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Products liability for financial products: judicial insurance for the insured.


The twentieth and twenty-first centuries have seen the insurance industry reach an unprecedented level in American society in terms of the influence it has on American families. Virtually every aspect of an American's life is touched or affected by the presence of an insurance policy, whether it is Liability Insurance, Property Insurance, or Casualty Insurance. This presence exists because participation in modern America requires a citizen to acquire insurance in order to protect themselves, their families, and their property. This existence and influence has not gone unnoticed by American courts, as stated by Supreme Court Justice Hugo Black, "Perhaps no modern commercial enterprise directly affects so many persons in all walks of life as does the insurance business. Insurance touches the home, the family, and the occupation or the business of almost every person in the United States." (1)

Unfortunately, as insurance companies have grown in size and prominence over the last 200 years, the consumer market, as well as the legislative and judicial regulation of insurer-consumer relationships, has struggled and failed to keep pace. The slick advertisements that present the self-proclaimed ironclad policy to the consumer actually leave them purchasing a policy containing massive loopholes and hidden defects, rather than the protection they thought they purchased. The results of such policies are often consequence-free denials of coverage by the insurer, leaving the insured without the very policy protection he believed he purchased.

The purpose of this article is to recognize the important role our judiciary must play in protecting consumers of insurance but has yet to fill due to the deficiencies in the current judicial regulatory schemes available for first-party insurance actions (hereafter called "casualty insurance), which involve disputes centered on property and casualty insurance policies. After highlighting the current judicial shortcomings, this article will propose and advocate for the application of products liability principles to casualty insurance actions due to the unique nature of property and casualty insurance policies, and the attractiveness of a products liability framework for solving the myriad of issues present in casualty insurance actions.

The idea of applying a products liability framework to the field of insurance policies is not a novel one, although the analysis of the variety of products liability principles was not carried through in-depth by the author. (2) The same author has also recognized the need for creation of a "post-sale" regulatory scheme to protect consumers from defective financial products ("financial products" being the current buzzword for insurance policies in the industry). (3) However, this article will delve into the problems faced by the insured and the courts with enforcing the current law regulating insurance companies and will then propose the use of several principles currently existing in the field of products liability, to give real protection to the buyers of insurance.

This article consists of five parts. Part I is this introduction. Part II explains and discusses why the insurance industry has not been, and cannot be, regulated through consumer market behaviors (or market self-regulation) and legislatively created administrative regulations. Both failures are due to the unique nature of the insurance market and the enormous size and buying power created by its financial gains.

Part III of this article examines the current regulatory principles the judiciary has at its disposal for the adjudication of casualty insurance actions. This examination starts by explaining what a casualty insurance action is, as differentiated from a third-party insurance (hereafter called "lawsuit insurance") action, and why judicial regulation is needed. Next, Part III goes over the history of casualty insurance actions before the courts, starting with the application of contract principles, but changing over time to actions grounded in tort, as courts gradually realized the inability of contract law to regulate the insurers' behaviors. Finally, Part III examines the shortcomings and inefficiencies of the judicial regulation of casualty insurance actions as they have played out in courtrooms.

Part IV of this article shows how the uniqueness of property and casualty insurance policies and their marketing warrant the imposition of products liability principles, especially when coupled with the problems most often seen in casualty insurance actions. First, doing so will lead to the improvement of consumer information through judicial regulation of defective policy warnings, and, secondly, the judicial regulation of defective policy design will reduce the harm to consumers. Next, Part IV discusses the three products liability theories which are especially pertinent to solving current problems in casualty insurance actions: breach of warranty liability (4), strict tort liability under section 402A (5), and strict tort liability for misrepresentation by seller under section 402B. (6)

Finally, Part V of this article ties together the various threads laid out in the preceding parts and will leave the reader with a new understanding of the challenges courts have today of deciding casualty insurance actions and an appreciation of just how attractive products liability principles are for deciding such actions. In sum, the courts need stronger tools to stop the insurance industry's abuse of its customers.


Before beginning a discussion on the necessity of judicial regulation of insurance companies, it is important to discuss the availability and the ultimate deficiency of the other two means of regulation: market self-regulation through consumer behavior and administrative regulation through the legislative branch of government.

A. Buying an Insurance Policy Is Not Like Buying an Apple, So Why Would the Same Rules Apply to Both?

Although the title of this section sounds a bit oversimplified, it is an adequate description of why the insurance market has failed to regulate itself through insurance consumer behavior. Market self-regulation occurs when consumers, as a group, become aware of bad goods or bad practices by the seller of those goods. Once the consumer group as a whole has been made aware, they regulate how the market itself conducts business by shifting their buying power to another market or seller, thereby forcing the shunned seller to change the way he does business. The key to this type of regulation is informed and aware consumers who are able to disseminate information to fellow consumers, thereby informing the group as a whole and allowing them to dictate how sellers act. The simpler a product or good is, the more effective market self-regulation becomes for a larger number of consumers. This is where the apple analogy becomes effective. (7) However, as modern society has become increasingly sophisticated, so have the products that are available to consumers through the open market. This did not go unnoticed by California Supreme Court Justice Traynor, who realized that these new complexities leave consumers unable to protect themselves. (8)

The same analysis also works for regulating State Farm's behavior in marketing its apples. Every potential buyer of State Farm's apples hears the same sales pitch of how, like a good neighbor, State Farm's friendly and folksy sales people and farm workers strive to give you the best product on the market. However, once the product or good is seen, the potential buyers of these apples know they have been hoodwinked, and that State Farm only cares about making money instead of providing the best apples on the market. Word of mouth between buyers, as each one is immediately disappointed with the same bad apple upon delivery, would also lead to a consumer group decision to abandon State Farm's apples and seek out other vendors.

As suggested in the heading of this section, insurance policies are not apples. They are highly sophisticated boilerplate, standard-form objects that are extremely difficult to inspect because the generalized and abstract language used encompasses a wide range of potential occurrences, which creates ambiguous interpretations during the claims process following an occurrence. (9) Also, any problems or failures of the insurance purchased do not become evident until following a catastrophic occurrence, which will usually happen long after the sale and to a smaller number of people. Therefore, an insurer's reputation held by a large number of consumers concerning their claims' handling does not truthfully represent how they act. (10) Furthermore, even though there may exist buyers in the market place who have the knowledge and ability to "sniff out" the bad apple, the insurance industry is unique in that it has an ability to modify its behavior and products to satisfy informed and intelligent customers. This is accomplished through the buyer-agent relationship. The sellers of insurance, or the agents, must discuss buyers' personal situations in order to assess coverage needs. The interaction allows agents to screen the sophistication of buyers, and adjust their behavior accordingly. (11)

Therefore, buying insurance is not like buying an apple. Due to its complex and sophisticated nature, the market consumer group as a whole does not have the ability to inform itself as to the quality of insurance and the adequacy of the insurance seller's behavior prior to the sale, leading to the failure of re-directing the purchase. Furthermore, the occurrences of insurance failures and reprehensible seller practices only affect a small percentage of the market: the informed minority becomes informed only after buying a "bad apple from State Farm." This means that the keys to market self-regulation, or the informed and aware consumer behavioral adjustments, are not present in the insurance industry, leading to a total failure of self-regulation. In addition, although some consumers might be informed, the agent can identify this minority prior to engaging in bad behavior and change its spots.

B. The Trillion Dollar Lobby Monkey on the Legislative Branch's Back

The second method of failed regulation is the legislatively created administrative regulation. This failure is due to numerous factors: federalism concerns, special interest groups, regulatory forum shopping, limited administrative investigative resources, and the fact that in 2008, during the global financial crisis, the insurance industry's net premiums still totalled around $1.2 trillion. (12)

The mention of a federalism concern in regards to legislative regulation of insurance companies means that each of the fifty states has its own set of standards and guidelines to regulate the sale of insurance within the particular state's borders. If one state has a more favorable or lenient regulatory system, then the insurance company to be regulated will choose to locate there. A large incentive, therefore, exists for states to create favorable regulatory methods to attract insurance companies. (13) Furthermore, due to the large financial capacity and influence held by larger insurance companies, pressure can be put onto a state's legislature to influence its behavior. (14) An example of the fruit of this insurance-created incentive would be a state's adoption of the "Unfair Claims Settlement Practices Act" ("UCSPA"), in which the legislature has deemed what behavior it finds to be fair and proper, while at the same time prohibiting private causes of action under the statute. (15) The UCSPA statutes create an insurance commissioner who is tasked with pursuing and disciplining bad insurance companies. This sounds great in theory, but dissenting California Supreme Court Justice Mosk pointed out the shortcomings of this legislatively created administrative regulation noting that following California's enactment of its UCPA in 1959, there is not 'a single case reported in which the Insurance Commissioner has taken disciplinary action against a carrier for 'unfair and deceptive acts or practices in the business of insurance' involving a claimant." (16) As will be discussed further in Part III, the varying definitions and tests of exactly what constitutes insurer bad behavior in the denial of insurance claims throughout the fifty states lends further weight to the failure of the legislature to regulate the insurance industry through administrative procedures.

