Opinion ID: 1345823
Heading Depth: 1
Heading Rank: 2

Heading: First Question Recognition of Bad Faith as a Tort

Text: The McCulloughs, supported by amicus curiae brief, [1] advance the premise that the legal duty of good faith and fair dealing arises from the contractual relationship but does not stem solely from the contract itself. Consequently, it is imposed by law and an independent tort action should be possible so the unequal bargaining power of the parties to an insurance contract is recognized in a way that would arguably deter bad faith claim practices by insurers. Golden Rule, also buttressed by amicus curiae brief, [2] strenuously argues that the implied duty of good faith and fair dealing is a simple contractual duty which prevents an independent tort action. On the first question, Golden Rule's gravamina, in addition to public policy concerns, are that legislative preemption has occurred and the theoretical bases of first-party bad faith actions are not sound. The preemption argument is that the Wyoming legislature has preempted the field by enacting the Unfair Trade Practices Act, W.S. XX-XX-XXX through XX-XX-XXX and an attorney's fees and interest recovery statute, W.S. XX-XX-XXX(c) [3] . The attack on the utilization of first-party bad faith cuts to the fundamental difference between third-party and first-party situations focusing on the adversarial nature of first-party relationships where it is argued no fiduciary relationship develops, no relationship of trust or reliance on the contract appears, and no indicia of agency becomes present. Unlike the third-party situation, both the insured and the insurer in the first-party context are parties to the contract and their rights should be controlled solely by the insurance policy. The DLA brief, in relation to the first question, essentially argues in parallel to the contentions of Golden Rule, but broadens the preemption argument to encompass the entire Wyoming Insurance Code in W.S. 26-1-101 through XX-XX-XXX. It stresses that any recognition of first-party bad faith as a tort can only disturb the balance that has been struck by the Wyoming Legislature. Also, it broaches the view that Arnold v. Mountain West Farm Bureau Mut. Ins. Co., Inc., 707 P.2d 161 (Wyo. 1985) is controlling and should answer the first question in the negative. Justification in logic is presented by all litigants but, aside from their roots in economic interest, the direct inquiry is should Wyoming have the insurance company duty of good faith and fair dealing first-party tort cause of action and, if so, what should be the standard for application of the cause of action and with what effect on potential award of punitive damages. While a majority of states have adopted this cause of action, [4] the label attached to it and the standards to determine bad faith differ among the jurisdictions. The approaches divide into four main categories: (1) recognized as an independent tort; [5] (2) labeled as contractual but allowing a broader range of damages which may include punitives; [6] (3) characterized as contractual and confining to strictly benefit of the bargain damages; [7] or (4) established statutorily. [8] Despite the diversity among the jurisdictions, we believe the superior view recognizes the existence of the independent tort for violation of a duty of good faith and fair dealing in insurance policy application by the carrier to its insured. Wyoming law has a consistent thread running from the 1964 case of Western Casualty and Surety Co., 390 P.2d 602 involving the third-party situation of a failure to settle and Arnold, 707 P.2d 161 involving first-party uninsured motorist coverage, so that recognition of the independent action for the tort of first-party bad faith would be structurally consistent and could be expected. [9] Additionally, this court in Tate v. Mountain States Tel. and Tel. Co., 647 P.2d 58, 63 (Wyo. 1982) held: There are certain classes of contracts which create a relation out of which certain duties arise as implied by law independently of the express term of the contract. If the negligent breach of contract is also a breach of such duty the remedy is ex contractu and ex delicto.    Such is the situation in this case. Of course, a double recovery is not allowed. The insurance contract is one of these special classes of contracts so that this duty of good faith and fair dealing imposed by law arises from the contractual relationship. Anderson, 271 N.W.2d at 374; Hilker v. Western Automobile Ins. Co. of Ft. Scott, Kan., 204 Wis. 1, 231 N.W. 257 (1930). See also Hoiness-LaBar Ins. v. Julien Const. Co., 743 P.2d 1262 (Wyo. 1987); Hursh Agency, Inc. v. Wigwam Homes, Inc., 664 P.2d 27, 32 (Wyo. 1983), liability could lie either for breach of contract or negligent default of duty imposed by contract; and Hagar v. Mobley, 638 P.2d 127, 137 (Wyo. 1981), where duty arose from statutory standards imposed on real estate brokers. The fear that recognition of this cause of action will blur the distinction between traditional theories of tort and contract is unsound. The fear that such a holding would eliminate the barrier between tort and contract and lead