Opinion ID: 871065
Heading Depth: 2
Heading Rank: 2

Heading: Best Place, Inc. v. Penn America Insurance Co.

Text: Hawai`i first recognized a tort bad faith cause of action in a first-party insurance context in Best Place, Inc. v. Penn America Insurance Co., 82 Hawai`i 120, 920 P.2d 334 (1996). In Best Place, the insured sued its fire insurer for (1) breach of contract and (2) tortious breach of the implied covenant of good faith and fair dealing after the insurer denied a claim for fire loss. Id. at 122, 920 P.2d at 336. We held that there is a legal duty, implied in a first-party insurance contract, that the insurer must act in good faith in dealing with its insured, and a breach of that duty of good faith gives rise to an independent tort cause of action. Id. at 132, 920 P.2d at 334. Before expressly recognizing the tort of bad faith in the first-party insurance context, we reviewed our case law dealing with insurer bad faith, together with statutory law regulating the insurance industry in Hawai`i. Id. at 123-27, 920 P.2d at 337-41. We then discussed, and distinguished, the alternative theories of tort and contract for insurer misconduct. Id. at 127-32, 920 P.2d at 341-46. We noted that the key distinction between the alternative theories was that the tort theory provided the insured a broader range of compensatory damages and certain additional items of recovery, such as damages for emotional stress and punitive damages, which are generally not available in actions based solely on breach of contract: By characterizing the insured's cause of action as sounding in tort, the courts adopting this reasoning made available to the insured a broader range of compensatory damages and certain additional items of recovery, such as damages for emotional distress and punitive damages, which are generally not available in actions founded solely on breach of contract. Id. at 127-28, 920 P.2d at 341-42 (emphasis added) (quoting W. Shernoff, S. Gage and H. Levine, Insurance Bad Faith Litigation, § 1.07(2) (1994)). We further noted in Best Place the sound policy considerations underlying the adoption of the tort of bad faith in the insurance context. We are also persuaded that there are sound reasons for recognizing a cause of action in tort for beach of the implied covenant of good faith and fair dealing in the insurance context. Adopting the tort of bad faith is consistent with the case law and statutory provisions dealing with insurer misconduct in this jurisdiction. In addition, the special relationship between insurer and insured is, as the Rawlings court observed, atypical, and the adhesionary aspects of an insurance contract further justify the availability of a tort recovery. Finally, a bad faith cause of action in tort will provide the necessary compensation to the insured for all damage suffered as a result of insurer misconduct. Without the threat of a tort action, insurance companies have little incentive to promptly pay proceeds rightfully due to their insureds, as they stand to lose very little by delaying payment. Id. at 132, 920 P.2d at 346 (emphasis added); see also Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986). In follow-up to the policy reasons supporting the tort of bad faith, we made it clear that the insurer's tort duty to act in good faith in dealing with its insured is independent of the insurer's contractual duty to pay claims: The breach of the express covenant to pay claims, however, is not the sine qua non for an action for breach of the implied covenant of good faith and fair dealing. The implied covenant is breached, whether the carrier pays the claim or not, when its conduct damages the very protection or security which the insured sought to gain by buying insurance. Id. (quoting Rawlings, 151 Ariz. at 157, 726 P.2d at 573). Finally, the Best Place court then set forth the standard for establishing tort liability in first-party cases: We believe that the appropriate test to determine bad faith is the general standard set forth in Gruenberg and its progeny. Under the Gruenberg test, the insured need not show a conscious awareness of wrongdoing or unjustifiable conduct, nor an evil motive or intent to harm the insured. An unreasonable delay in payment of benefits will warrant recovery for compensatory damages under the Gruenberg test. However, conduct based on an interpretation of the insurance contract that is reasonable does not constitute bad faith. In addition, an erroneous decision not to pay a claim for benefits due under a policy does not by itself justify an award of compensatory damages. Rather, the decision not to pay a claim must be in bad faith. Id. at 133, 920 P.2d at 347 (emphasis added) (citations omitted); see McCormick v. Sentinel Life Ins. Co., 153 Cal.App.3d 1030, 200 Cal.Rptr. 732 (1984); see also Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032 (1973). In summary, when Best Place recognized the tort of bad faith in the first-party insurance context, it intended to provide the insured with a vehicle for compensation for all damages incurred as a result of the insurer's misconduct, including damages for emotional distress. We made a clear distinction between contractual remedies for failure to perform contractual obligations, and the tort remedy of bad faith for breach of the implied covenant of good faith and fair dealing, whether the insurer ultimately pays the claim or not. Our rationale for recognizing the tort of bad faith with its potential liability for all damages incurred as a result of the insurer's misconduct, including emotional distress damages, was two-fold: (1) bad faith conduct by an insurer damages the very protection or security which the insured sought to gain by buying insurance ( id. at 129-30, 920 P.2d at 343-44), and (2) in the absence of the threat of a bad faith action, insurers would have little incentive to promptly pay benefits owing to their insured as they would stand to lose very little by delaying payment if the insured was limited to contractual remedies ( id. at 132, 920 P.2d at 346). Significantly, there is no language in Best Place that would indicate that this court intended to place a threshold requirement of economic or physical loss caused by bad faith for recovery of emotional distress damages incurred as a result of an insurer's bad faith conduct. Best Place recognized that a bad faith claim by an insured stems from the manner in which an insured's claim was handled, rather than from a determination of whether the insured had suffered an economic or physical loss. While we have not previously directly addressed the specific issue of whether to adopt an economic or physical loss threshold rule, our subsequent case law following Best Place reveals that we have, consistent with Best Place, refrained from imposing such a threshold when presented with a claim for bad faith. In Enoka v. AIG Hawaii Insurance Co., Inc., 109 Hawai`i 537, 128 P.3d 850 (2006), we held that even where the insurer had no contractual duty to pay any money or benefits, such that an economic loss could not be incurred, the insured could nonetheless bring a claim against the insurer for bad faith mishandling of the insured's claim. As this court stated in Best Place, the insurer may commit bad faith, whether the carrier pays the claim or not.  82 Hawai`i at 132, 920 P.2d at 346 (emphasis added); see also Francis v. Lee Enterprises, Inc., 89 Hawai`i 234, 971 P.2d 707 (1999) (noting that, in Best Place, [w]e further explained that an action for the tort of `bad faith' will lie ... when an insurance company unreasonably handles or denies payment of a claim ) (emphases added). Surely an insurer must act in good faith in dealing with its insured and in handling the insured's claim, even when the policy clearly and unambiguously excludes coverage. Inasmuch as Enoka has alleged that AIG handled the denial of her claim for nofault benefits in bad faith, we conclude that she is not precluded from bringing her bad faith claim even where there is no coverage liability on the underlying policy. Accordingly, we hold that the trial court erred in determining that, because Enoka's breach of contract claim failed, her bad faith claim must fail. Enoka, 109 Hawai`i at 552, 128 P.3d at 865; see also Catron v. Tokio Marine Mgmt., Inc., 90 Hawai`i 407, 978 P.2d 845 (1999), Christiansen v. First Ins. Co. of Hawai`i Ltd., 88 Hawai`i 442, 967 P.2d 639 (1998), rev'd on other grounds, 88 Hawai`i 136, 963 P.2d 345 (1998). In summary, Best Place and our subsequent case law evidence an intent to provide the insured with a vehicle for compensation for all damages incurred as a result of the insurer's misconduct, including damages for emotional distress, without imposing a threshold requirement of economic or physical loss. Best Place, 82 Hawai`i at 132, 920 P.2d at 346.