No Tort Remedy for Non-Insurance Claims Bad Faith
Is There a Private Right Against Insurer for Unfair Settlement Practices?
The Supreme Court of California was faced with the question of whether an insurance company’s breach of the covenant sounds in tort when it retroactively overcharges a premium it knows is not owed.
In Jonathan Neil & Associates v. Jones,[1] a dispute between Jones Trucking and Jonathan Neil & Associates arose after an audit of the Joneses’ operations found the trucking company was subcontracting business to other trucking companies. A rule governing the state’s assigned risk plan called for Jones Trucking to pay for the subcontractors’ insurance. Cal-Eagle, the insurer, sought to retroactively collect increased premiums from the Joneses, and brought in Jonathan Neil & Associates, a collection agency.
A breach of the duty of reasonable settlement gives rise to tort damages.[2] However, the Supreme Court of California has, in the past, refused to extend the tort remedy to breaches of contracts other than insurance contracts.[3] The question raised was whether bad faith conduct not involving a claim entitled an insured to tort damages. The court rejected the expansion of tort damages.
Refusing to allow tort damages and taking away all the punitive and other tort damages awarded the insured, the court said:
In sum, the Joneses were not in the same vulnerable position as those who suffer from the insurer’s bad faith claims and settlement practices - they were not denied the benefits of the insurance policy, were not required to prosecute the insurer to vindicate their contractual rights, and had available various administrative, contractual, and tort remedies. Accordingly, we conclude that tort remedies for breach of the implied covenant of good faith and fair dealing in this circumstance are unnecessary to protect the insured’s interests and hold that no such damages are available for the Joneses’ bad faith claim.[4]
Special Relationship Required
“The tort of bad faith requires a special relationship and breach of the same honesty and reasonable commercial standards. [Wise v. Sebena (1991), 248 Mont. 32, 38, 808 P.2d 494, 498.]
To establish a cause of action and proof of a special relationship the plaintiff must establish:
the contract must be such that the parties are in inherently unequal bargaining positions;
the motivation for entering the contract must be a non-profit motivation, i.e., to secure peace of mind, security, future protection;
ordinary contract damages are not adequate because they do not require the party in the superior position to account for its actions, and
they do not make the inferior party ‘whole’ and one party is especially vulnerable because of the type of harm it may suffer and of necessity places trust in the other party to perform; and
the other party is aware of this vulnerability.”[5]
Some courts allow recovery for actions in bad faith that are not part of the insurance relationship. In Coleman v. Republic Indemnity Insurance Co. of California,[6] the California Court of Appeal found that an insurer owes no duty of good faith and fair dealing to a third party claimant, even if the insurer coincidentally insures the third party claimant.
The plaintiffs were insured by Republic Insurance Company and were involved in a traffic accident with the defendant, Jesus Gonzalez, who was insured by Infinity Insurance Company. Infinity is Republic’s parent company. Infinity allegedly advised plaintiffs that the statute of limitations would expire one year after the traffic accident. Nevertheless, Infinity’s adjuster told plaintiffs that if they turned in all medical documentation before the limitations period expired, then their claim would be processed and settled regardless of the statute of limitations.
The plaintiffs submitted all the information on their personal injury claim but did not file suit within one year. After the statute of limitations expired, Infinity rejected the claim because the statute had run. The plaintiffs then filed suit against Gonzalez, Infinity, and Republic, alleging negligence against Gonzalez and intentional and negligent infliction of emotional distress, fraud, and breach of the implied covenant of good faith and fair dealing against both Infinity and Republic. The plaintiffs alleged that Republic was Infinity’s “alter ego” and, therefore, that Infinity and Republic should be treated as one insurer.
The Court of Appeal held that plaintiffs could not state a cause of action for breach of the implied covenant of good faith and fair dealing because Infinity and Republic (as Infinity’s alter ego) did not owe plaintiffs a duty of good faith and fair dealing. The court reasoned that the plaintiffs were in an adversarial relationship with the insurers despite being coincidentally insured by Republic.
In Alabama, a plaintiff alleged a cause of action that does not exist under Alabama law, bad faith of a contract not a contract of insurance. Because this court determined that the well-pleaded facts, accepted as true, do not state a claim that is plausible, the bad faith claim must be dismissed. [Goudy Constr., Inc. v. Raks Fire Sprinkler LLC (N.D. Ala. 2019)]
“Imposing a duty of good faith and fair dealing running from the Insurer to the [plaintiffs] would ‘create a serious conflict of interest for the [I]nsurer’ by obligating it to safeguard both the [plaintiffs’] and Gonzalez’s interests.” Plaintiffs, as third party claimants, have no contractual relationship with the insurer and cannot sue the insurer for breach of the implied covenant of good faith and fair dealing. In so arguing, the court applied the law as stated by the California Supreme Court in Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287 (Moradi-Shalal).
The Supreme Court held that a third party claimant—an individual who is injured by the alleged negligence of an insured party—does not have a private right of action against the insurer for unfair settlement practices.
Liberty Mutual, acting as a surety, maintained that the Court must dismiss a bad faith cause of action because it fails to state a legally sufficient cause of action, namely that no cause of action exists in South Dakota for a bad faith claim against a surety even though South Dakota law recognizes a bad faith cause of action in the insurance context, it has not been determined whether a surety bond is also subject to a bad faith cause of action. The court concluded that suretyship is a form of insurance and the plaintiff may maintain a claim of bad faith against Liberty in Double H Masonry, Inc. v. Liberty Mut. Ins. Co. (D. S.D. 2016).