As such, the legislative branch of our government is hamstringed in its attempt to regulate the insurance industry. This is not to say that all legislators are dishonest or are taking bribes; it is just to say that larger insurance companies hold far greater power in the bargaining department than do state legislators, and there are plenty of states that would welcome an insurance company to a new home.


The term "casualty insurance action" is used to describe a suit with the opposing parties being the insured-consumer versus his insurer-seller. They most often center around a denial of coverage for a large property or casualty claim, where the insured-consumer is deprived of the protection he relied on in purchasing the insurer's policy, when sudden occurrences destroy the insured's property or income producing assets. (17) An example is where a lawsuit is filed after a home or business bums down and the owner has called upon his insurance company to pay for the legitimate loss pursuant to the fire insurance policy he purchased, only to be denied coverage. These claims are differentiated from a "lawsuit insurance action," where a lawsuit has been filed against the purchaser-turned-tortfeasor, and the insurance company's appointed lawyer, pursuant to the automobile liability insurance policy, defends the lawsuit in a manner not in the purchaser-turned-tortfeasor's best interests. As will be explained below, much of the current regulatory theory used by courts today for casualty insurance actions developed in the context of lawsuit insurance actions first, and was then applied to first-party actions.

As will be explained in Part III (a), one of the problems facing courts today in regulating insurance company behavior comes from the nature of the insurance industry itself. Traditionally, courts used common law contract principles and remedies to decide the outcome when adjudicating disputes between insurance companies and their customers, and some are still used today. (18) As was discussed in Part 11(a), buying or contracting to buy an insurance policy is not the same as buying an apple. The development of contract principles and remedies through the common law process arose through disputes involving the purchases of relatively simple items, as discussed previously. These principles can simply be put in a way that would make a contracts law professor cringe: two parties of equal bargaining power and understanding come together to create a transaction, each has something the other wants, one has a good with a determinable value, and the other has the determined value of the good. Being of equal understanding and bargaining power allows the parties to evenly negotiate the terms of the transaction with both having input to compromise and create a two-sided deal beneficial to each, and if an insurmountable disagreement arises, either side can walk away and find a new candidate to arrange a transaction. Being of equal understanding means that the consumer is fully aware and informed of the market conditions, the quality of goods being sold, and the availability of alternative goods to purchase. Therefore, the potential consumer can sniff out a bad product or bad behavior by the seller before he becomes hurt, and he can find another seller. This capability to fashion a deal is called the "freedom of contract," and is the lynchpin of contract principles and remedies. (19)

The idea of insured-consumers using freedom of contract to protect their interests is a laughable fiction when one considers freedom of contract's inapplicability to the modern insurance transaction, based upon the modest and uncomplicated transactions which created the principle. (20) Also, and possibly the most important concern cutting against the validity of "freedom of contract," even though the insurance market is effectively rigged against the consumers, is that courts still applying freedom of contract seem to ignore the requirement of consumers being rational and informed for it to work. As previously discussed in the apple analogy, insurance policies are some of the most complicated creations for sale today and, therefore, are not subject to the usual market controls. Average Joe Consumer does not have the ability to break down policy fine print in order to hypothesize what calamity the vague language could be applied to so he can freely negotiate a new policy. Because the consumer does not have the capacity to inform himself about the policy being sold, he is incapable of making a rational decision about whether to buy it or not, meaning that he cannot leave insurer number one and go to insurer number two to see if he can get a better deal. This restrictive and adhesive market means that the majority of insured citizens in America today are susceptible to exploitation by property and casualty insurers.

Next, Part III(a) will discuss the principles and theories used by courts when solving casualty insurance disputes in the early twentieth century before they began moving towards the current regulatory scheme.

A. Judicial Regulation Under Traditional Contract Principles

Historically, until around the end of the 1950s, the only judicial recourse available to an insured-consumer who was the victim of an insurer-seller's failure to cover or honor the policy was a remedy grounded in contract law principles. These principles state that if the deal was made for a commercial advantage, and was unfulfilled by one party, a substitute could fulfill the obligations. Any recovery in a breach of contract action is limited to the dollar amount set out in the agreement, disallowing consequential damages because they were not foreseeable by the parties when the contract was formed. In no way are punitive damages allowed under traditional breach of contract principles.

These principles work when applied to traditional, freely negotiated commercial contracts. However, insurance policies are not traditional, freely negotiated commercial contracts. In addition to the above discussion on the adhesive nature of insurance policies and their limitations on flexibility, insurance policies are not commercial contracts made for an immediate benefit. They are purchased by the insured-consumer to be a shield or safety device in a time of sudden calamity or catastrophe, and are hoped by the consumer to never be used. Also, if an insurer breaches and wrongfully denies coverage, the denied insured-consumer certainly cannot shop around the market for a substitute to fulfill his breached policy.

Applying these traditional contract principles and remedies, courts deciding insurance disputes in the early twentieth century often reasoned the plaintiff-insured freely entered into the policy, and freely gave his right to defend to the defendant-insurer. As a result, he cannot now claim that defendant-insurer's decision to reject a settlement offer within the policy limits was unreasonable, and defendant-insurer must pay the excess amount. The court would then hold that the defendant-insurer was only bound to pay what he agreed to pay (the policy limit) and plaintiff-insurer must pay the excess judgment (which would have been avoided had defendant-insurer accepted the settlement offer in the first place). (21) So under contract principles, even if a denied insured-consumer wins after the time, anguish, and expenses of a trial, the only remedy he receives (and the only penalty for the defendant-insurer) is fulfillment of the dollar amount specified in the insurance policy.

This limitation of contractual remedy has changed insurance companies' thinking, whereby delays and threats of refusal to cover the policy are used to beat down the insured-consumer into taking less money than they are entitled to under the policy. The more emboldened insurers will deny any recovery to the policyholder with the hope that he will be too poor or beat down to file a suit, thereby creating a surplus of income for the insurer. As explained by the Rhode Island Supreme Court:
   Insurers, backed by sufficient financial resources,
   are encouraged to delay payment of claims to their
   insureds with an eye toward settling for a lesser
   amount than that due under the policy.... The inequity
   of this situation becomes particularly apparent
   in the area of disability insurance in which the
   insured, often pursued by creditors and devoid of
   bargaining power, may easily be persuaded to settle
   for an amount substantially lower than that provided
   for in the insurance contract. (22)

This slow realization as to the inadequacies and inequitable consequences of contract remedies to casualty insurance actions was tough for the courts to swallow, and they made clear their distaste.

As will be discussed in Part III(b), courts began searching for a way around rigid contract principles in the mid-twentieth century in order to further protect consumers from unscrupulous insurers. This was because they recognized the lack of an incentive for insurers to correct exploitative policies, and the unavailability of a regulatory scheme to protect denied-insureds.

B. Creation of First-Party Bad Faith" as a Tort

Courts by the mid-twentieth century finally recognized that insurers were selling insured-consumers basically worthless insurance policies by either not investigating claims, flat-out refusing to cover claims, or by excluding coverage through overly broad and generalized policy provisions keyed to whatever was needed for denial. Insurer-sellers were doing all of this with little fear of the consequences or incentives to change, because any dispute of the denial by the insured-consumer would be looked at by a court using traditional contract principles which left the insured-consumer with little to no protection at all. Having recognized its inadequacy to regulate the sale of insurance policies, American courts in the latter half of the twentieth century pursued a goal of providing a more just and fair resolution for the insured-consumer in insurance disputes. This goal was accomplished by expanding the damages available to injured insured-consumers, thus increasing the penalty (dollar amount coming out of the insurer's pocket) and incentivizing the liable insurer-seller to comply with its policies. Turning away from contract law, courts embraced tort law with the creation of a new tort--bad faith denial of insurance.

