Opinion ID: 4249099
Heading Depth: 3
Heading Rank: 2

Heading: The Duty of Good Faith and Fair Dealing

Text: ¶34 Insurers have, at minimum, the same implied “duty of good faith and fair dealing implied in all contracts and . . . a violation of that duty gives rise to a claim for breach of contract.” Beck v. Farmers Ins. Exch., 701 P.2d 795, 798 (Utah 1985). “Every contract or duty . . . imposes an obligation of good faith in its performance and enforcement.” U.C.C. § 1-304 (AM. LAW INST. & UNIF. LAW COMM’N 2016). See also RESTATEMENT (SECOND) OF CONTRACTS § 205 (AM. LAW INST. 2017) (“Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”); Aditi Bagchi, Note, Unions and the Duty of Good Faith in Employment Contracts, 112 YALE L.J. 1881, 1882 (2003) (“The duty of good faith is a background condition imposed on all contracts that limits the negative effects of unequal bargaining power . . . .”). “’Good faith’ . . . means honesty in fact and the observance of reasonable commercial standards of fair dealing.” U.C.C. § 1-201(b)(20) (AM. LAW INST. & UNIF. LAW COMM’N 2016). ¶35 In insurance contracts, the good faith performance of an insurer is evaluated by an objective standard that is measured by what a reasonable insured would expect from an insurer. See Sandt, 854 P. 2d at 523. “Good faith . . . emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as 5But see Truck Ins. Exch. v. Rutherford, 2017 UT 25, ¶ 14, 395 P.3d 143 (finding that where language is unambiguous in insurance code there is “no need for a tie-breaker, and thus no relevance for the principle of liberal construction of the Act” (emphases added) (citation omitted)). In Rutherford, we noted that our common law interpretation that the “tie goes to the insured” in ambiguous statutes was abrogated by Utah Code sections 31A-1-102 and -201(1). Id. ¶ 15. While Rutherford required us to interpret the coverage mandated by statute, this case requires us to interpret the coverage mandated in a contract. Our interpretation of insurance contracts is still governed by the common law requirement that we construe insurance contracts “in favor of coverage” when the terms are ambiguous. 17 FIRE INSURANCE EXCHANGE v. OLTMANNS DURHAM, J., concurring in part and in the result involving ‘bad faith’ because they violate community standards of decency, fairness or reasonableness.” RESTATEMENT (SECOND) OF CONTRACTS § 205 cmt. a (AM. LAW INST. 2017). In the insurance context, this court has held “that the implied obligation of good faith performance contemplates, at the very least, that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim.” Beck, 701 P.2d at 801 (applying this duty in the first-party context); see also Black v. Allstate Ins. Co., 2004 UT 66, ¶¶ 19–20, 100 P.3d 1163 (applying the same standard in the third-party context), reh’g denied (2004). ¶36 Insurers are also required to “’deal with laymen as laymen and not as experts in the subtleties of law and underwriting’ and to refrain from actions that will injure the insured’s ability to obtain the benefits of the contract.” Beck, 701 P.2d at 801 (citation omitted). Insurers owe a responsibility to their insureds because of their position of authority and control over the underwriting process. See Allen v. Metro. Life Ins. Co., 208 A.2d 638, 644 (N.J. 1965) (“While insurance policies and binders are contractual in nature, they are not ordinary contracts but are ‘contracts of adhesion’ between parties not equally situated. The company is expert in its field and its varied and complex instruments are prepared by it unilaterally whereas the assured or prospective assured is a layman unversed in insurance provisions and practices. He justifiably places heavy reliance on the knowledge and good faith of the company and its representatives and they, in turn, are under correspondingly heavy responsibility to him.”(citations omitted)).