The Sounds of Silence: Waiting for Courts to Acknowledge that Public Policy Justifies Awarding Damages to Third-Party Claimants When Liability Insurers Deal with Them in Bad Faith

A long-standing and virtually unchallenged doctrinal rule provides that a liability insurance carrier owes no duties in tort or contract to a third-party claimant who has been injured by its insured. As a matter of doctinal consistency and logic, the traditional rule makes some sense. The liability insurer has no contractual relationship with the claimant, and third-party beneficiary doctrine is not easily used to impose duties. Moreover, by stepping into the shoes of the insured tortfeasor to whom it owes a heightened duty of good faith, the insurer is in an adversarial relationship with the claimant that makes it difficult to argue that the insurer also owes a duty of good faith and fair dealing to the claimant. Nevertheless, liability insurers can compound the injuries suffered by claimants by refusing to make prompt and fair payments for injuries suffered. For a brief time, the infamous Royal Globe decision provided a cause of action to claimants in California, but the decision was prospectively overruled only nine years later. I contend that Royal Globe was misconceived because it was premised on questionable statutory interpretation, leading to an impossible task for lower courts to articulate the details of a private right of action in the language of a regulatory statute. However, the clearly articulated public policy that injured parties receive compensation from insurers suggests that the motivations of the Royal Globe court were basically sound. I argue that courts should address the problem of "reverse insurance fraud" - in which a liability insurer stonewalls payment to a third-party claimant in bad faith, which is to say solely for the purpose of minimizing its payments on the claim and without any legal justification relating to questions of liability or the measure of damages - by focusing on the public policy in issue. My thesis is that courts should award tort damages to third-party claimants only in those cases where the public interest in prompt and fair payment to injured parties is undermined by the insurer's conduct. In making this case, I analogize to the tort of wrongful discharge in violation of public policy in the employment law setting, where courts have held that employers should be liable in tort if they discharge employees for reasons that offend public policy, even if the employer owes no tort or contract duties regarding the duration of employment. I conclude that courts should similarly recognize the tort of bad faith settlement practices in violation of public policy, even if they continue to adhere to the baseline common law rule that a liability insurer owes no duties directly to third-party claimants. I conclude the article with an appendix that includes a hypothetical judicial opinion that embraces my doctrinal argument. This article was solicited for inclusion in a Symposium published by the Nevada Law Journal on the topic, "My Favorite Insurance Law Case," and so I took the liberty of creating my own court opinion for purposes of the Symposium.