Opinion ID: 2567250
Heading Depth: 3
Heading Rank: 1

Heading: The Nature and Purpose of an Insurance Contract

Text: ¶ 10 Traditionally, insurance contracts were regarded as commercial contracts for money in which the insured has bargained for the insurance company's payment of a certain sum upon the occurrence of a specified event. See Kewin v. Mass. Mut. Life Ins. Co., 409 Mich. 401, 295 N.W.2d 50, 53-55 (1980) (holding that a disability income protection insurance policy contract is a commercial contract); Acquista v. N.Y. Life Ins. Co., 285 A.D.2d 73, 730 N.Y.S.2d 272, 276 (N.Y.App.Div.2001) (discussing the traditional analysis, where insurance policies are viewed as contracts for the payment of money only). In accord with this understanding of the bargain, courts employing the traditional approach have limited an insured's damages to the amount owed under the terms of the policy, plus interest. See New Orleans Ins. Co. v. Piaggio, 16 Wall. 378, 83 U.S. 378, 386, 21 L.Ed. 358 (1872) (holding that an insured was not entitled to special damages for the detention of money due to him beyond what the law allows as interest); Clark v. Life & Cas. Ins. Co., 245 Ky. 579, 53 S.W.2d 968, 969 (1932) (recognizing that the measure of recovery for the failure to pay money is the amount agreed to be paid with legal interest); Acquista, 730 N.Y.S.2d at 276 (recognizing that under the traditional analysis, the damages available for an insurer's failure to pay or provide benefits have been limited to the amount of the policy plus interest). These courts have reasoned that, because money was what the insured bargained for, the insured's receipt of the expected amount, plus interest, would suffice to place him in the position he would have been in had the contract been performed. See Kewin, 295 N.W.2d at 55 (In the commercial contract situation, ... the injury which arises upon a breach is a financial one, susceptible of accurate pecuniary estimation. The wrong suffered by the plaintiff is the same, whether the breaching party acts with a completely innocent motive or in bad faith.). ¶ 11 Crucial to the traditional understanding that insurance policies are commercial contracts for money was the assumption that the financial proceeds obtained through an insurance policy are somehow fungiblein other words, that a[n insured] has access to an alternative source of funds from which to pay that which the insurer refuses to pay. Acquista, 730 N.Y.S.2d at 276. However, [t]his is frequently an inaccurate assumption. Id. In fact, it seems clear that in many cases a large part of an insured's motivation for acquiring an insurance policy is his expectation that he may well be unable to find an alternative source of funds to cover the loss that the policy is meant to cover. ¶ 12 As a growing number of jurisdictions have recognized, the conception of an insurance policy as merely a commercial contract for money is flawed. `An insurance policy is not obtained for commercial advantage; it is obtained as protection against calamity.' The Best Place, Inc. v. Penn Am. Ins. Co., 82 Hawai`i 120, 920 P.2d 334, 342 (1996) (quoting Noble v. Nat'l Am. Life Ins. Co., 128 Ariz. 188, 624 P.2d 866, 867 (1981)). `[T]he insured's objective in buying [an insurance] company's express covenant to pay claims is security from financial loss which he [or she] may sustain from claims against him [or her] and protection against economic catastrophe in those situations in which he [or she] may be the victim.' Id. at 344 (alteration in original) (quoting Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 570 (1986)); see also Miller v. Fluharty, 201 W.Va. 685, 500 S.E.2d 310, 319 (1997) ([A] policyholder buys an insurance contract for peace of mind and security, not financial gain.... [A]ll policyholders... should get their policy proceeds promptly without having to pay litigation fees to vindicate their rights. (footnote omitted)). ¶ 13 In Beck, this court joined those jurisdictions that have rejected the traditional view of insurance contracts as commercial contracts for money. We recognized the unique nature and purpose of an insurance contract, in that insurance frequently is purchased not only to provide funds in case of loss, but to provide peace of mind for the insured or his beneficiaries. Beck, 701 P.2d at 802. Essentially, what the insured has bargained for in the context of an insurance contract includes both peace of mind and the insurance company's payment of whatever sum is owed within a reasonable period of time. See id. ¶ 14 In keeping with this modified and, we believe, more accurate assessment of the nature of insurance contracts, we concluded in Beck that, in the insurance policy context, the implied covenant of good faith and fair dealing, which inheres in all contracts, contemplates, at the very least, that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim. Id. at 801.