Comparative Fault and Insurance Bad Faith

Abstract:     
This Article examines the topic of comparative fault in insurance bad faith settings. In the 1980s and 90s, most states adopted a tort or extracontractual remedy for insurer bad faith in first-party or third-party insurance contexts. Courts and scholars now have begun to consider whether to adopt a comparative fault defense for the insured’s own conduct. The Article explores whether a comparative fault defense is even necessary. As it turns out, the case for the defense is more complicated and less compelling that one might at first expect. A comparative fault defense would not displace contract defenses; rather, it would be an overlay on those defenses. Thus, the comparative defense warrants adoption only if its marginal benefits outweigh the marginal costs of adding a tort defense to contract defenses that will be relevant in any event. This comparison varies depending on the shape of a jurisdiction’s bad faith doctrine. For instance, a comparative defense is not warranted when bad faith, though termed a “tort,” essentially allows only damages that fit a contract model. In addition, the case for a comparative defense is weak when the insured’s ability to recover for bad faith is closely linked to the insured’s ability to recover on the contract; in such cases, the contract defenses would capture most insured conduct that would be relevant to the bad faith claim. The Article then discusses a number of unsettled or unexplored issues about how a comparative fault defense should operate if a jurisdiction adopts it. These issues include coordinating the comparative fault defense with contract defenses, and applying the comparative defense in multi-party and multi-theory claims.

Number of Pages in PDF File: 60

Keywords: insurance, first-party insurance, liability insurance, bad faith, comparative fault

JEL Classification: K13, K41

Accepted Paper Series