A Hawai`i State Supreme Court decision gives consumers the right to sue their own insurance company (for the "tort" of bad faith) if the insurance company does not treat its own insured fairly and reasonably.
The court recognized an implied covenant/contract of good faith and fair dealing in every contract (with the noted exception of at-will employment). In addition to any administrative remedies provided for by Hawai`i statute, the court recognized the tort of bad faith should help protect the consumer and deter misconduct by the insurance companies.
In the case the Court decided, The Best Place, Inc. v. Penn America Insurance Co., 82 Hawai`i 120, 920 P.2d 334 (1996), a Waikiki club tried to collect on a fire insurance policy after the club was destroyed by fire four months after the issuance of the policy. The insurer decided to investigate after the cause of the fire was established as arson. The investigation determined that the club had lost money ever since opening, and despite numerous unpaid bills, the fire insurance premium was paid three days before the fire.
The insurer informed the consumer (policyholder) that in order to collect benefits, the manager would have to be examined under oath and the club would have to submit a "Proof of Loss" form, to satisfy a provision of the policy, along with other documents. The consumer (policyholder) did not fulfill these requests by the insurer and the insurer refused to pay benefits.
The consumer's lawyer sent written requests asking why benefits had not been payed, and seeking an explanation for the insurer's previous demands for an examination and documentation. The insurer's lawyer never responded to these requests. A lawsuit began.
It is the lack of action on the insurance company's part that helps to establish why bad faith claims are separate and distinct from breach of contract claims.
A claim of bad faith is not based on whether the insurer eventually fulfilled the contract by paying benefits. This is because if breach of contract was the only remedy, the insurance company could refuse to pay benefits, make their own insured (the consumer who paid premiums to avoid trouble) sue them, and then just pay the benefits it should have paid long before.
Rather, a bad faith claim relies on the standard of "an unreasonable delay of payment of benefits". However, claims based on the insurance company's mistaken judgment, erroneous decisions or reasonable contract interpretations generally do not qualify as misconduct which can lead to a lawsuit for bad faith.
If the consumer shows the insurance company unreasonably delayed, failed to respond, or otherwise acted unreasonably, the consumer is entitled to compensatory damages. If the insurer's misconduct is even worse (for example, if it can be shown that the insurer was indifferent to its contractual obligations), then the insured consumer is justified in seeking punitive damages.
Finally, in a later decision, Alzharani v. Pacific InternationalServices Corp., 82 Hawai`i 466 (1996), the Hawai`i Supreme Court addedto the Best Place decision, holding that Best Place extends to both (1) first-party contracts (the consumer's own insurance policy with the insurance company) and (2) third-party insurance contracts. This means the consumer also has a right to expect good faith when the insurancepolicy the consumer is seeking benefits from was purchased by someone else, such as if you are hit by a car and you want the other driver's insurance company to pay for your damages. Therefore, the other driver's insurance company is supposed to treat the auto accident victim fairly and reasonably.
