Opinion ID: 2567250
Heading Depth: 3
Heading Rank: 2

Heading: Consequential Damages for Breach of Insurance Contract

Text: ¶ 15 Having thus delineated the nature and purpose of an insurance contract, our opinion in Beck proceeded to apply contract law principles in order to determine the scope of available damages for breach of the implied covenant of good faith and fair dealing. We began with the general assertion that [a]lthough the policy limits define the amount for which the insurer may be held responsible in performing the contract, they do not define the amount for which it may be liable upon a breach. Id. Rather, in addition to general damagesthose flowing naturally from the breachan insured is entitled to consequential damagesthose reasonably within the contemplation of, or reasonably foreseeable by, the parties at the time the contract was made. Id. ¶ 16 We further concluded that the consequential damages that an insured might foreseeably incur due to an insurance company's breach of the implied covenant of good faith may encompass losses well in excess of the policy limits, such as for a home or a business, and, in unusual cases, damages for mental anguish. Id. at 802; see also Acquista, 730 N.Y.S.2d at 276 (recognizing that an insured's inability to pay that which the insurer should be covering may result in further damage to the insured, including the potential for emotional distress or even further physical injury that may result where a plaintiff under the strain of serious medical problems is forced to also undertake the stress of extended litigation). ¶ 17 Having discarded the notion that an insurance contract is merely a commercial contract for money, and having recognized that an insured may recover consequential damages beyond the amount prescribed by the insurance policy where the insurance company has breached the implied covenant of good faith and fair dealing, we are now presented with the question of whether an insured may also recover consequential damages where the insurance company has breached the express terms of the insurance contract, and, if so, how these damages differ from those available for breach of the implied covenant of good faith and fair dealing. As we have already stated, consequential damages are available under general contract law. In the context of breaches by an insurance company, this is true whether the company has breached the express terms of the contract or the implied covenant of good faith and fair dealing. In both cases, the insured is entitled to those [damages] reasonably within the contemplation of, or reasonably foreseeable by, the parties at the time the contract was made. Beck, 701 P.2d at 801. In both cases, whether particular damages may be considered foreseeable will always hinge upon the nature and language of the [insurance] contract and the reasonable expectations of the parties. Id. at 802. ¶ 18 This is not to say that an insured may in every instance recover the same measure of damages whether the proven breach is of the express contract terms or of the implied covenant of good faith and fair dealing. Indeed, we eschewed such a result in Billings v. Union Bankers Insurance Co., 918 P.2d 461, 467 (Utah 1996). Our opinion in Billings made extensive reference to policy reasons for limiting damages for an insurance company's breach of the express terms of the contract where it acted in good faith, noting that it would be unfair not to permit an insurer who has a legitimate dispute with an insured over a claim to have the dispute resolved before having to pay the claim. Id. However, our holding may more usefully be understood as simply recognizing that the available damages for the two types of breaches are likely to differ to the extent that a breach of the implied covenant is different in nature from a breach of express contractual terms. ¶ 19 For one thing, while the implied covenant of good faith and fair dealing may not be waived by either party, Beck, 701 P.2d at 801 n. 4, parties may, at least to some extent, contractually limit their expectations under the express terms of the contract by drafting its language accordingly. [2] If the language of an insurance policy explicitly obligates the insurance company to resolve claims within a reasonable time, the damages that may foreseeably result from the company's breach of this express obligation would be no different from the foreseeable damages for a breach of the company's implied duty, under the covenant of good faith, to resolve claims within a reasonable time. Where insurance contracts impose no such explicit good faith or other similar obligations on the insurance company, the insured will likely have a claim for breach of the express terms of the contract only where the insurance company has incorrectly refused payment on a claim. ¶ 20 It seems clear that both parties to an insurance contract should expect that an insurance company may require a reasonable amount of time to process or investigate a claim before determining whether to pay or deny it. See Billings, 918 P.2d at 465 (holding that when an insured's claim is fairly debatable, the insurer is entitled to debate it and cannot be held to have breached the implied covenant if it chooses to do so). [3] Where an insurance company's breach consists only of ultimately resolving a claim incorrectly and failing to pay the insured, we may presume that any damages sustained by the insured during the initial reasonable investigation period were not caused by the breach, as these damages would have been sustained even if the insurance company had resolved the claim correctly in the insured's favor. See Mahmood v. Ross, 1999 UT 104, ¶ 20, 990 P.2d 933 (To recover consequential damages, a non-breaching party must prove (1) that consequential damages were caused by the contract breach....). ¶ 21 In contrast, where the insurance company has unreasonably delayed processing a claim or has otherwise acted in bad faith during the investigation process, it is much more likely that any damages sustained by the insured were caused by the breach. In the latter case, the delay or other bad faith behavior is itself part of the breach, extending its duration over a significant time period, whereas in the former case, the breach has not begun until the incorrect decision has been made. Of course, once the insurance company has issued an incorrect decision, further damages, caused by the insurance company's mistaken assessment and its withholding of payment, may occur. To the extent these damages are reasonably foreseeable, they should be included in the consequential damages calculation for breach of the express terms of the contract.