The court's new regulatory tool in the insurance field was first seen in the realm of lawsuit insurance disputes. The Supreme Court of California announced this new tool in the judiciary's tool box in 1958 in Comunale v. Traders & General Insurance Company. (23) By injecting tort law principles into an action for failure to settle a claim within limits, the California court made available to the injured insured-consumer the relief of not having to pay the excess judgment. The court stated the "implied covenant of good faith and fair dealing [which is] implicit in every contract" meant that in a third-party dispute, an insurer must accept an offer within the limits of the insurance policy. (24) This is because the insurer has taken control of the insured's defense in the lawsuit and, therefore, the insured's interests are above those of the insurer. (25) A refusal to settle which results in an excessive jury verdict against the insured will mean the insurer has to pay the excess amount, upon a showing by the insured that the insurer lacked good faith. The Ohio Supreme Court stated:
   A lack of good faith is the equivalent of bad faith,
   and bad faith, although not susceptible of concrete
   definition, embraces more than bad judgment or
   negligence. It imports a dishonest purpose, moral
   obliquity, conscious wrongdoing, breach of a
   known duty through some ulterior motive or ill will
   partaking of the nature of fraud. It also embraces actual
   intent to mislead or deceive another. (26)

The rule announced in Comunale is still prevalent today for lawsuit insurance disputes, which focus heavily on the fiduciary duties created by the insurer taking control of the insured consumer's defense. (27)

The Supreme Court of California did not wait long to inject Comunale's reasoning for third-party disputes into the world of first-party property and casualty insurance disputes, doing so in Gruenberg v. Aetna Insurance Company. (28) Disregarding the distinctions between first and third party actions, the court held, "when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort." (29) The court further stated that the injured insured-consumer could also recover tort damages for mental distress in addition to the contract and consequential damages, adding another deterrent for insurer-sellers by making a larger penalty for bad faith denial. (30)

The California court went further and, by making a public policy statement, solidified their new tort of first-party bad faith denial in Egan v. Mutual of Omaha Insurance Company. (31) In Part III(c), this article will discuss how courts around the country began to take note and how the spread of the new tort did not take long.

C. Spreading of "First-Party Bad Faith " Among the States

As discussed in Part III(b) above, California struck the first blow for injured insured-consumers in Gruenberg by creating a tort cause of action for first-party insurance disputes. However, California was not the only state experiencing behavior from insurers like the type seen by the California courts.

In 1978, the Wisconsin Supreme Court took up the torch and found that a cause of action in tort against an insurer for a bad-faith refusal to honor a claim would be allowed in Anderson v. Continental Insurance Company. (32) However, Anderson characterized the new tort as an intentional tort, requiring a "defendant's knowledge or reckless disregard" of the lack of reasonable basis for denying the claim. This mens rea component was added because the court thought the California approach might force insurers to pay claims when they had a right to deny the claim, and to keep rates low. (33) After the announcement of this rule, the other 48 states were left with three options to choose from in regards to casualty insurance disputes: (1) stick to contract principles; (2) follow the Gruenberg non-intentional first-party bad faith insurance tort claims; or (3) follow the Anderson intentional first-party bad faith insurance tort claims.

State courts making these decisions were seeing the same problems the Wisconsin and California supreme courts saw--a lack of judicial regulation and remedial tools in casualty insurance disputes about payment of claims that were covered by the policy. Over half of the states have decided to adopt some form of the new first-party tort since its creation in 1973, which is a sign that the problems of property and casualty insurance are real nationwide, and that there needs to be a judicial method of regulation present for the insurance market.

There are twelve states which have chosen to follow California's framework in Gruenberg, where no requirement exists that the insurer have actual knowledge or reckless disregard of the lack of a reasonable basis for denying the insurance claim. (34) This results in an easier claim for plaintiffs to bring in comparison with Wisconsin's formulation.

The Wisconsin Supreme Court's formulation in Anderson of the new first-party bad faith tort has been followed by sixteen states. This formulation of the new tort requires that the insurer have actual knowledge or a reckless disregard for the lack of a reasonable/arguable basis for denying coverage. This is a harder claim to prove than the Gruenberg standard. (35)

Of the remaining states that have not adopted the new first-party tort, only six of them have had the issue brought before their supreme court. These states stuck with contract principles and declined to extend the new tort. (36)

Each state that has adopted the new tort has stuck with the general framework put together by either the Wisconsin or California high courts. However, they have also put their own spin on just what the definition of "bad faith" is in a casualty insurance action, and what exactly a plaintiff has to show. Also, each state has offered different defenses for insurers, as well as tinkering with the timeframe during which an insurer's decision is to be examined. The result is an unpredictable, non-uniform, and fact sensitive method of judicial regulation, which proves to be an inefficient method of regulating the insurance market.

Part III(d) of this article examines the deficiencies present in the bad-faith regulatory tool in creating incentives for insurers to behave by providing deterrents. This will be shown through the confusion and inability of courts as to just what they are supposed to be finding in order to get liability. Also shown will be the inefficiency of a subjective and case sensitive inquiry as a regulatory tool in terms of trying to create a uniform incentive for insurers to sell policies that work. This is even more prevalent when one sees the lengths some courts have gone to in order to provide honest insurers an out for legitimate denials, only to have these safe-ways hijacked.

D. The Failure of "First-Party Bad Faith " to Create Incentives and Act as a Deterrent

For a court to effectively and efficiently regulate a certain area of society, it must use widely applicable rules that are easy for lower courts to apply in order to give uniform, predictable, and acceptable results. Although the California Supreme Court in Gruenberg was well intentioned, the tort of "first-party bad faith" is not an efficient tool for regulating the sellers of property and casualty insurance.

First, first-party bad faith is most certainly not widely applicable. This is because each court reviewing this type of claim must delve into the subjective knowledge of the insurer-seller at the time leading up to and factoring into the denial. This is the wrong focus for a regulatory model. The insurer did not sell the insured an adjuster, or a claims review process. The insurer sold the policy. The focus should be an objective based inquiry: "What was this policy supposed to do, and were its limitations effectively communicated to the insured-consumer in an objectively understandable manner?" But the most important question is: "Did the agent protect his principal and act as a fiduciary expert in seeing to the principal's needs?" This question is an extension of the principle that good faith requires paying claims.

The scarce applicability of this first-party bad faith cause of action cuts against effective deterrence because an insurer knows it might get caught every once in a while, but if it has an "arguably reasonable" basis for denying the claim, then it will not be liable. (37) An "arguably reasonable" basis for denying the claim can be explained as follows: an insured files a claim to recover on his home fire loss policy. Ten people claim to have seen the house bum down, nine of which claim natural causes, and one who claims arson. The insurer's quest could stop right there and he could deny coverage in good faith without waiting on the results of the police investigation because one out of ten people saying arson could be "arguably reasonable." Thus, depending on the jurisdiction, an insurer can subjectively create an arguable basis for denial and avoid a bad-faith finding of liability.

Secondly, "first-party bad faith" as a regulatory tort does not produce uniform or predictable deterrents to incentivize drafting effective policies or to provide information to the insured-consumers about their policies' limitations. This is because trial court juries, and reviewing appellate court judges, have struggled to define just exactly what "bad faith" is. A Tennessee court has stated:
   Mere negligence is not sufficient to impose liability
   for failure to settle. Moreover, an insurer's mistaken
   judgment is not bad faith if it was made honestly
   and followed an investigation performed with ordinary
   care and diligence. However, negligence may
   be considered along with other circumstantial evidence
   to suggest an indifference toward an insured's
   interest. (38)

This same type of vague inquiry is used in Colorado, (39) and was even admitted by the Alabama Supreme Court in Slade, although Alabama also requires a showing of the breach of a known duty. (40) However, this is not as simple as the Alabama Supreme Court suggested. Who is determining the motive of self-interest or presence of ill will in the adjuster? Such a subjective inquiry will have wildly inconsistent and varied results depending on everything from the demographics of the jury to the opinions of the reviewing judges, and has proven to be an ineffective regulatory method.