generally to the awarding of punitive damages in all breach of contract cases is unwarranted. Permitting an insured to maintain a cause of action in tort is justified primarily on the basis of the public service nature of the insurance business and the unequal bargaining relationship between insurer and insured. These circumstances do not exist in all, or even in most, contracts. Roberts v. Western-Southern Life Ins. Co., 568 F. Supp. 536, 555 n. 44 (N.D.Ill. 1983). See also Hoskins v. Aetna Life Ins. Co., 6 Ohio St.3d 272, 452 N.E.2d 1315 (1983). Additionally, this court has at least inferentially recognized that insurance contracts involve unequal bargaining power by adoption of the rate of construction favoring the insured. See Aetna Ins. Co. v. Lythgoe, 618 P.2d 1057 (Wyo. 1980) and Alm v. Hartford Fire Ins. Co., 369 P.2d 216 (Wyo. 1962). See also Comment, Establishing the Tort of Bad Faith in Wyoming, XX Land & Water L.Rev. 625, 628 (1985), which recites the inequality of bargaining power thesis. See Neal v. State Farm Ins. Companies, 188 Cal. App.2d 690, 10 Cal. Rptr. 781 (1961). The foundational case of insurer liability as asserting rights to good faith and rejecting imposition of oppression was Hilker, 231 N.W. at 258, which stated: In view of the fact that these contracts of insurance are prepared by the company and are not prescribed by law, the tendency of the decisions has been to extend, rather than to circumscribe, the field of liability on the part of the company and to hold that the rights of the insured go deeper than the mere surface of the contract written for him by the defendant. Its stipulations imposed obligations based upon those principles of fair dealing which enter into every contract. Brassil v. Maryland Casualty Co., 210 N.Y. 235, 104 N.E. 622, 624, L.R.A. 1915A, 629, 632. That court further recited `that it would be a reproach to the law if there were no remedy for so obvious a wrong as was inflicted upon this plaintiff.' Id. 231 N.W. at 261 (quoting Brassil v. Maryland Casualty Co., 210 N.Y. 235, 104 N.E. 622, 624). On rehearing, Hilker v. Western Automobile Insurance Co. of Ft. Scott, Kan., 204 Wis. 1, 235 N.W. 413, 415-16 (1931) stated: We can see no room to quibble upon the proposition that the insurer made an inadequate, a careless, if not shiftless, investigation of the facts with reference to the accident and injury, that it never at any time was in position to exercise a sound or good-faith judgment, and that in none of these respects did it meet the duty which it owed to the plaintiff. An earlier authority on the emerging trend was Note, The Availability of Excess Damages for Wrongful Refusal to Honor First Party Insurance Claims  An Emerging Trend, 45 Fordham L.Rev. 164 (1976). The countervailing view was stated in Thornton and Blaut, Bad Faith and Insurers: Compensatory and Punitive Damages, 12 Forum 699 (1977). [10] Wyoming generally recognizes the benefit of the bargain damages in relation to contractual damages. UNC Teton Exploration Drilling, Inc. v. Peyton, 774 P.2d 584 (Wyo. 1989); Robert W. Anderson Housewrecking and Excavating, Inc. v. Board of Trustees, School Dist. No. 25, Fremont County, Wyoming, 681 P.2d 1326 (Wyo. 1984); Panhandle Eastern Pipe Line Co. v. Smith, 637 P.2d 1020 (Wyo. 1981). Compare Atlas Const. Co. v. Slater, 746 P.2d 352 (Wyo. 1987), assessing detriment for tort damages which were proximately caused by breach of duty. The additional impetus for good faith is furnished by the contingencies as the price of bad faith which are provided by a tort standard protected duty. Crisci v. Security Ins. Co. of New Haven, Conn., 66 Cal.2d 425, 58 Cal. Rptr. 13, 426 P.2d 173 (1967). See also J. McCarthy, Punitive Damages in Bad Faith Cases, § 1.8 (4th ed. 1987) in analysis of the effect of Crisci. To deny an action in tort would deny such recovery and consequently encourage insurers to delay settlement. In contrast, an action in tort will provide necessary compensation for insureds and incentive for insurers to settle valid claims.    At worst, the availability of an action in tort will add nothing to the liability of insurers. White v. Unigard Mut. Ins. Co., 112 Idaho 94, 730 P.2d 1014, 1018 (1986). See also 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 (1973). Preclusion by alternative statutory remedy has been denied acceptance in most jurisdictions unless the remedy would be as broad as the bad faith tort claim. It seldom is and would not be in Wyoming and we join the majority precept in rejection of statutory preemption. Travelers Ins. Co. v. Savio, 706 P.2d 1258 (Colo. 1985). Furthermore, it is logically argued that Western Casualty and Surety Co., 390 P.2d 602 is dispositive since the statutory preemption or preclusion would logically apply to either type of bad faith claim. Clearly, the Wyoming statutes, W.S. XX-XX-XXX(c) and XX-XX-XXX, and the entire insurance code, W.S. 26-1-101 through XX-XX-XXX, do not provide the same scope of remedies as found in the good faith and fair dealing independent tort remedy. See Comment, supra, XX Land & Water L.Rev. at 640 and W. Shernoff, S. Gage & H. Levine, Insurance Bad Faith Litigation, § 7.04[1] (1989).