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The Tort of Bad Faith  

The implied covenant of good faith and fair dealing is a concept of  insurance law at least three centuries old. It first appeared in British  jurisprudence in a case decided by Lord Mansfield sitting in the House  of Lords as the highest court in Britain. In Carter v. Boehm. 3 Burrow,  1905, Lord Mansfield explained that insurance is a contract upon  speculation; the special facts upon which the contingent chance is to be  computed, lie, most commonly, in the knowledge of the insured only. The  underwriter trusts to his representation, and proceeds upon confidence  that he does not keep back any circumstance in his knowledge, to mislead  the underwriter into a belief that the circumstance does not exist, and  to induce him to estimate the risk as if it did not exist.  The keeping back such circumstance is a fraud, and therefore the policy  is void. Although the suppression should happen through mistake, without  any fraudulent intention, yet still the underwriter is deceived, and  the policy is void; because the risk run is really different from the  risk understood and intended to be run, at the time of the agreement.  [The Chicago v. Thompson, 19 Ill. 578, 1858 WL 5993, 9 Peck 578 (Ill.  1858)] and the contract of insurance is founded on good faith.  Lord Mansfield stated the rule still followed to this day:  Good faith forbids either party by concealing what he privately knows,  to draw the other into a bargain, from his ignorance of that fact, and  his believing the contrary.  

THE DUTY TO ACT IN GOOD FAITH  \'

The implied covenant explains that no party to a contract of insurance  should do anything to deprive the other of the benefits of the contract.  For insurance to work; for each insurer to properly evaluate the risks  presented; for each insurer to obtain the insurance desired; and for  each insured and insurer resolve all claims fairly and equitably they  must treat each other with the utmost good faith and do nothing to  deprive the other of the benefits of the contract.  Each party to the contract of insurance is expected to treat the other  fairly in the acquisition and performance of the contract. For example,  the prospective insured is required to answer all questions about the  risk he, she or it are asking the insurer to take and about the person  the insurer is asked to insure. Similarly, the insurer must honestly,  clearly and in good faith explain to the insured(s) the risks the  insurer is willing to take and the terms, conditions and provisions of  the contract of insurance. 

 THE CREATION OF THE TORT OF BAD FAITH