As a result of the subjective and case sensitive inquiry, which focuses on the subjective knowledge and intent of the adjuster, the tort of first-party bad faith has failed its regulatory and incentive creating purpose. The rules are not widely applicable because each jurisdiction has its own view of the tort, and because the court looks to the individual actions of the particular insurer. This subjective inquiry does not give predictable results, but rather allows an inefficient and exploitative policy or practice by an insurer in one jurisdiction whereas it might be viewed as fair and efficient in the next one. Therefore, first-party bad faith claims are not a universal stick to punish bad policies regardless of the jurisdiction and thus they fail to provide a widespread incentive to change the structure and design of insurance policies.


At first glance, this idea may seem a bit strange, but it becomes more appealing the further the idea is carried. Part IV will introduce the proposal and advocate that products liability principles and theories be applied to casualty insurance disputes. Products liability has proven success as an effective regulatory tool. The fact that products liability principles and the insurance industry share the same regulatory goals seems to indicate that the principles and theories of product liability could be successfully applied to casualty insurance.

As discussed in Part III of this article, contract law and contract principles have played the villain in the good faith versus bad faith conundrum. This has resulted in the court system reading something into existence that does not, in fact, exist. This judicial fiction is the "implied covenant of good faith and fair dealing." The courts started this ball rolling in Comunale with its "bad faith" subjective analysis in casualty insurance disputes. Even though well intentioned, when it attempted to regulate the insurance companies and give these companies incentives to not breach their policies, the courts overlooked an existing and far simpler solution in terms of fact-finder friendliness, uniform results, and a proven track record. That solution was set out in the compendium of products liability principles advanced in McPherson v. Buick, where the court ripped away the ancient contract principle of "privity," which had long served as a veil for shielding product manufacturers from liability resulting from their defective products. (41)

A. Availability and Attractiveness of Products Liability Tort Principles to Protect the Consumers of Casualty Insurance

When considering this proposal try not to get too caught up on the differences between the various tangible products. Consider, for example, a laptop computer and an insurance policy. Although their construction is different--one is a complicated instrument capable of being produced or crafted only by people specifically trained in its construction, while the other is, wait ... exactly the same.

While those opposing my approach could argue that in products liability cases it is the product itself that causes the injury, unlike casualty insurance disputes where the harm is caused by a calamity or sudden occurrence. However, this distinction alone is not sufficient to discount the application of products liability principles as a regulatory method for casualty insurance disputes because the products liability framework was developed to serve the exact same regulatory goals discussed at the beginning of this article and outlined briefly in the following paragraphs.

First, insured-consumers need to be given appropriate and sufficient information so that they are aware of the policy limitations before they purchase the policy. There must be a means for providing compensation to the injured insurance consumer and some method for deterring the insurance industry from engaging in bad behavior. This has been accomplished with products liability by requiring that effective warnings be given to consumers and placed on the products.

Secondly, in casualty insurance disputes the defective policies themselves need to be redesigned in order to correct the harms caused by generalized exclusionary statements that can be construed to the insurer's benefit whenever it is advantageous. Products liability principles can also serve as a suitable regulatory alternative in this sense by creating objective and predictable requirements by stating specifically what defect exists (lack of coverage) and how to fix it.

An insurance policy is viewed, by the insured-consumer, as a tangible form of protection that will shield him from further damage when sudden occurrences or calamities transpire to his detriment. This can be directly correlated to certain products. For example, a construction worker's safety harness serves the function of preventing further injury in the case of a fall. The failure of the safety harness to function as intended may mean that it is actually the failure of this tangible protection, i.e. the safety harness and not the fall, that is ultimately to blame for the worker's catastrophic injuries. The same parallel could be drawn regarding an airbag or seatbelt failure. Likewise, insurance companies market casualty insurance as protection for the consumer. The initial impact or occurrence activates the "safety-net protection" which is provided to shield the insured-consumer from further injury. Furthermore, insurance companies have recently begun referring to the policies they offer on the market as "financial products," which lends even more credence to an insured-consumer's belief that he has purchased a tangible form of protection. Additional justification for using products liability principles in regulating the insurance market is that, in the words of my Torts and Products Liability professor, Don Gamer, "it impeaches the product and not the producer." This means that the focus is taken off the subjective actions of the insurance adjuster and is instead placed on the actual policy, which is the "tangible" thing purchased. This eliminates the confusion that results when the courts try to determine good or bad faith as discussed above.

The remainder of Part IV will summarize how several products liability theories are attractive alternatives that the courts should implement in the regulation of property and casualty insurance policies.

B. Warranty Principles

The warranty aspect of products liability theory focuses on important facets of the relationship created between the buyer and seller during their transaction. The communications and transfer of knowledge between the parties, along with the reliance, if any, that is placed on these details of the transfer are especially pertinent to this analysis. Part IV(b) of this article will initially address the Magnuson-Moss Warranty Act, which enables customers who are injured due to the gross product warranty abuse of the manufacturer to have their day in court by allowing them to initiate a private cause of action. Next, Section 2-315 of the Uniform Commercial Code will be discussed. This section provides the codification of the "Implied Warranty: Fitness for Particular Purpose." It serves to protect consumers, who are uninformed, unaware, and whom have placed total reliance in the seller's verbal or written expert promise to supply them with a good or service, to meet their needs. Then, Section 2-316 of the Uniform Commercial Code will be examined briefly because it controls how a seller can exclude or modify its warranty for a product.

i. Magnuson-Moss Warranty--Federal Trade Commission Improvement Act

In 1975, the United States Congress passed the Magnuson-Moss Warranty Act (hereafter MMWA). (42) The MMWA had four objectives. First, the MMWA was to promote consumers' understanding of written warranties by establishing a minimum disclosure standard for written consumer product warranties. Second, the MMWA was to provide certain basic consumer protections when an individual purchases a product that has a written warranty. Third, the MMWA was to make the Federal Trade Commission more effective by expanding their consumer protection activities. Fourth, the MMWA was to provide the consumer with an economically viable avenue of redress when a producer breached a warranty or service contract obligation by allowing a winning claimant to collect attorney's fees as well as damages from a suit. (43)

The MMWA was, in effect, a response to unscrupulous product manufacturers who drafted written warranties that were incredibly complicated and confusing. These unconscionable and adhesive sales contracts excluded any implied or express warranty made during the sale, and in the event of any "mishap" they excluded or modified any remedies in complete favor of the producer. Perhaps the most egregious example of this type of behavior can be seen in Henningsen v. Bloomfield Motors, Inc. (44) In this case, the car dealer's written warranty stated that no remedy existed other than as provided in the warranty, which stated that replacement or repair of the broken parts would be provided only upon the delivery of the wrecked car to the factory and only within 90 days. (45) The MMWA's first two objectives, promoting consumer understanding and providing consumer protections, were intended to correct behavior like that seen in Henningsen. The MMWA mandated that written warranties must have uniform terminology, and be clear enough for consumers to understand. (46)

The very problems discussed above are the same problems facing consumers of casualty insurance today and they are the very issues addressed by the MMWA. The use of confusing and broadly generalized language in insurance policy provisions results in ambiguous and non-uniform implementation when applied to a variety of occurrences. Any language that might put the insurance consumer on notice that certain protections are being withheld is hidden in non-conspicuous text and is not easily identifiable. Another consideration is that the expense of bringing a suit deters the consumer from seeking redress against an insurer who wrongfully withheld payments when the occurrence was covered in the policy.

Application of the MMWA's principles would solve many of the problems facing insurance consumers today, in that, the policy language itself would be made clear and it would be obvious which protections are lacking, making the policy more easily understood by a larger number of consumers, in addition, the availability of attorney's fees for a winning plaintiff would provide an incentive to injured consumers to bring a suit against a defective policy and its producer. Thus, the MMWA principles would promote the exact same objectives whether it is applied to insurance policies or product warranties.

ii. U.C.C. [section] 2-315: "Implied Warranty: Fitness for Particular Purpose"

The unique nature of the association between a seller and a consumer of casualty insurance created during the transaction is one of a fiduciary relationship. The seller or agent is holding himself out to be an expert who will sit down with the individual that is considering purchasing insurance coverage, and determine exactly which policy is appropriate based on the potential buyer's communication regarding the protections he desires and his financial situation. The agent would then craft a casualty insurance policy to fit the customer's specific needs. An essential component in this transaction is that, "the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods...." (47) This is the exact language used in the U.C.C.'s implied warranty for the fitness of a good for a particular purpose.

