Bad Faith Litigation: Do the Numbers Add Up?

I am a little bit of a skeptic - I don’t think it has devolved yet to cynicism - when it comes to insurance bad faith litigation. Done right, a state law system of bad faith rules and rights can establish appropriate boundaries for all three sides of the insurance triangle - the insurer, the insured and the claimant. Done wrong, however, it tends to be little more than a system for imposing additional obligations and expenses on insurers beyond any that were bargained for or paid for by insureds.

Beyond that, the whole subject of bad faith litigation, including whether it is appropriate and the rules that should govern it, tends to become one of public relations and political posturing, rather than of rational legal and economic thought. This article demonstrates that exact dynamic in the context of a dispute in West Virginia over the elimination of third party bad faith claims against insurers, after years in which such claims were actionable. What jumps out at me is the assertion that a particular amount - 77 million dollars in premium reductions - of savings to the public can be attributed to the elimination of the bad faith cause of action.

Now it is beyond my skills as an amateur economist, but it seems to be that there must be enough data pre and post the ban on such claims to actually measure, at least roughly, the economic effect of banning, as opposed to allowing, such bad faith claims against insurers. It would make an interesting test case as to the economic impact, pro or con, of insurance bad faith litigation, and might be a good starting point for more empirically based and rational discussions as to whether other states should allow, or instead ban, such causes of action. This would be a nice substitute for the current state of the debate in most states over whether bad faith litigation should be allowed, which tends to consist of little more than entirely predictable and unverifiable public posturing of the type reflected in the article on the effect in West Virginia of banning such causes of action.

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