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RAWLINGS v. APODACA | 151 Ariz. 149 (1986) | Leagle.com
151 Ariz.
Meyer, Hendricks, Victor, Osborn & Maledon, P.A., by R. Douglas Dalton, Ron Kilgard, Phoenix, for plaintiffs-appellees Rawlings.
David and Elizabeth Rawlings petitioned this court to review an opinion of the court of appeals which reversed the trial court's judgment in their favor. Rawlings v. Apodaca, 151 Ariz. 180, 726 P.2d 596 (App. 1985). We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24. We granted review to clarify the law of this state with regard to the "tort of bad faith." Rule 23, Ariz.R.Civ. App.P., 17A A.R.S. The issues we consider involve analysis of the type of conduct by an insurer that will support a tort action for "bad faith". We also consider what type of conduct will justify the imposition of punitive damages.
Soon after the fire, Rawlings filed their insurance claim, and Farmers commissioned a private investigating firm to determine the cause of the fire. When the fire investigators came to Rawlings' farm on August 3, Mr. Rawlings told them that he had sizeable uninsured losses1 and that he was interested in pursuing a claim against the Apodacas. Rawlings specifically asked whether he should have his own investigation done or whether he would have access to the report. They told him that he would receive a copy of their report and need not undertake his own investigation. Rawlings also suggested that Farmers might want to join its subrogation claim with Rawlings' claim against Apodacas. Based on the assurances that they would have access to the investigative report, the Rawlings did not hire their own investigator.
On August 28, 1979 Farmers sent Rawlings a check for $10,000, their policy limit. Having failed to obtain the report, in September Rawlings retained an attorney to pursue the matter. The lawyer contacted Schultz, who said that the report had been received, refused to provide it and said that it contained nothing of interest to Rawlings. The trial judge specifically found that Schultz knew this to be false. (Findings of Fact Nos. 5 and 6.) Rawlings' attorney then filed a complaint with the Arizona Department of Insurance. Farmers finally agreed to give Rawlings the report, but only if Rawlings paid half its cost. Rawlings refused and instead brought suit against both the Apodacas and Farmers. Rawlings alleged that the Apodacas negligently caused the fire and that Farmers "... breached its obligation of good faith and fair dealing with its insureds...." Rawlings also sought punitive damages and attorneys' fees. Having filed a lawsuit against Farmers, Rawlings was finally able to obtain the report through deposition of the custodian of records of the investigative firm.
Farmers argues that actionable bad faith by an insurer facing a first-party claim2 is limited to the unfounded refusal or delay in payment of a valid claim. Plaintiffs argue that such a rule grants insurance companies license to abuse their relationship with and power over their insured. They urge that bad faith claims are not limited to situations involving breach of the express promise to pay covered claims.
The law implies a covenant of good faith and fair dealing in every contract. Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 383, 710 P.2d 1025, 1038 (1985); see also Restatement (Second) of Contracts § 205 (1981); 5 WILLISTON ON CONTRACTS § 670 at 159 (3rd ed., Jaeger ed. 1961). The duty arises by virtue of a contractual relationship. The essence of that duty is that neither party will act to impair the right of the other to receive the benefits which flow from their agreement or contractual relationship. Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. at 383, 710 P.2d at 1038; Noble v. National American Life Insurance Co., supra; Fortune v. National Cash Register Co., 373 Mass. 96, 104, 364 N.E.2d 1251, 1257 (1977); Comunale v. Traders & General Insurance Co., 50 Cal.2d 654, 658, 328 P.2d 198, 200 (1958).
