HOW THE LAW OF UNINTENDED CONSEQUENCES COSTS THE INSURANCE INDUSTRY
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Neither the courts nor the governmental agencies seem to be aware that in a modern, capitalistic society, insurance is a necessity. No prudent person would take the risk of starting a business, buying a home, or driving a car without insurance. The risk of losing everything would be too great. By using insurance to spread the risk, taking the risk to start a business, buy a home, or drive a car becomes possible.
Insurance has existed since a group of Sumerian farmers, more than 5,000 years ago, scratched an agreement on a clay tablet that if one of their number lost his crop to storms, the others would pay part of their earnings to the one damaged. Over the eons, insurance has become more sophisticated, but the deal is essentially the same. An insurer, whether an individual or a corporate entity, takes contributions (premiums) from many and holds the money to pay those few who lose their property from some calamity, like fire. The agreement, a written contract to pay indemnity to another in case a certain problem, calamity, or damage that is fortuitous, that is that occurs by accident, is called insurance.
In a modern industrial society, almost everyone is involved in or with the business of insurance. They insure against the risk of becoming ill, losing a car in an accident, losing business due to fire, becoming disabled, losing their life, losing a home due to flood or earthquake, or being sued for accidentally causing injury to another. The insurers, insureds, or people damaged by those insured are dependent on one another.
In a country where human interactions are governed solely by the terms of written contracts, insurance would be a simple means of spreading risk and providing indemnity based on the promises made by the contract of insurance. But, in this the real world, insurance contracts are controlled by statutes enacted to ostensibly protect the consumer of insurance, regulations imposing obligations on the conduct of insurers and the decisions of trial and appellate courts interpreting insurance contracts.
A simple insurance contract between two parties might say: “I insure you against the risk of loss of your engagement ring valued at $15,000 by all risks of direct physical loss except wear and tear for a premium paid by you of $15.00.” Anyone who could read would understand that contract. If something happens to damage, destroy or lose the ring the insurer will pay you $15,000.00. However, insurers cannot write such a simple contract because the state requires many terms and conditions that complicate the policy wording and confuse the common person. The states and courts that did so had nothing but good intentions to protect the consumer against the insurer and control the actions of the insurer.
EXAMPLES OF UNINTENDED CONSEQUENCES & INSURANCE
Simplified Wording Causes Ambiguity
Insurance contracts can be simple or exceedingly complex, depending on the risks taken on by the insurer. Regardless, insurance is neither more nor less than a contract whose terms are agreed to by the parties to the contract. Over the last few centuries, almost every word and phrase used in insurance contracts have been interpreted and applied by one court or another. Ambiguity in contract language became certain. However, the average person saw the insurance contract as incomprehensible and impossible to understand.
Courts, struggling to understand policies of insurance added to the concern of Legislators:
As said in Insurance Company of North America v. Electronic
Purification Company, 67 Cal. 2d 679, 689, 63 Cal. Rptr. 382, 433 (1967), the insurance company gave the insured coverage in relatively simple language easily understood by the common man in the marketplace, but attempted to take away a portion of this same coverage in paragraphs and language which even a lawyer, be he from Philadelphia or Bungy, would find difficult to comprehend. [Hays v. Pacific Indemnity Group,8 Cal. App. 3d. 158, 80 Cal. Rptr. 815 (1970).]
Ostensibly to protect the public, to salve the concerns of jurists like the one quoted above, insurance regulators and Legislatures decided to require that insurers write their policies in “easy to read” language. Because they were required to do so by law, the insurers changed the words in their contracts into language that people with a fourth-grade education could understand. Precise language interpreted by hundreds of years of court decisions was disposed of and replaced with imprecise, easy to read language. For examples of the “easy to read” or “plain English statutes” go to Appendix 1.
The law of unintended consequences came into play. Instead of protecting the consumer, the imprecise language resulted in thousands of lawsuits determined to impose penalties on insurers for attempting to enforce ambiguous “easy to read” language. The lawsuits cost insurers and their insureds millions of dollars to get court opinions that interpret the language and reword their “easy to read” policies to comply with the court decisions. For more than 30 years, the law of unintended consequences struck the insurance industry that found that a law designed to avoid litigation resulted in exactly the opposite.
The attempts by the regulators and courts to control insurers and protect consumers were made with the best of intentions. The judges and regulators found it necessary to protect the innocent against what they perceived to be rich and powerful insurers. Unfortunately, the plain English statutes had the opposite effect. But, of course, even after it became clear that easy to read policies cause more problems than they cure, the laws and regulations have not been changed.
Bad Faith Causes Bad Behavior
In the 1950s, the California Supreme Court created a tort new to the pantheon of U.S. jurisprudence: the tort of bad faith.
A tort is a civil wrong from which one person can receive damages from another for multiple injuries to person or property. The tort of bad faith was created because an insurer failed to treat an insured fairly, and the court felt that the traditional contract damages were insufficient to properly compensate the insured. The court allowed the insured to receive, in addition to the contract damages that the insured was entitled to receive under the contract had the insurer treated the insured fairly, damages for emotional distress and punitive damages to punish the insurer for its wrongful acts.
Insureds, lawyers for insureds, regulators, and courts across the United States cheered the action of the California Supreme Court, for providing a fair remedy to abused insureds. Most of the states emulated the California Supreme Court and adopted the tort created by the California Supreme Court either by statute or court decision.