The implied warranty of fitness is the embodiment of protection for uninformed and unaware consumers who purchase goods from an informed and expert seller. Its design and purpose is to impress upon such a seller that he has a duty to provide a working and adequate good that fits the purchaser's needs and will not damage or hurt the purchaser. The obligations set forth in the implied warranty of fitness often coincide with strict tort liability because, by holding oneself out as an expert, the seller undertakes a greater role and thus a greater responsibility. This principle is illustrated in Barb v. Wallace where the customer explained what he sought and subsequently relied upon the "expert's" recommendation and was later injured by the recommended product. (48)

Those who oppose imposing this type of liability on the sellers of insurance might argue that selling a go-cart engine is completely different from the sale of insurance. They might even go further and assert that the consumer is only seeking to buy the protection and service of insurance and say that the policy being examined for defects is only a container, and not the object being sold. Even though this argument seems logical, courts have already addressed this issue and have found in favor of the injured consumer. In Shaffer v. Victoria Station, Inc., the plaintiff was a restaurant patron who ordered a glass of wine and, upon delivery, the glass broke in plaintiffs hand, causing severe lacerations. (49) The court found that the implied warranty of fitness had been breached because "this bottle was thus 'supplied under the contract of sale' and it follows that it should be reasonably fit for the purpose for which it was supplied. [However,][i]n fact it was not reasonably fit and in consequence of that unfitness the Plaintiff was injured." (50) The court found that strict products liability under section 402A of the Restatement, which will be addressed in Part IV(c) of this article, would also apply:
   We hold the sale of a glass of wine is subject to the
   strict liability provisions of [section] 402A....
   Confirmation of the applicability of [section] 402A
   to this case is given in comment H, which says:
   '[t]he defective condition may arise not only from
   harmful ingredients [ ] but also [ ] from the way in
   which the product is prepared or packed.... The
   container cannot logically be separated from the
   contents when the two are sold as a unit. (51)

This issue was revisited in Gunning ex rel. Gunning v. Small Feast Caterers, Inc., and the court came to the same conclusion. (52) The injured plaintiff relied on the defendant to supply a good that was packaged in a manner that was fit for the particular purpose intended. The policy considerations of section 2-315 of the U.C.C. and section 402A of the Restatement both come into play because the defendant was not an occasional provider, and held himself out as providing this type of service. "The fact that it is the glass and not the drink that caused the harm is of no moment." (53)

Insurance agents are not "occasional providers" of insurance policies; instead they hold themselves out and are viewed by consumers seeking to purchase casualty insurance as expert providers. They know that insurance consumers are relying on them to deliver a policy that will meet their needs and serve their stated purposes. When the provided casualty insurance policy is intended to cover a particular purpose expressed by the consumer, and that policy fails to cover the particular purpose, under section 2-315, the insurer would be liable because of his fiduciary obligation to the consumer. Furthermore, the policy implications inherent in section 402A allow the focus to be on the defective nature of the packaging (the policy itself) so that product safety will be improved for all similarly situated consumers. (54)

Every nuance of the argument in this section for the imposition of an implied warranty of fitness for particular purposes in the realm of casualty insurance disputes can be seen in the case of C & J Fertilizer, Inc. v. Allied Mutual Insurance Company (55):

'The final and perhaps most significant characteristic of insurance contracts differentiating them from ordinary, negotiated commercial contract, is the increasing tendency of the public to look upon the insurance policy not as a contract but as a special from of chattel. The typical applicant buys 'protection' much as he buys groceries.' ... 'A person who has been incessantly assured a given company's policies will afford him complete protection is unlikely to be wary enough to search his policy to find a provision nullifying his burglary protection if the burglar breaks open an inside, but not an outside, door.' ... 'The reasonable consumer for example depends on an insurance agent and insurance company to sell him a policy that 'works' for its intended purpose in much the same way that he depends on a television salesman and television manufacturer. In neither case is he likely to be competent to judge the fitness of the product himself; in both, he must rely on common knowledge and the creator's advertising and promotion.' (56)

The Iowa Supreme Court realized that any reluctance to an application of an implied warranty products liability theory in the realm of casualty insurance transactions, simply because that theory first evolved to protect tangible chattel consumers, was untenable. The consumer told the insurance agent that he wanted a burglary policy and he relied upon the insurer's knowledge and expertise to create this protection. This reliance and trust formed part of the transaction, therefore, the insurer should be held to a higher standard than if he was selling apples. If the insurer was going to disclaim or exclude any coverage under the requested provision, the insurer had to comply with section 2-316 of the Uniform Commercial Code for that exclusion to be effective. (57)

C. Restatement (Second) of Torts [section] 402A: Strict Liability for Defective Products

i. Development of Strict Liability in Tort for Defective Products

The potential for strict liability tort principles to be applied in a products liability setting was most effectively put forth in a concurring opinion by Justice Traynor of the California Supreme Court in Escola v. Coca Cola Bottling Co. of Fresno, (58) Justice Traynor makes a public policy argument that unknowing and uninformed consumers should not be forced to bear the burden of showing why the product failed and injured them. In the modern product creation process, the seller is the only one in a position to correct any defective design or warning. As such, in an action for such defect, the producer-defendant should be liable and, therefore, required to fix the defect. The producer defendant can then distribute the costs of fixing such defect among all other consumers. The result is a safer product, which poses less harm to society and to innumerable future consumers of the same or similar products.

This theory was finally utilized in the case of Greenman v. Yuba Power Products, Inc, (59) Justice Traynor, who wrote the opinion, explained the analysis as such: "A manufacturer [or retailer] is strictly liable in tort when an article he places on the market, knowing that it is to be used without inspection for defects, proves to have a defect that causes injury to a human being." (60) This view of products liability quickly gained support and was put forward in section 402A of the Second Restatement of Torts as the controlling theory for bringing a tort suit based in products liability. It was favored because the inquiry focused on the product or warning itself and not on the behavior of the defendant producer. This was a predictable and uniform rule, which served to curtail abuses by producers of bad products.

The next section will review the two grounds of products liability action pertinent in a casualty insurance dispute--defective warning to the consumer on the policy's limitations, and a defective policy itself.

ii. Restatement (Second) of Torts [section] 402A Products Liability Theories

Justice Traynor's strict liability theory of products liability was compiled and put forth in the American Law Institute's Second Restatement of Torts section 402A: "Special Liability of Seller of Product for Physical Harm to User or Consumer." (61) However, for the purposes of this article, the actual black letter rule is not the focus. It is instead the guiding principles behind the construction of section 402A, which apply to the problem currently faced by courts in dealing with casualty insurance actions.

The basic principle controlling section 402A's analysis is a "consumer expectations" idea. This principle served to limit the exposure of strict liability to defendant producers in the cases of open and obvious dangers, which were not latent or hidden. Therefore, if a consumer could appreciate the potential danger of a product without needing a warning, or without the danger coming from a hidden defect, the producer would not be liable for the consumer's harm.

Restatement (Second) of Torts section 402A has three occurrences to which it can be applied. First is a manufacturing defect, meaning that the design and warning are sufficient, but something happened during the crafting process that made the item dangerous. This first occurrence does not concern the current problem with policy design and warnings in first-party insurance disputes. Second is a defective design of the product, meaning that the product left the seller's hands exactly as he meant it to, but contained a hidden defect which could harm consumers. And third is a defective warning on the product, meaning that the consumers were not provided proper information on the limitations of the product and the potential harm it might cause.

iii. Application of Strict Products Liability to Casualty Insurance Disputes

The policy justifications for applying a strict liability theory to the field of first-party insurance has been put forth and validated by only one jurisdiction, the Supreme Court of West Virginia in Hayseeds, Inc. v. State Farm Fire & Casualty. (62) The West Virginia court recognized the huge disparity in power between an insurer-seller and an insured-consumer. This disparity, coupled with the unique nature of a property insurance policy, meant that the insurer-seller has a higher duty to its insured. For a denied insured to be forced not only to prove that the denial of coverage was wrong, but also to prove that the denial decision was made in bad faith would be too much in the Hayseeds court's view, stemming in part from the complicated nature of the insurance policy provisions, the effects of which when applied are known solely to the seller.