What are the benefits which flow from the insurance contract and the relationship it creates? Obviously, the insured buys the company's express agreement to pay certain types of claims. But the covenant of good faith is an implied covenant. Wagenseller, supra. In delineating the benefits which flow from an insurance contract relationship we must recognize that in buying insurance an insured usually does not seek to realize a commercial advantage but, instead, seeks protection and security from economic catastrophe. Noble v. National American Life Insurance Co., 128 Ariz. at 189, 624 P.2d at 867; Egan v. Mutual of Omaha Insurance Co., 24 Cal.3d 809, 816-817, 169 Cal.Rptr. 691, 695, 620 P.2d 141, 145 (1979), cert. denied 445 U.S. 912, 100 S.Ct. 1271, 63 L.Ed.2d 597 (1980); Crisci v. Security Insurance Co., 66 Cal.2d 425, 433-434, 58 Cal.Rptr. 13, 19, 426 P.2d 173, 179 (1967). Thus, the insured's object in buying the company's express covenant to pay claims is security from financial loss which he may sustain from claims against him and protection against economic catastrophe in those situations in which he may be the victim. Noble v. National American Life Insurance Co., 128 Ariz. at 189, 624 P.2d at 867; Chavers v. National Security Fire & Casualty Co., 405 So.2d 1, 6 (Ala. 1981). In both cases, he seeks peace of mind from the fears that accompany such exposure.
Because of the disparity in bargaining power and the nature of the contract, the insurer receives both premium and control. Barrera v. State Farm Mutual Automobile Insurance Co., 71 Cal.2d 659, 79 Cal.Rptr. 106, 117, 456 P.2d 674, 685 (1969). Thus, in third-party situations, the insured surrenders to the insurer the right to control and manage the defense of claims made against him. See Parsons v. Continental National American Group, 113 Ariz. 223, 550 P.2d 94 (1976). In first-party situations the insurer sets the conditions for both presentment and payment of claims. In both first- and third-party situations the contract and the nature of the relationship effectively give the insurer an almost adjudicatory responsibility. The insurer evaluates the claim, determines whether it falls within the coverage provided, assesses its monetary value, decides on its validity and passes upon payment. Although the insured is not without remedies if he disagrees with the insurer, the very invocation of those remedies detracts significantly from the protection or security which was the object of the transaction. Thus, the insurance contract and the relationship it creates contain more than the company's bare promise to pay certain claims when forced to do so; implicit in the contract and the relationship is the insurer's obligation to play fairly with its insured. Parsons v. Continental National American Group, supra,3 Egan v. Mutual of Omaha Insurance Co., supra.
We hold, therefore, that one of the benefits that flow from the insurance contract is the insured's expectation that his insurance company will not wrongfully deprive him of the very security for which he bargained or expose him to the catastrophe from which he sought protection. Conduct by the insurer which does destroy the security or impair the protection purchased breaches the implied covenant of good faith and fair dealing implied in the contract. Egan v. Mutual of Omaha Insurance Co., 24 Cal.3d at 319, 169 Cal. Rptr. at 695-96, 620 P.2d at 145-46. This is not to say, of course, that the insurer must pay claims which are not covered, or take any other action inconsistent with the contract. For example, we have held that the covenant of good faith and fair dealing implied in at-will employment contracts does not protect an employee from a "no cause" termination because such a tenure provision is inconsistent with the nature of such contracts. Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. at 385, 710 P.2d at 1040.
In Noble v. National American Life Insurance Co., supra, we recognized the tort of bad faith in first-party cases. See also Gruenberg v. Aetna Insurance Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032 (1973), and Fletcher v. Western National Life Insurance Co., 10 Cal.App.3d 376, 89 Cal.Rptr. 78 (1970). In Noble the plaintiff had submitted a valid claim for surgical and hospital expenses to her insurance company, which refused to pay. We held that an insurer that intentionally and unreasonably denies or delays payment breaches the covenant of good faith owed to its insured. Noble, 128 Ariz. at 190, 624 P.2d at 868. A failure to pay a claim is unreasonable unless the claim's validity is "fairly debatable" after an adequate investigation. Id. In Sparks v. Republic National Life Insurance Co., 132 Ariz. 529, 647 P.2d 1127, cert. denied, 459 U.S. 1070, 103 S.Ct. 490, 74 L.Ed.2d 632 (1982), we reached a similar result in a case where the insurer groundlessly asserted that it had no obligation to continue payments once the policy was terminated. As a result, the claimant had to forego necessary treatment, and suffered serious physical deformities. We held that the fair debatability of the claim cannot be created by the insurer's reliance on ambiguity in the policy, otherwise "insurers would be encouraged to write ambiguous insurance contracts...." 132 Ariz. at 539, 647 P.2d at 1137.
