policy contains provisions that are extremely in favor of the company, courts will find that the contract, or any portion of the agreement, was unconscionable at the time it was made and the court may refuse to enforce that provision. The basic test followed in most states is to ask, in light of the general background and the needs of the particular case, whether the causes involved are so one-sided as to be unconscionable under the circumstances existing at the time the contract was made.
Liability for Advertising
When an insurance company has used advertising and solicitation materials that are unfair or deceptive, some states provide legal protection to the policyholders and others do not. For example, the California Insurance Code prevents insurers from engaging in such conduct, but California law does not provide the policyholder with a private cause of action against the carrier. A policyholder may only have a cause of action for negligent or intentional misrepresentation against the agent selling such a policy as opposed to the a cause of action against the carrier who often times is more likely to be able to pay a judgment rendered by a court in favor of the policyholder. In cases under California law, only the words in the actual policy are actionable and falsely written advertisements do not give rise to a cause of action against the carrier. Policyholders must realize that they are buying the contract, not the advertising.
Liability of Agents
What an agent says in terms of "puffing" or exclaiming the virtue of a policy is often not actionable, except in the circumstances where an agent assumes additional duties, has a special relationship of trust with the buyer, or holds himself/herself out as having special expertise, then a special duty arises. But when an insurance agent gives assurance of proper coverage and it turns out to be false, that agent will be held liable for negligent misrepresentation. That is not to say that an insured can remain intentionally ignorant of the terms of a policy. An insured is not required to independently verify the accuracy of representations made by the agent regarding the policy and an agent can be held liable for intentional or negligent misrepresentation.
Duty to Deal Fairly with Insureds
Every insurance contract contains an unwritten, invisible, or implied term referred to as the covenant or promise of good faith and fair dealing. This is a promise imposed by law upon an insurance company to always act fairly towards its insureds in handling their claims. Whether or not such a clause is included in the policy, judges will read the policy as if it were there.
Carriers must meet the reasonable expectations of the policyholder and an insurer must always give as much consideration to the financial interests of its insureds as it does to its own financial interests.
In bad faith cases a jury is always asked whether under the facts the carrier acted reasonably. Denying benefits, delaying payments and paying less than what is owed are examples of bad faith. An insurance company is obligated to thoroughly and promptly investigate all claims and must inquire into all the possible issues that might support an insured's claim. This obligation is not terminated simply because the insured files a lawsuit against the company. Where an insurer makes a belated offer of settlement, a cause of action for bad faith does not correct or set aside the previous wrongful conduct. Any payments to the insured only reduce the amount of the insurance company's final liability as it may determined by a jury.
In a bad faith action an insurance company's business practices or common course of conduct is routinely admissible to show motive, opportunity, intent, plan, knowledge or the absence of a mistake or an accident in the manner in which it dealt with its insured. It is not necessary to show that the insurer intended to cause harm in a breach of the covenant of good faith and fair dealing. The policyholder need only show that the insurer failed to honor the agreement and had no cause not to pay what was due under the contract. When a person buys an insurance policy, the very risks that are insured against make it clear that if a claim is not satisfied the policyholder will suffer financial pressure and emotional distress. Policyholders obviously will be vulnerable to oppressive tactics by a carrier and insurance companies are presumed to know that a denial of benefits will very well result in emotional distress to their insureds.
Damages that can be Collected
Where a policyholder successfully shows that an insurer breached the covenant of good faith and fair dealing, the insured can recover all damages caused by the breach. This includes all consequential losses, loss of use of the insurance proceeds, general damages, attorneys' fees and in cases of egregious and outrageous misconduct, punitive damages.
To recover for emotional distress it must be shown to have been caused directly as a result of the insurer's conduct. Normally, once actual economic loss is established, the policyholder is entitled to recover damages for emotional distress as well, as long as that injury was caused by the insurer's breach of the covenant of good faith and fair dealing.
Time Limits on Filing Suit
The statute of limitations in a bad faith case varies from state to state. A statute of limitations is the legal deadline after which a lawsuit cannot be filed. In most states, the two-year statute for personal injuries and emotional distress governs a lawsuit for bad faith. Many insurance policies impose a contractual obligation on the insured to bring any lawsuit within one year after breach of the contract, no matter what the rule is under state law concerning when a lawsuit can be lawfully filed. Calculating this one-year period, though, is not simple. Most states hold the time limit in the contract is enforceable but suspend the running of the one-year statute between the period of time the policyholder gives notice of the loss and the date on which the claim is denied.