What Is the Implied Covenant of Good Faith and Fair Dealing in Law?

Every time you sign a contract, you are agreeing to more than what appears on paper. In the United States, each contract contains an implied duty of good faith and fear dealing. Essentially, this means that both parties intend to honor the contract – and that neither party will do anything to interfere with the other party’s rights to receive the benefits of a contract.

For example, consider a car insurance contract. The policyholder agrees to pay their premiums and the insurance company agrees to help the policyholder financially in the event of an accident. In this case, the implied covenant of good faith and fair dealing means the insurance company will not do anything to avoid paying the policyholder’s accident-related costs.

Bad faith insurance litigation is so common because insurance companies frequently deny or delay valid claims, thus violating the implied covenant of good faith and fair dealing.

What Is Good Faith?

According to the American Bar Association, “good faith” translates to honesty, specifically “honesty in a person’s conduct during the agreement.” Someone acting in good faith may make mistakes, but they have no intention of ripping you off. People acting in good faith do not conceal important information, either.

For example, consider a marriage contract. If someone gets married without telling their partner that they are already married, they are acting in bad faith, and the marriage is voidable.

What Is Fair Dealing?

“Fair dealing” means upholding the “spirit of the bargain” and not acting contrary to the other party’s interests. The opposite of fair dealing might look like a lack of diligence, incorrectly or intentionally performing contractual duties incorrectly, using a contract to confuse the other party, or interfering with the other party’s ability to uphold the contract.

Examples of a lack of fair dealing may include:

  • An insurance company using confusing language in a car insurance policy
  • An insurance company requiring excessive proof for a property damage claim
  • An employer driving an employee to quit before their contract ends via workplace harassment or other tactics
  • A contractor making mistake after mistake while they remodel a home

If someone fails to bring good faith and fair dealing to their contracts, you may be able to void the contract. Sometimes, you can also sue the other party for violating the implied covenant of good faith and fair dealing.

What Are the Consequences for Violating the Implied Covenant of Good Faith and Fair Dealing?

The consequences for violating the implied covenant of good faith and fair dealing will depend on the nature of your contract. In most cases, the contract will become voidable, which means the deceived person can exit the contract without breaching it.

If either party was fraudulent, they may face fraud charges and other criminal consequences. In insurance contracts, there are special laws that determine what happens if an insurance company fails to act in good faith.

At Busch, Reed, Jones & Leeper, P.C., we know when violating the implied covenant of good faith and fair dealing warrants a lawsuit or other action. We have more than 150 years of combined experience handling bad faith litigation, and we are ready to hear about your case.

Please call us at (770) 629-0154 or contact us online to schedule a free consultation with a committed attorney.

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