Journal of Legal Studies
Insurers may at times exploit the delay inherent in the civil litigation process to induce needy insureds to settle for less than the amount that the contract promises. The prospect of extracontractual remedies for such "bad faith" at the end of the litigation process can make these tactics unprofitable and thus serve a potentially valuable function. But the remedy may be worse than the problem, as the courts seem to find bad faith on the part of insurers who have genuine and reasonable disputes with their policyholders over the terms of the policy or over factual issues essential to the insured's right to recover. The ability of the courts to identify opportunistic behavior accurately is thus in doubt, and the possibility arises that bad faith doctrine in first-party cases does little to police misconduct while doing much to cause uneconomic increases in the premiums that policyholders must pay.
Alan O. Sykes, "Bad Faith Breach of Contract by First-Party Insurers," 25 Journal of Legal Studies 405 (1996).