Opinion ID: 1464124
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Heading: Should there be a remedy for an insurer's bad-faith refusal to pay first-party claims or benefits under a policy of insurance?

Text: Many jurisdictions have declined to recognize such a cause of action on the grounds that the remedy for an insurer's failure to pay should be limited to the amount due under the policy or that the plaintiff failed to present a tort cause of action that alone would support a claim for extra-contractual damages. Renfroe v. Preferred Risk Mut. Ins. Co., 296 F. Supp. 1137 (N.D.Okla. 1969) (declining to award damages for insurer's alleged willful refusal to pay claim because Oklahoma law limits plaintiff's remedy to amount due under policy); Industrial Fire & Casualty Ins. Co. v. Romer, 432 So. 2d 66 (Fla.Ct.App. 1983) (an insurer's bad-faith refusal to pay claim gives rise to cause of action only if facts of refusal amount to independent tort); Haas v. Pacific Mut. Life Ins. Co., 70 Ohio App. 332, 41 N.E. 2d 263 (1941) (declining to award incidental damages to plaintiff and viewing claim simply as contract-enforcement action); Gross v. Connecticut Gen. Life Ins. Co., 390 S.W. 2d 388 (Tex. Ct. App. 1965) (declining to award special or exemplary damages for insurer's failure to pay because damages not covered by policy). Some courts also recognize that to permit an insured to maintain a first-party claim for bad faith against its insurer could lead to the prosecution of questionable or extortionate lawsuits. See T.D.S. Inc., supra, 760 F. 2d at 1548-49 (Tjoflat, J., dissenting). Many other jurisdictions, however, have recognized the cause of action. Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 108 Cal. Rptr. 480, 510 P. 2d 1032 (1973); Bibeault v. Hanover Ins. Co., 417 A. 2d 313 (R.I. 1980); Nichols v. State Farm Mut. Auto Ins. Co., 279 S.C. 336, 306 S.E. 2d 616 (1983); Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 271 N.W. 2d 368 (1978); A.S. Klein, Annotation, Insurer's Liability for Consequential or Punitive Damages for Wrongful Delay or Refusal to Make Payments Due Under Contracts, 47 A.L.R. 3d 314 (1992). The Nichols court found that at least 25 states have adopted a cause of action for bad faith in an insurer's handling of a claim for first-party benefits. Nichols, supra, 306 S.E. 2d at 618. Most jurisdictions have characterized a cause of action for bad-faith failure to pay an insured's claim as a tort that arises out of the implied duty of an insurance company to deal fairly and act in good faith in processing the claims of its policyholder. A familiar articulation of the principle is in one of the leading cases, Anderson, supra, 271 N.W. 2d 368, in which Justice Heffernan described tortious breach of contract as a convenient shorthand method of denominating the intentional conduct of a contracting party when it acts in bad faith to avoid its contract obligations. Id. at 374. We need not debate which is more appropriate: to consider the bad-faith refusal as a breach of an implied term of the contract or as an independent tort. The theoretical formulations add not to our understanding: [I]f the cause of action arises from a breach of a promise set forth in the contract, the action is ex contractu, but if it arises from a breach of duty growing out of the contract it is ex delicto. Heyer v. Flaig, 70 Cal. 2d 223, 74 Cal. Rptr. 225, 449 P. 2d 161, 164 (1969). Does this mean that if one building contractor promised to perform the work in a professional manner and another did not that the first contractor would be sued in contract for any shoddy work and the second contractor would be sued in tort? We think not; the law would imply in the latter case a promise to perform in a professional manner. Should not the law equally imply here a promise by the insurer to perform the contract, that is to pay the benefits, in a diligent and efficient manner? The demands of formalism do not require that we make a tort out of what is really an unfulfilled promise. See Grant Gilmore, Death of Contract 102 (1974) (discussing relationship between doctrines of tort and contract). We thus believe that to recognize a cause of action for bad-faith failure to pay an insured's claim is consistent with New Jersey law. Compensation should not be dependent on what label we place on an action but rather on the nature of the injury inflicted on the plaintiff and the remedies requested. An insurance company's breach of the fiduciary obligation imposed by virtue of its policy, by its wrongful failure to settle, sounds in both tort and contract. Rova Farms, supra, 65 N.J. at 504, 323 A. 2d 495. In Weinisch v. Sawyer, supra, 123 N.J. 333, 587 A. 2d 615, in the context of an agent's breach of duty of care, we said: Although the allegation of an agent's breach of a duty of care carries tort overtones, the contractual relationship between insured and insurer dominates not only the relationship between them, but also that between the insured and the agent. [ Id. at 342, 587 A. 2d 615.] Accordingly, the cause of action is best understood as one that sounds in contract. And on the score of whether we should recognize a remedy for the wrong, we realize that legislation has been proposed to provide such a remedy, but has not yet passed. See A. 1279, 205th Leg., First Annual Sess. (1992) (permitting first-party claim against insurer and contemplating punitive and consequential damages, in addition to recovery of policy benefits). Generally, we have held that absent forthcoming remedies from our coordinate branches of government, justice would be better served were a court of law to fashion a remedy in a particular case, and perhaps be corrected by the Legislature, than were innocent victims to have no redress at all. E.g., Kelly v. Gwinnell, 96 N.J. 538, 552-56, 476 A. 2d 1219 (1984). [T]he difficulties of adjudication [should not] frustrate the principle that there be a remedy for every substantial wrong. Dillon v. Legg, 68 Cal. 2d 728, 69 Cal. Rptr. 72, 79, 441 P. 2d 912, 919 (1968); see also People Express Airlines, Inc. v. Consolidated Rail Corp., 100 N.J. 246, 254, 495 A. 2d 107 (1985) ([T]he challenge is to fashion a rule that limits liability but permits adjudication of meritorious claims. The asserted inability to fix chrystalline [sic] formulae for recovery on the differing facts of future cases simply does not justify the wholesale rejection of recovery in all cases.). We believe here that for the Court to sidestep the question of whether a remedy should be awarded would be unwise, and will recognize a remedy for bad-faith refusal. The trial court best articulated the rationale for such a remedy in its rhetorical question to the insurance companies: You mean that even if this had taken years that Lloyds [sic] hadn't paid[.]    [I]f you weren't paid in January, February, March,    and you weren't paid in 1987, you weren't paid in 1988, you weren't paid in 1989; you mean that none of that would make any difference? That you folks don't have to pay until you get around to paying; and that the only remedy would be for loss of interest? That doesn't seem to be fair. In Polito v. Continental Casualty Co., 689 F. 2d 457, 461 (3d Cir.1982), Judge Gibbons recognized the same potential for unfairness: [I]f liability is limited to the amount of the loss plus interest, [insurance companies] are encouraged to take advantage of the insured by delaying payments   . He thus wrote that New Jersey law would recognize that casualty insurers undertake an implied contractual duty, as fiduciaries to parties with whom they have a contractual relationship, to act in good faith and to deal fairly in the settlement of claims, and that such an implied contractual duty supports a claim for consequential damages. [ Id. at 463.]