Opinion ID: 1118833
Heading Depth: 2
Heading Rank: 1

Heading: duty to settle in good faith

Text: That there is a duty of good faith and fair dealing inherent in every contract is not disputed. Under the common law, every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. Restatement (Second) of Contracts § 205 (1979). [A]ll courts are agreed that the insurer does owe to the insured some duty in this respect. Hilker v. Western Automobile Ins. Co., 204 Wis. 1, 235 N.W. 413, 414 (1931). The Supreme Court of Montana expressly held in Lipinski v. Title Ins. Co., 202 Mont. 1, 655 P.2d 970 (1983), despite a statutory provision which prohibits the imposition of punitive damages arising from a breach of contract, that insurance companies have a duty to act in good faith with their insureds, and that this duty exists independent of the insurance contract and independent of statute. Id., 655 P.2d at 977 (emphasis added). Such a duty is beyond that which the policy imposes by itself  the duty to defend, settle, and pay  but is a duty imposed by law on an insurer to act fairly and in good faith in discharging its contractual responsibilities. Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 108 Cal. Rptr. 480, 510 P.2d 1032, (1973). Contrary to some authority, this duty arises not only in the context of third party situations (actions brought as a result of the insurer's failure to settle the claims of third parties within the policy limits of the insured), but also in first party actions (when the insured is personally filing a claim for benefits against the insurer under the policy). As the court in Gruenberg stated: It is manifest that a common legal principle underlies all of the foregoing decisions; namely, that in every insurance contract there is an implied covenant of good faith and fair dealing. The duty to so act is imminent in the contract whether the company is attending to claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort. Gruenberg, supra, 108 Cal. Rptr. at 486, 510 P.2d at 1038 (emphasis added). See also Rogers v. Pennsylvania Life Insurance Co., 539 F. Supp. 879 (S.D.Iowa, 1982); Tank v. State Farm Fire and Casualty Co., 105 Wash.2d 381, 715 P.2d 1133 (1986); Chavers v. National Security Fire and Casualty Co., 405 So.2d 1 (Ala. 1981); Massey v. Armco Steel Co., 635 S.W.2d 596 (Tex. 1982); Noble v. National American Life Insurance Co., 128 Ariz. 188, 624 P.2d 866 (1979); Anderson v. Continental Insurance Co., 85 Wis.2d 675, 271 N.W.2d 368 (1978); Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 157 Cal. Rptr. 482, 598 P.2d 452 (1979). As the court in Anderson noted, [t]he rationale which recognizes an ancillary duty on an insurance company to exercise good faith in the settlement of third-party claims is equally applicable and of equal importance when the insured seeks payment of legitimate damages from his own insurance company. That such a duty arises out of the relationship between the contracting parties themselves cannot be doubted Anderson, supra, 271 N.W.2d at 375 (emphasis added). The question before this Court, then, is not whether a duty of good faith exists, but rather whether a breach of this duty will give rise to an independent action in tort.