Thus, in first-party cases also, the insurer's eventual performance of the express covenant — by paying the claim — does not release it from liability for "bad faith". The prohibition against challenging a claim unless it is fairly debatable merely expresses the obligation to give equal consideration to the insured's interests. Gruenberg v. Aetna Insurance Co., 9 Cal.3d at 573, 108 Cal. Rptr. at 485, 510 P.2d at 1037, cited in Noble v. National American Life Insurance Co., 128 Ariz. at 189, 624 P.2d at 867. See also Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381, 715 P.2d 1133 (1986) ("an insurance company's duty of good faith [means] an insurer must deal fairly with an insured, giving equal consideration in all matters to the insured's interests" (emphasis added)).
Tort obligations are in general obligations that are imposed by law — apart from and independent of promises made and therefore apart from the manifested intention of the parties — to avoid injury to others. By injury here is meant simply the interference with the individual's interest ... that is deemed worthy of legal protection.... [One category is] a large body of intangible interests, both economic and relational.
Analysis of the cases does lead to the conclusion that a tort action for breach of the implied covenant is more often recognized where the contract creates a relationship in which the law implies special duties not imposed on other contractual relationships. These relationships are "characterized by elements of public interest, adhesion, and fiduciary responsibility." Seaman's Direct Buying Service, Inc. v. Standard Oil Co. of California, 36 Cal.3d at 768, 206 Cal. Rptr. at 362, 686 P.2d at 1166. See also Gates v. Life of Montana Insurance Co., 638 P.2d 1063 (Mont. 1982); Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d at 820, 169 Cal. Rptr. at 696-97, 620 P.2d at 146-47; Wallis v. Superior Court, supra. Examples include the implied relational duty of the common carrier to carry his passengers or goods safely. L.B. Laboratories v. Mitchell, 39 Cal.2d 56, 62-63, 244 P.2d 385, 388 (1952). Failure to perform this implied covenant may expose the carrier to liability in tort as well as on the contract of carriage. Id. The law has imposed similar implied covenants on the relationships between innkeeper and guest, physician and patient and attorney and client. See Restatement (Second) of Torts § 314A; Yeager v. Dunnavan, 26 Wn.2d 559, 562-63, 174 P.2d 755, 757 (1941). In the last two relationships the implied covenant demands reasonable competence, and for its breach the patient or client may maintain an action in either tort or contract. See W. PROSSER & W. KEETON, supra, § 92 at 660-62 and numerous cases cited therein.
Wallis v. Superior Court, 160 Cal. App.3d at 1117, 207 Cal. Rptr. at 128 (emphasis in original).4 Thus, we conclude that one of the prime reasons for the recognition of tort actions for breach of the implied obligations raised by certain contractual relationships is that any other rule provides more of an incentive for breach of the contract than for its performance. Certainly, this is often the situation in insurance contracts and, we believe, makes tort remedies appropriate for some types of breach of the duties implied by law in the contractual relationship.
In insurance cases we believe the culpable conduct is an intentional act5 by which the insurer fails to provide the insured with the security and protection from calamity which is the object of the relationship. Noble v. National American Life Insurance Co., 128 Ariz. at 190, 624 P.2d at 868; see also Farr v. Transamerica Occidental Life Insurance Co., 145 Ariz. at 5, 699 P.2d at 380.
The founded belief is absent when the insurer either knows that its position is groundless or when it fails to undertake an investigation adequate to determine whether its position is tenable. In either event, its position is without reasonable basis and subjects it to payment of damages in addition to those traditionally recoverable in a breach of contract action.6
There is some controversy over whether the rule for awards of punitive damages in bad faith tort cases differs from that which exists in other types of tort cases.7 The argument is advanced that since bad faith is a species of intentional tort, punitive damages are automatically recoverable in every case in which the plaintiff proves that the tort was committed. We reject that contention. In a series of recent cases, our court of appeals has held that punitive damages may not be awarded in a bad faith tort case unless the evidence reflects "something more" than the conduct necessary to establish the tort. Farr v. Transamerica Occidental Life Insurance Co., 145 Ariz. at 7, 699 P.2d at 383 (relying on Neal v. Farmers Insurance Exchange, 21 Cal.3d 910, 148 Cal.Rptr. 389, 582 P.2d 980 (1978)). We agree with the views expressed in Farr.