The court's reasoning in Hayseeds is much like a court's reasoning in finding liability for a defective product under section 402A. Only the insurer-seller knows what specific information could fully convey to the insured-consumer adequate knowledge and appreciation of the policy's defects. For example, if the plaintiff insured can show that he was never warned that the hurricane damage policy he purchased did not cover flood damage, and he was then denied coverage for flood damage incurred during a hurricane, the defendant insurer would be strictly liable for failing to convey this knowledge to the plaintiff insured. This knowledge would have alerted him to the need of purchasing a supplemental flood coverage provision, which would have negated his loss.

Likewise, due to the complicated nature of insurance policies, only the insurer-seller has the knowledge and ability to correct defects in policy language provisions that have the effect of causing the insured-consumer harm after a court identifies such defective language. These defects in the policy would be an arbitrary or ambiguous clause, which could be used by an unscrupulous adjuster to deny coverage to an insured-consumer.

For these reasons, a strict tort products liability theory is appealing in the context of insurance producer regulation. The tried and true formula takes all analytical focus off of the producer-seller and instead asks (1) did you inform the insured-consumer of the limitations/dangers present in the policy he was buying?; and (2) was the product/policy designed in a way which hinders its purpose, thereby frustrating the expectations of the insured-consumer when he bought it?

Opponents to the imposition of strict liability in casualty insurance actions might argue that it would abrogate the insurer's right to investigate and reject invalid claims. However, this argument neglects that under a strict liability approach, the insurer's ability to refuse payment of illegitimate claims remains untouched. Prerequisite to any recovery would be a showing by a plaintiff to a jury that the claim was legitimate, and that the insurer wrongfully refused. A practical and beneficial effect of applying strict products liability to casualty insurance disputes is that it gives incentive to insurers to thoroughly investigate the merits of a claim in order to make an informed decision. Considering the insurer's resources and claim assessment expertise, any such imposition would be equitable. (63)

D. Restatement (Second) of Torts [section] 402B Strict Liability for Misrepresentation by Seller

The Second Restatement of Torts section 402B put forward a second theory of products liability applicable to casualty insurance disputes in "Misrepresentation by Seller of Chattels to Consumer." It states:
   One engaged in the business of selling chattels who,
   by advertising, labels, or otherwise, makes to the
   public a misrepresentation of a material fact concerning
   the character or quality of a chattel sold by
   him is subject to liability for physical harm to a
   consumer of the chattel caused by justifiable reliance
   upon the misrepresentation, even though; (a) it
   is not made fraudulently or negligently, and (b) the
   consumer has not bought the chattel from or entered
   into any contractual relation with the seller.

Section 402B is grounded in strict liability, just like section 402A. This means that if a plaintiff-consumer can show that he justifiably relied on the communications of the defendant-seller in buying a product, and was subsequently injured because the communications relied upon and used to induce his purchase misrepresented an important part of the product's character or quality, then the defendant-seller is strictly liable to him for the misrepresentation. This follows the same policy basis of section 402A, that the producer and its agents control what information is released about a product in order to solicit the purchasing of the product. If a producer is disseminating false or misleading information about the character and quality of its goods, and people believe this information to their detriment, then that producer is liable for their harm. This theory was fleshed out in the case of Klages v. General Ordnance Equipment Corporation. (64) The attendant in Klages relied on the defendant's promotional literature and representations on the character of its good in making his decision to purchase it. When the good later turned out to not have the advertised qualities, and did not perform as the plaintiff-consumer relied that it would, the court said defendant-producer was strictly liable with no defense of assumption of the risk.

Section 402B is especially applicable to the realm of insurance policy marketing. The complex nature of the polices themselves, which has been discussed above in this article, leaves insured-consumers no option but to rely on the communications and representations of the insurance companies and their agents when deciding which seller's policy would best be relied upon to suit his needs. This reliance, if it later turns out to be misplaced, binds an insurer-producer to the information he provided because he is the only one who truly knows how the product will work. This same thought process could also trigger the products liability theory of "implied warranty of fitness for a particular purpose," discussed previously in this article. (65)

If we return to the hurricane policy hypothetical discussed above, this obvious applicability is even starker. The insurer-seller states, "[T]his policy will protect the dream beach home you have worked all your life to build from all the ravages of a hurricane." The insured-consumer does not know what exactly "all the ravages of a hurricane" entails, but he does know that the insurer-seller has been doing business on the gulf coast for years. He relies upon insurer-seller's representation of coverage and purchases the policy. Six months later Hurricane Traynor storms ashore, destroying insured-consumer's beach house with its storm surge. This surge is then classified as flood damage by seller's policy, coverage of which is specifically excluded in the policy. If the now plaintiff-insured had known about the lack in flood/water coverage, he would have asked how to acquire said coverage and learned from now defendant-seller that a government-subsidized flood policy was available to fill this coverage gap in his policy. Section 402B says that such misrepresentations about the effectiveness of the policy, when it is applied to certain situations, bind the producer-seller when those representations are relied upon and harm consumers.

Therefore, section 402B would serve both of the goals inherent in regulation of the first-party property and casualty insurance market. It would do so by providing an incentive for insurer-sellers to communicate clearly the limitations and dangers present in each policy, and to correct any policy language defects that misrepresent the quality of the coverage provided by the insurance policy by placing the deterrent of potential liability for consequential damages on the insurance seller.


Based upon the foregoing reasons discussed in this article, it is clear that the current scheme used by the judiciary to regulate the behavior of insurer-sellers in today's first-party property and casualty insurance market are woefully inadequate and do not create conditions which could bring about change. This is because the tort action of "first-party bad faith" requires a highly subjective inquiry of the adjuster's actions, results of which vary from state to state, and even county to county. For the regulation to be effective, the results have to be uniform and predictable, combined with a deterrent penalty sufficient enough for insurer-sellers to know what behaviors create liability within the courts, and just how bad those penalties will hurt.

Application of these products liability theories to casualty insurance disputes would serve twin goals of regulating the insurance industry: first, by increasing the information made available to insured-consumers in order for them to make more informed decisions; and secondly, by correcting the abuses caused by defective, ambiguous, and exploitative language present in insurance policy provisions, which are used on a whim to deny coverage. It is obvious how effective products liability regulation could be for the insurance industry. This arises from the unique nature of the policies themselves, the glaring similarities between insurance policies and products, the focus on the product/policy solely in an objective manner resulting in easy application by courts low and high, and the success had by products liability in regulating the production of goods to make it safer for consumers in America today. Remember, products liability should be viewed as a regulatory method and not a legislative creature. The MacPherson court started the ball rolling and made the consumer market a safer place in the realm of tangible chattels. It is time for the next step to be taken. This proposal is worth a serious look as its application could solve many problems present today, which have the potential to affect anyone who has read this article.

(1) United States v. S.-E. Underwriters Ass'n, 322 U.S. 533, 540 (1944). South-Eastern had been charged with violating the Sherman Anti-Trust Act by monopolizing trade and commerce and restraining interstate trade and commerce after fixing arbitrary and noncompetitive fire insurance rates in Alabama, Georgia, North Carolina, Florida, South Carolina, and Virginia. The issue before the Supreme Court was whether the sale of insurance could be considered "interstate commerce."

(2) See Daniel Schwarcz, A Products Liability Theory for the Judicial Regulation of Insurance Policies, 48 Wm. & Mary L. Rev. 1389 (2007). Schwarcz suggests that the "reasonable expectations doctrine," insurance market self-regulation, and state administrative regulation should all be replaced with a products liability framework.

(3) See Daniel Schwarcz, Monitoring, Reporting, and Recalling Defective Financial Products, 2013 U. Chi. Legal F. 409 (2013).

(4) Magnuson-Moss Warranty--Federal Trade Commission Improvement Act, 15 U.S.C. [section][section] 2301-2312 (2012) [hereafter Magnuson-Moss Act]; U.C.C. [section][section] 2-313, 2-315, 2-316 (1977).

(5) Restatement (Second) of Torts [section] 402A.

(6) Restatement (Second) of Torts [section] 402B.

(7) Take for instance "State Farm's" apple stand at the local farmer's market. When consumers approach to buy an apple, they have a chance to visually inspect State Farm's goods. The quality of the apple is easy to ascertain as buyers can check for bruising, worm holes, and fairness of the price as related to other apples. Every potential buyer who inspects State Farm's apples has the ability to pick out the bad ones, and if State Farm only sells bad apples, the buyers also have the ability to choose another seller before spending any money. When State Farm begins to lose its customers due to buyers shifting their preferences elsewhere, it can either change the way it produces apples or go out of business entirely. This is the essence of market self-regulation through consumer behavior.