The insurers who treated their insureds badly, in fact, profited since they continued their wrongful acts and only were required to pay the few insureds that sued. Those that did not sue added to the wrongdoing insurers profit margins. Honest insurers paid frauds and claims they did not owe and found they needed to raise premium charges to cover the extra expense. The increased premium paid by insureds to cover the extra expense were a clear example of the effect of the law of unintended consequences. The honest insurers who treated those they insured with good faith and fair dealing who paid off fraudsters and paid uncovered claims to avoid bad faith suits needed to charge more than the bad faith insurers who litigated with their insureds.
The law of unintended consequences struck the insurance industry and the insurance buying public. Rather than deter wrongful actions by application of the tort of bad faith, the law of unintended consequences resulted in punishing the honest and correct insurers, honoring the insurers who acted in bad faith with profit, and allowed many frauds to succeed.
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(c) 2022 Barry Zalma & ClaimSchool, Inc.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected].
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Notice of Claim Later than 60 Days After Expiration is Too Late
Post 5089
Injury at Massage Causes Suit Against Therapist
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Hiscox Insurance Company (“Hiscox”) moved the USDC to Dismiss a suit for failure to state a claim because the insured reported its claim more than 60 days after expiration of the policy.
In Mluxe Williamsburg, LLC v. Hiscox Insurance Company, Inc., et al., No. 4:25-cv-00002, United States District Court, E.D. Missouri, Eastern Division (May 22, 2025) the trial court’s judgment was affirmed.
FACTUAL BACKGROUND
Plaintiff, the operator of a massage spa franchise, entered into a commercial insurance agreement with Hiscox that provided liability insurance coverage from July 25, 2019, to July 25, 2020. On or about June 03, 2019, a customer alleged that one of Plaintiff’s employees engaged in tortious ...
ZIFL – Volume 29, Issue 11
The Source for the Insurance Fraud Professional
Posted on June 2, 2025 by Barry Zalma
Post 5087
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Read the full article and the full issue of ZIFL June 1, 2025 at https://zalma.com/blog/wp-content/uploads/2025/05/ZIFL-06-01-2025.pdf
Zalma’s Insurance Fraud Letter – June 1, 2025
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ZIFL – Volume 29, Issue 11
The Source for the Insurance Fraud Professional
Read the full article and the full issue of ZIFL June 1, 2025 at https://lnkd.in/gTWZUnnF
Zalma’s Insurance Fraud Letter (ZIFL) continues its 29th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at ...
No Coverage if Home Vacant for More Than 60 Days
Failure to Respond To Counterclaim is an Admission of All Allegations
Post 5085
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In Nationwide Mutual Insurance Company v. Rebecca Massey, Civil Action No. 2:25-cv-00124, United States District Court, S.D. West Virginia, Charleston Division (May 22, 2025) Defendant Nationwide Mutual Insurance Company's (“Nationwide”) motion for Default Judgment against Plaintiff Rebecca Massey (“Plaintiff”) for failure to respond to a counterclaim and because the claim was excluded by the policy.
BACKGROUND
On February 26, 2022, Plaintiff's home was destroyed by a fire. At the time of this accident, Plaintiff had a home insurance policy with Nationwide. Plaintiff reported the fire loss to Nationwide, which refused to pay for the damages under the policy because the home had been vacant for more than 60 days.
Plaintiff filed suit ...
ZIFL Volume 29, Issue 10
The Source for the Insurance Fraud Professional
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Zalma’s Insurance Fraud Letter (ZIFL) continues its 29th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at http://zalma.com/zalmas-insurance-fraud-letter-2/ You can read the full issue of the May 15, 2025 issue at http://zalma.com/blog/wp-content/uploads/2025/05/ZIFL-05-15-2025.pdf
This issue contains the following articles about insurance fraud:
Health Care Fraud Trial Results in Murder for Hire of Witness
To Avoid Conviction for Insurance Fraud Defendants Murder Witness
In United States of America v. Louis Age, Jr.; Stanton Guillory; Louis Age, III; Ronald Wilson, Jr., No. 22-30656, United States Court of Appeals, Fifth Circuit (April 25, 2025) the Fifth Circuit dealt with the ...
Professional Health Care Services Exclusion Effective
Post 5073
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This opinion is the recommendation of a Magistrate Judge to the District Court Judge and involves Travelers Casualty Insurance Company and its duty to defend the New Mexico Bone and Joint Institute (NMBJI) and its physicians in a medical negligence lawsuit brought by Tervon Dorsey.
In Travelers Casualty Insurance Company Of America v. New Mexico Bone And Joint Institute, P.C.; American Foundation Of Lower Extremity Surgery And Research, Inc., a New Mexico Corporation; Riley Rampton, DPM; Loren K. Spencer, DPM; Tervon Dorsey, individually; Kimberly Dorsey, individually; and Kate Ferlic as Guardian Ad Litem for K.D. and J.D., minors, No. 2:24-cv-0027 MV/DLM, United States District Court, D. New Mexico (May 8, 2025) the Magistrate Judge Recommended:
Insurance Coverage Dispute:
Travelers issued a Commercial General Liability ...
A Heads I Win, Tails You Lose Story
Post 5062
Posted on April 30, 2025 by Barry Zalma
"This is a Fictionalized True Crime Story of Insurance Fraud that explains why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is designed to help everyone to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the Perpetrators than any Other Crime."
Immigrant Criminals Attempt to Profit From Insurance Fraud
People who commit insurance fraud as a profession do so because it is easy. It requires no capital investment. The risk is low and the profits are high. The ease with which large amounts of money can be made from insurance fraud removes whatever moral hesitation might stop the perpetrator from committing the crime.
The temptation to do everything outside the law was the downfall of the brothers Karamazov. The brothers had escaped prison in the old Soviet Union by immigrating to the United...