Source: http://www.butler.legal/recovery-of-damages-for-emotional-distress-in-tort-contract-and-statutory-bad-faith-actions
Timestamp: 2019-04-21 11:16:16+00:00

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This is one of a series of articles under the by line "Butler on Bad Faith" originally published in Mealey's Litigation Report: Bad Faith, Vol. 12, #6, p. 22 (July 21, 1998). Copyright Butler 1998.
Crisci v. Security Ins. Co.(10) held that emotional distress damages were recoverable in third party bad faith claims for wrongful failure to settle.(11) In that case, there was an excess judgment against the insured. As a result, she experienced mental suffering. The trial court found that the insurer had refused wrongfully to settle. The court awarded the insured $25,000 in damages for emotional distress, as well as the amount of the excess judgment.
Six years later, the California Supreme Court imported this tort duty into cases of first party bad faith. In Gruenberg v. Aetna Ins. Co.,(14) the court found the same duty to the insured in both third and first party bad faith claims. The insurer's duty to settle fairly the claims of third parties, and the insurer's duty to act fairly on an insured's direct claim, were "merely two different aspects of the same duty."(15) Therefore, tort damages, including emotional distress, may flow from a breach of either.
Since this landmark decision, at least twenty five states have recognized the tort of bad faith in first party insurance claims.(16) Because these actions sound in tort, recovery of emotional distress damages is possible in each of those states. Other "bad faith" states base the cause of action either on contract principles or statutory enactments.
Emotional distress damages are relatively easy to recover in tort. Traditionally, the common law required physical injury or that the tortfeasor's conduct be outrageous.(17) These high standards were justified by the need to ensure the legitimacy of the claim. In bad faith tort actions, however, there are no such stringent requirements.
In states which follow traditional contract principles of bad faith, recovery of emotional distress damages is practically impossible. For instance, the Michigan Supreme Court, in Kewin v Massachusetts Mutual Life Ins Co.,(22) declined to recognize a tort for bad faith breach of an insurance contract. In Kewin, an insured had sued and won damages for mental distress from an insurer that denied disability benefits. The Michigan Court of Appeals reversed the award on technical pleading grounds.
The Michigan Supreme Court, in Kewin, concluded, over a strong dissent, that disability contracts are commercial. Such contracts are agreements to pay money upon the occurrence of a specified event. Mental distress damages do not flow from the breach of such contracts. They are not "personal."
On the other hand, in Rhode Island, the tort remedy is engrafted on the statute. There, the bad faith statute has been interpreted as codifying existing case law recognizing tort actions for bad faith.(29) Therefore, awards for emotional distress are proper.
In Florida, a recent decision goes another way. The Florida Supreme Court, in Time Ins. Co., Inc. v. Burger,(30) held that emotional distress damages are recoverable under the bad faith statute, but only in actions based on health insurance.
Time Insurance Company ("Time") provided health insurance to Harvey Burger ("Burger"). Burger had a $500 medical bill. He submitted the bill to Time. However, because the bill contained a "stray mark" it looked like $1500 instead of$500.
In August 1991, Time informed Burger that it was investigating whether he had tried to defraud the company. Time also did not pay Burger's other outstanding medical bills. Allegedly, Burger forewent medical treatment from August, 1991, through November, 1992, because he was unsure if Time would pay.
Around April, 1992, Burger filed suit for statutory "bad faith" under section624.155 Florida Statutes. The suit either was filed in or removed to Federal Court. In November, 1992, Time paid all the outstanding medical bills.
Health insurance contracts concern matters of "comfort, happiness and personal welfare." Surely, people buy health insurance policies for physical well-being as well as to avoid the financial burden of medical treatment.
Practitioners and insurance companies in Florida now are considering what effect the Burger decision will have on other kinds of bad faith cases. Will the trial and appellate courts allow damages for emotional distress in bad faith actions based on property, liability, or other insurance coverages? The answer to this question is suggested by the apparent basis for the Burger decision. Because a health insurance contract is a kind of "personal" contract, the Burger decision can be squared with the traditional analysis of damages which evolved from Hadley v.Baxendale. Thus, there is an argument to be made that Burger be applied narrowly. Accordingly, the future of emotional distress damages in Florida bad faith actions appears limited to health insurance cases.
1. Roger C. Henderson, The Tort of Bad Faith in First Party Insurance Transactions:Refining the Standard of Culpability and Reformulating the Remedies by Statute, 26 U.Mich. J.L. Ref. 1 (1992).
2. Kewin v. Massachusetts Mutual Life Ins. Co., 409 Mich. 401, 414-15 (1980).
3. Id. at 434-35 (Williams, J. dissenting).
5. Henderson, supra n. 1, at 16.
8. See Radcliffe v. Frankin National Ins. Co., 298 P.2d 1002, 1020-24 (Or. 1956).
9. Henderson, supra n. 1, at 22.
10. 426 P.2d 173 (Cal. 1967).
11. Henderson, supra n. 1, at 25.
12. Crisci, 426 P.2d at 178.
14. 510 P.2d 1032 (Cal. 1973).
16. See The Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 52-53 (Tex. 1997).
17. See Restatement (Second) of Torts § 46 (1965).
18. Gruenberg, 510 P.2d at 1041.
19. 271 N.W.2d 368 (1978).
21. Henderson, supra n. 1, 56-57.
22. Kewen v. Massachusetts Mutual Life Ins. Co., 409 Mich. 401 (1980).
24. 84 N.W.2d 816 (Mich. 1957).
26. 431 A.2d 966 (Penn. 1981).
28. See Duffy v. Nationwide Mutual Ins. Co., 1993 U.S. Dist. LEXIS 16197, *10 (E.D. Pa.,Nov. 10, 1993).
29. See Marshall Contractors, Inc. v. Peerless Ins. Co., 827 F. Supp. 91, 95 n. 2 (D.C. R.I.1993); see also Pace v. Insurance Co. of North America, 939 F.2d 572, 580 (1st Cir. 1988).
30. No. 90,869, 1998 Fla. LEXIS 1157 (June 12, 1998).
31. Under the "impact" rule, a person cannot recover compensatory damages for mental distress or psychiatric injury in the absence of a discernible physical injury. See, Brownv. Cadillac Motor Car Division, 468 So. 2d 903 (Fla. 1985).
32. No. 90,869, 1998 Fla. LEXIS 1157, at *3 (June 12, 1998).
37. Chelini v. Nieri, 196 P.2d 915 (Cal. 1948).
38. No. 90,869, 1998 Fla. LEXIS 1157, at *3 (June 12, 1998).

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