(8) Escola v. Coca Cola Bottling Co. of Fresno, 150 P.2d 436, 443 (Cal. 1944). "As handicrafts have been replaced by mass production ... the close relationship between the producer and consumer of a product has been altered.... The consumer no longer has means or skill enough to investigate for himself the soundness of a product, ... and his erstwhile vigilance has been lulled...."

(9) See Kenneth S. Abraham, Distributing Risk: Insurance, Legal Theory, and Public Policy 174 (1986) ("Insurance policies often are not specific enough to make the rights and obligations of the parties during the claims process crystal clear.").

(10) See Schwarcz, supra note 2, at 1414 (Most consumers only experience insurer behavior following a small occurrence such as a broken windshield or fallen tree. The reputation built upon these inexpensive claims does not take into account the low-probability, high-cost losses which form the bulk of casualty insurance actions.).

(11) See R. Ted Cruz & Jeffrey J. Hinck, Not My Brother's Keeper: The Inability of an Informed Minority to Correct for Imperfect Information, 47 Hastings L.J. 635, 672, 674-75 (1996).

(12) See Press Release, Insurance Information Institute, ISO Release: Full Year 2008 Results Show P/C Industry Well Capitalized Despite Being Pummeled by Catastrophes, Recession, and the Financial Crisis (Apr. 9, 2009), available at

(13) See Daniel Schwarcz, Regulating Insurance Sales or Selling Insurance Regulation?: Against Regulatory Competition in Insurance, 94 Minn. L. Rev. 1707, 1721 (2010) (discussing the taxes states can collect from the insurance sales made within their borders).

(14) See Lavonne Kuykendall, Insurer State Farm Drops Plan to Leave Florida, Wall St. J., Dec. 16, 2009, (State Farm agreed to stay only after the state regulator allowed it to not renew around 15% of its residential property policies and to raise its rates on approximately 15% of all homeowners and condo unit policies.).

(15) See generally Cal. Ins. Code [section] 790.03 (West 2013); N.C. Gen. Stat. [section] 58-63-15 (2011); Ohio Rev. Code Ann. [section] 3901.21 (West 2013); S.C. Code Ann. [section] 38-59-20 (2002).

(16) See Moradi-Shalal v. Fireman's Fund Ins. Cos., 758 P.2d 58, 77 (Cal. 1988) (Mosk, J., dissenting).

(17) See Robert H. Jerry, II & Douglas R. Richmond, Understanding Insurance Law [section] 13 A (5th ed. 2012) (This does not include "personal lines of insurance" which would be health, life, or disability insurance and are usually sold as group policies.).

(18) See Beck v. Farmers Ins. Exch., 701 P.2d 795, 802 (Utah 1985) (In rejecting a tort theory of bad faith, the court held that in first-party actions, the duties and obligations of the insurer and insured are contractual in nature rather than fiduciary.); Strader v. Union Hall, Inc., 486 F. Supp. 159, 164 (N.D. Ill. 1980) (The court held that the plaintiffs tort action for breach of good faith by insurer did not exist in Illinois, and the only action would be under breach of contract.).

(19) Courts using this contracts' lens in a dispute are going to say that the party harmed because of a breach was fully aware and informed when he entered the deal. Therefore, the party was free to walk away and the fact they are hurt is their own fault; they had the ability to lessen the impact of any harm. This would include finding another seller of products to replace what was lost in the breach. The remedy for any breach will be limited to the amounts negotiated in the contract, with the potential of the additional cost to the victim of the breach in finding a new seller. In sum, courts applying contract principles say that freedom of contract allows each party in a deal to have the capability to protect their own interest.

(20) See Schwarcz, supra note 2, at 1412. Schwarcz points out, first, the drafting of many insurance policies are done by a single service, resulting in "base policies" which can be customized by endorsements, these being standardized boiler plate forms favored for their saving on drafting costs. That is to say, the consumer has no voice in drafting the mass-market policies, severely undercutting the idea of equal bargaining power. Secondly, to maximize profits, exploitative provisions are sold to informed and uninformed consumers alike, with the result that a large number of consumers buy a high priced policy that does not fit their needs as explained to the seller. Third, state regulations limiting the rates of insurance policies add incentive for insurance firms to draft one-sided policies, which will retain premiums paid by the insured. Fourth, insurance policies are impossible to decipher by an average consumer, as they use a collection of vague and overly generalized statements to deal with a multitude of possible occurrences, thereby creating multiple ambiguities and inefficiencies. Fifth, insurance firms keep using the same policy language because the results of any particular suit can be predicted as more courts interpret it.

(21) See generally Neuberger v. Preferred Acc. Ins. Co. of New York, 89 So. 90 (Ala. Ct. App. 1921); Long v. Union Indem. Co., 178N.E. 737 (Mass. 1931); Rumford Falls Paper Co. v. Fid. & Cas. Co. 43 A. 503 (Me. 1899); McClung v. Pennsylvania Taximeter Cab Co., 97 A. 694 (Pa. 1916); Wisconsin Zinc Co. v. Fid. & Deposit Co. of Md., 155 N.W. 1081 (Wis. 1916).

(22) Bibeault v. Hanover Ins. Co., 417 A.2d 313, 318 (R.I. 1980) (recognizing that a contract claim for insurance proceeds may not protect the injured party in such a situation); Cf. Noble v. Nat'l Am. Life Ins. Co., 624 P.2d 866, 868 (Ariz. 1981) (finding insurance companies have a duty of good faith to pay valid claims). See generally Spencer v. Aetna Life & Cas. Ins. Co., 611 P.2d 149, 155 (Kan. 1980) (discussing courts' reasons for adopting the tort of bad faith.).

(23) Comunale v. Traders & Gen. Ins. Co., 328 P.2d 198 (Cal. 1958). Traders refused to settle a claim within policy limits after their insured struck Mr. & Mrs. Comunale in a crosswalk. Id. The refusal to settle within the policy limits led to a jury trial, which in turn led to a huge jury verdict against Traders and their insured. Id. The California Supreme Court abandoned contract principles and held Traders liable for the verdict amount over the policy limit, finding they failed to exercise "good faith and fair dealing." Id. at 262.

(24) Id. at 201.

(25) See id.

(26) Slater v. Motorists Mut. Ins. Co., 187 N.E.2d 45, 46 (Ohio 1962) (formulating the standard to use in a lawsuit insurance action for failure to settle or to negotiate).

(27) See, e.g., Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 323 A.2d 495, 508-09 (N.J. 1974) (discussing the possibility of liability, without a showing of bad faith, due to the fiduciary relationship between the insurer and insured); see also Crisci v. Sec. Ins. Co., 426 P.2d 173, 177 (Cal. 1967).

(28) Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973). Insured filed suit against his insurer, seeking recovery for bad faith denial of fire policy coverage and outrageous conduct when he alleged that the insurer willfully, maliciously, and falsely told the police he had committed arson when insured's restaurant burned down. Id. at 1035. As the police investigated the insured (because of the insurer's arson claim), the insured was unable to attend insurer's requested meeting. Id. The insured's failure to show was used as the reason for denial. Id.

(29) Id. at 1038.

(30) See id. at 1042.

(31) Egan v. Mut. of Omaha Ins. Co., 620 P.2d 141 (Cal. 1979). Plaintiff's disability insurer cut off his benefits without first discussing his medical condition with his physicians. Id. at 144. In justifying the award of punitive damages, the court stated, "The obligations of good faith and fair dealing encompass qualities of decency and humanity inherent in the responsibilities of a fiduciary. Insurers hold themselves out as fiduciaries, and with the public's trust must go private responsibility with that trust.... [T]he relationship of the insurer and insured is inherently unbalanced.... The availability of punitive damages is thus compatible with recognition of insurers' underlying public obligations and reflects an attempt to restore balance in the contractual relationship." Id. at 146.

