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In 1971 the National Association of Insurance Commissioners proposed: “An Act Relating to Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance.” This model legislation prohibits various unfair practices by insurance companies in dealing with applications, claims, and settlements of insurance with individuals. In an effort to control unfair trade practices in the business of insurance, many states have enacted some form of the Act or its regulations. In each of these states the enforcement of the provisions of the unfair practices legislation is the statutory duty of the state superintendent or commissioner of insurance. Courts have reached divergent results, however, regarding the utility of this legislation, particularly as to whether private individuals may invoke and enforce the Act in actions against insurers for punitive damages.

When a private cause of action for punitive damages is allowed under the Act, an additional problem is presented. Courts have long upheld the fundamental principle of insurance law that an insurer's duty to settle claims fairly and in good faith is limited to the insured. Whether the Act abrogates this principle and extends this obligation to a third-party claimant has prompted inconsistent results among various state courts. The purpose of this comment is first, to determine the basis upon which a private cause of action may be allowed under the Model Act; second, to examine the appropriateness of allowing third-party claimants damages from insurers through a private action; and third, to evaluate the policy impact of the Act regardless of whether a private action is allowed.

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