However, the species of intentional conduct necessary for recovery of tort damages in a bad faith case may fall short of what is required for a punitive damage award. In this as in other torts, both intentional and unintentional,8 punitive damages are only recoverable under special circumstances.
We do not believe that the concept of punitive damages should be stretched. We restrict its availability to those cases in which the defendant's wrongful conduct was guided by evil motives. Thus, to obtain punitive damages, plaintiff must prove that defendant's evil hand was guided by an evil mind. The evil mind which will justify the imposition of punitive damages may be manifested in either of two ways. It may be found where defendant intended to injure the plaintiff. It may also be found where, although not intending to cause injury, defendant consciously pursued a course of conduct knowing that it created a substantial risk of significant harm to others. See Grimshaw v. Ford Motor Co., 119 Cal.App.3d 757, 809, 174 Cal.Rptr. 348, 381 (1981). It has been stated that action justifying the award of punitive damages is "conduct involving some element of outrage similar to that usually found in crime." Restatement (Second) of Torts § 908 comment b; see also W. PROSSER & W. KEETON, § 2 at 9. Applying this analogy, punitive damages will be awarded on proof from which the jury may find that the defendant was "aware of and consciously disregard[ed] a substantial and unjustifiable risk that" significant harm would occur. See A.R.S. § 13-105(5)(c), defining criminal recklessness.
1. Some losses were covered, but exceeded the policy limits; other losses were evidently not covered.
2. Claims brought directly against an insurer by its own insured are commonly referred to as "first-party" claims, while those brought against the insured by a third person are called "third-party" claims.
3. The industry itself seems to recognize these principles. Advertising programs portraying customers as being "in good hands" or dealing with a "good neighbor" emphasize a special type of relationship between the insured and the insurer — one in which trust, confidence and peace of mind have some part.
4. The English seem to have evolved a similar rule for similar reasons. The English system evidently allows punitive damages for breach of contract where defendant "with a cynical disregard for a plaintiff's rights has calculated that the monetary gain arising out of his wrongdoing will most likely exceed the damages at risk." See Trans Container Services v. Security Forwarders, Inc., 752 F.2d 483, 487 (9th Cir.1985), citing Rookes v. Barnard, [1964] A.C. 1129 at 1227. See also Nicholson v. United Pacific Insurance Co., 710 P.2d 1342, 1348 (Mont. 1985).
5. Again, distinguishing between inadvertence, loss of papers, misfiling of documents and like mischance, negligent or not. See ante at 157, 726 P.2d at 573.
6. We acknowledge, of course, that tort actions for breach of contractually created relationships — such as doctor-patient, lawyer-client, inn-keeper-guest — may be maintained even though the defendant's conduct was unintentional. The difference between these and the requirement of intent in "bad faith" cases is attributable to the difference in the covenant implied by law. In the doctor-patient relationship, for example, the law implies an undertaking by the doctor to have and exercise the skill of an average, competent physician. Harvey v. Kellin, 115 Ariz. 496, 499, 566 P.2d 297, 300 (1977). Negligence consists of the failure to do so and subjects the doctor to tort liability for the damage resulting therefrom. Kronke v. Danielson, 108 Ariz. 400, 499 P.2d 156, 159 (1972).
7. We have recently accepted review and heard argument in two cases in which the issue is presented. See Linthicum v. Nationwide Life Insurance Co., 150 Ariz. 326, 723 P.2d 675 (1986), and Hawkins v. Allstate Insurance Co., No. CV 86 0010-PR.
8. For example, punitive damages are not recoverable in every fraud case, even though fraud is an intentional tort. See Echols v. Beauty Built Homes, Inc., 132 Ariz. 498, 501, 647 P.2d 629, 632 (1982); see also Nieto-Santos v. Fletcher Farms, 743 F.2d 638, 643 (9th Cir.1984).