In March 1945, the United States Congress expressly reaffirmed its support for state-based insurance regulation by passing the McCarran–Ferguson Act[7] which held that no law that Congress passed should be construed to invalidate, impair or supersede any law enacted by a state regarding insurance.
The key point of divergence between the United States and England on this issue is that unlike American courts, English courts have consistently refused to go further and broadly extend the duty of utmost good faith from the pre-contract period into the post-contract period.
[13] Other state courts began to follow California's lead and held that a tort claim exists for policyholders that can establish bad faith on the part of insurance carriers.
[15] A few states like New Jersey and Pennsylvania declined to allow tort claims for first-party insurance bad faith and instead allowed policyholders to recover broader damages for breach of contract against first-party insurers, including punitive damages.
Bad faith is a fluid concept and is defined primarily by court decisions in case law.
Examples of bad faith include undue delay in handling claims, inadequate investigation, refusal to defend a lawsuit, threats against an insured, refusing to make a reasonable settlement offer, or making unreasonable interpretations of an insurance policy.
Bad faith in first party contexts often involves the insurance carrier's improper investigation and valuation of the damaged property (or its refusal to even acknowledge the claim at all).
Bad faith can also arise in the context of first party coverage for personal injury such as health or life insurance, but those cases tend to be rare.
[16] Third party situations (essentially, liability insurance) break down into at least two distinct duties, both of which must be fulfilled in good faith.
In one of the most famous decisions of his career (involving Jerry Buss's bad faith lawsuit against Transamerica), Justice Stanley Mosk wrote: [W]e can, and do, justify the insurer's duty to defend the entire 'mixed' action prophylactically, as an obligation imposed by law in support of the policy.
[26] The broadest forms of direct action statutes are found in only four American jurisdictions: the states of Louisiana and Wisconsin, and the federal territories of Guam and Puerto Rico.
[28] Bad faith cases may also be slow, at least in the third party context, because they are necessarily dependent upon the outcome of any underlying litigation.
For example, the 2003 Campbell decision involved State Farm's handling of litigation resulting from a fatal car accident in 1981, 22 years earlier.
Another important feature of Campbell is that it powerfully illustrates how an insurer cannot avoid tort liability for bad faith by belatedly attempting to cure its breach of contract.
Thus, State Farm's belated payment of the full judgment against its insured (including amounts in excess of its policy limits) did not prevent the Utah Supreme Court from still holding it liable (after the U.S. Supreme Court reversed the original judgment) for $9 million in punitive damages.
A 2014 statistical study based on data from 1977, 1987, and 1997 nationwide surveys of U.S. automobile injury claims by the Insurance Research Council was able to identify such an effect.
The researchers found that "tort liability for insurer bad faith is associated with 10-11 percent higher UM settlements ... an increase that is both statistically and economically significant".
Outside of those two jurisdictions, insurers have much more power to delay and deny claims, safe in the knowledge that their liability is limited to breach of contract damages (i.e., policy limits) and they cannot be compelled to compensate insureds for damages arising from bad faith claims handling.
[35] New Zealand's highest court in 1998 refused to decide the issue of whether to impose extracontractual tort liability for bad faith claims handling.