In Negotiating and Settling Insurance Bad Faith Cases , insurance expert witness Guy O. Kornblum of GK Consultants, LLC, writes:
The potential exposure to punitive or exemplary damages is the greatest danger to an insurer defending an extra-contractual claim. For example, courts have allowed the recovery of punitive damages when the insurer’s breach is accompanied by an independent tort or where a serious wrong of a tortious nature has been committed and the public interest would be served by the deterrent effect of punitive damages.
GENERAL PRINCIPLES Insurance bad faith cases fall primarily into two categories: first-party and third-party cases. First-party cases evolve from coverage in which the insurance company is obligated to indemnify or reimburse its insured directly. Third-party cases involve underlying claims which trigger an insurer’s obligations to protect an insured against lawsuits by others. It involves the basic obligations of the insurer to defend and indemnify the insured, and to settle such cases when a reasonable opportunity to do so is presented. The right to coverage is triggered by strangers to the insurance relationship who bring a suit against the insured. It draws on traditional tort concepts of fault, proximate cause and duty. “In liability insurance, by ensuring personal liability, and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks.”
Within the framework of the third-party claim is the “duty to defend” case, which involves claims by an insured against an insurer for breach of the obligation to defend the insured when suit is brought against it. This case may arise even if the insurer has no duty to indemnify under the same coverage since the duty to defend is broader than the duty to indemnify. The former is triggered by the potential for coverage; the latter is triggered by actual coverage.