(32) Anderson v. Cont'l Ins. Co., 271 N.W.2d 368 (Wis. 1978). Insured bought a policy covering his home for damage arising from fire, explosion, or smoke. Id. at 371. Insured's furnace exploded, covering the inside of his house with oil and smoke residue. Id. Insured alleged that the insurer refused to negotiate in good faith, only offering unrealistically low amounts and continually delaying any payment. Id. at 372. The court found that insurer's reprehensible conduct of avoiding full payment of a claim it knew to be legitimate and covered under the policy created an issue of material fact as to whether the insurer was liable for the tort of first-party bad faith. Id. at 373.

(33) Id. at 378.

(34) See generally Constance A. Anastopoulo, Bad Faith: Building a House of Straw, Sticks, or Bricks, 42 U. Mem. L. Rev. 687, 747 (2011).

(35) See generally id. at 748.

(36) See generally id.

(37) See State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293 (Ala. 1999). The insurer claimed good faith in denying coverage by claiming that it could not have acted in bad faith because the jury found the damage to be outside the scope of the insurance policy where insured's home was partially collapsed after lightning blew out a retaining wall. Id at 302.

(38) Johnson v. Tenn. Fanner's Mut. Ins. Co., 205 S.W.3d 365, 371 (Tenn. 2006) (internal citations omitted).

(39) See Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1274 (Colo. 1985) (analyzing whether a reasonable insurer, under the circumstances, would have denied or delayed payment of the claim under the facts and circumstances).

(40) See Slade, 747 So. 2d at 303-04 ("[T]he standards for recovery for a bad-faith refusal to pay a first-party insurance claim are not so clear. This lack of precision has caused confusion among the bench and bar and has caused much of the debate in this case.... Bad faith, then, is not simply bad judgment or negligence. It imports a dishonest purpose and means a breach of known duty, i.e., good faith and fair dealing, through some motive of self-interest or ill will.").

(41) MacPherson v. Buick Motor Co., 111 N.E. 1050 (N.Y. 1916) (explaining "privity" would not hold and, therefore, the defendant could not be excused from inspecting the components of the car because as a manufacturer of automobiles it was responsible for the finished product and, the more probable the danger, the greater the need for inspection).

(42) Magnuson-Moss Warranty--Federal Trade Commission Improvement Act, 15 U.S.C. [section][section] 2301-2312(2012).

(43) See Janet W. Steverson & Aaron Munter, Then and Now: Reviving the Promise of the Magnuson-Moss Warranty Act, 63 U. Kan. L. Rev. 227, 229-38 (2015).

(44) Henningsen v. Bloomfield Motors, Inc., 161 A.2d 69 (N.J. 1960) (discussing throwing out the defendant's adhesive warranty, and focusing on the complexity and nonconspicuous aspects of the exclusionary language, which was hidden from the plaintiff when he was being forced to sign the contract).

(45) Id. at 74.

(46) 120 Cong. Rec. 40,711 (1974) (statement of Sen. Moss) ("By making warranties of consumer products clear and understandable through creating a uniform terminology of warranty coverage, consumers will for the first time have a clear and concise understanding of the terms of warranties of products they are considering purchasing.").

(47) U.C.C. [section] 2-315 (1977).

(48) Barb v. Wallace, 412 A.2d 1314 (Md. Ct. Spec. App. 1980) (demonstrating a scenario where the customer informed the seller what he was seeking and the seller then recommended a particular product because it would meet the customer's needs, but it failed to work as the seller had represented and injured the customer).

(49) Shaffer v. Victoria Station, Inc., 588 P.2d 233 (Wash. 1978) (illustrating plaintiffs suit was based upon three theories: negligence, breach of implied warranty under the UCC, and strict products liability under Restatement (Second) [section] 402A.)

(50) Id. at 235.

(51) Id. at 236 (quoting Comment H concerning [section] 402A of the Second Restatement of Torts).

(52) Gunning v. Small Feast Caterers, Inc., 777 N.Y.S.2d 268 (N.Y. Sup. Ct. 2004) (detailing how a complimentary glass of water provided by a restaurant exploded in patron's hand; suit was brought on the theories of breach of implied warranty for fitness and strict products liability under section 402A).

(53) Id. at 271.

(54) Sukljian v. Charles Ross & Son Co., Inc., 503 N.E.2d 1358 (N.Y. 1986) ("By reason of their continuing relationships with manufacturers, [the defendant is] in a position to exert pressure for the improved safety of [its] products and can recover increased costs within [its] commercial dealings, or through contribution or indemnification in litigation; additionally.... [the defendant] may be said to have assumed a special responsibility to the public, which has come to expect [it] to stand behind [its] goods.").

(55) C & J Fertilizer, Inc. v. Allied Mut. Ins. Co., 227 N.W.2d 169 (Iowa 1975). Plaintiff C & J Fertilizer had purchased a burglary insurance policy for its business. The policy contained hidden, fine-print, language which stated that for a burglary to be deemed as having occurred, and thus trigger coverage, there had to first be damage to an outside door. Plaintiff was burglarized but only had damage to an interior door, which triggered an exclusionary provision contained in the policy. The Iowa court rejected defendant's arguments against applying products liability theories to insurance transactions due to the unique view of insurance held by the consuming public.

(56) Id. at 179 (internal citations omitted).

(57) Any exclusion or modification of the implied warranty of fitness for the particular purpose of the insurance policy must be conspicuously presented and made known to the insurance buyer so that the knowledge of the exclusion becomes part of the deal. Thus, the consumer could have the opportunity to seek another insurer that might not have such exclusionary language. This would be beneficial to the public as it would create competition between insurers to conspicuously disclose any exclusionary language.

(58) Escola v. Coca Cola Bottling Co. of Fresno, 150 P.2d 436 (Cal. 1944) (Plaintiff was a server who had a coke bottle explode in her hand while she was stocking a drink cooler. The majority found the Defendant liable upon a mini res ipsa loquitur theory (negligence on its face). However, Justice Traynor advocated for strict liability due to the complex and secretive nature of mass production, knowledge that only the defendant producer would have, along with being the sole possessor of the ability to fix such defects.).

(59) Greenman v. Yuba Power Products, Inc., 377 P.2d 897 (Cal. 1963). Plaintiff had purchased a home work station, which was highly complex and technical. He was injured due to a defect in the design of the machine, which only the defendant-producer had the knowledge of, or the ability to, fix. The court found for the plaintiff on the theory of strict liability in a products liability context.

(60) Id at 62.

(61) Restatement (Second) of Torts [section] 402A (1965) (The text of [section] 402A reads as follows: "(1) One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if (a) the seller is engaged in the business of selling such a product, and (b) it is expected to and does reach the user or consumer without substantial change in the condition in which it is sold. (2) The rule stated in Subsection (1) applies although, (b) the seller has exercised all possible care in the preparation and sale of his product, and (b) the user or consumer has not brought the product from or entered into any contractual relation with the seller.").

(62) Hayseeds, inc. v. State Farm Fire & Cas., 352 S.E.2d 73 (W. Va. 1986). Insurer refused to cover the fire policy issued to the plaintiff-insured after his business burned down. After finding that plaintiff proved the defendant had wrongfully denied coverage, the court refused to entertain the good versus bad faith analysis. The court held that anytime a policyholder must sue his own insurance company over a property damage claim, and substantially prevails, the defendant-insurer is strictly liable for the net economic loss (consequential damages) caused by the delay in settlement, as well as an award for aggravation and inconvenience (emotional distress damages).

(63) See David Pomerantz, The Insurer's Exploding Bottle: Moving From Good Faith to Strict Liability in Third and First Party Actions, 46 Ohio S r. L.J. 157, 179 (1985). This author argues that the Ohio Supreme Court should abandon the good versus bad faith standard and adopt strict liability in casualty insurance and lawsuit insurance actions.

(64) Klages v. Gen. Ordnance Equip. Corp., 367 A.2d 304 (Pa. Super. Ct. 1976) (Plaintiff, a gas station attendant, bought defendant-producer's mace based upon the promotional literature which stated, in part, "Rapidly vaporizes on face of assailant effecting Instantaneous incapacitation.... an attacker is Subdued--instantly.... Disables as effectively as a gun." (emphasis added). Subsequently, the plaintiff was robbed, he attempted to mace the gun-wielding suspect in the belief that the mace would end the attack, but the mace didn't work as advertised and the plaintiff was subsequently shot.).

(65) U.C.C. [section] 2-315 (1977).
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Author:Phillippi, William R., III
Publication:Faulkner Law Review
Date:Mar 22, 2016
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