Opinion ID: 2634519
Heading Depth: 2
Heading Rank: 3

Heading: damages for breach

Text: ¶ 23 We will now provide guidance on the type of damages that are appropriate in this case should the district court determine that there was a breach of Allstate's duty to investigate. To do so, we must address whether a breach of an insurer's duty to fairly investigate and evaluate a third-party claim gives rise to a cause of action in tort, or only one in contract. ¶ 24 In Beck, we addressed the type of damages available for an insurer's breach of duty in a first-party situation. We held that, under first-party coverage, the duties and obligations of the parties are contractual rather than fiduciary, and that [w]ithout more, a breach of those implied or express duties can give rise only to a cause of action in contract, not one in tort. Beck v. Farmers Ins. Exch., 701 P.2d 795, 800 (Utah 1985). ¶ 25 We also addressed in Beck the type of damages that may arise from an insurer's breach of duty with regard to third-party coverage. Specifically, we observed that [i]n a third-party situation, the insurer controls the disposition of claims against its insured, who relinquishes any right to negotiate on his own behalf, and that [a]n insurer's failure to act in good faith exposes its insured to a judgment and personal liability in excess of the policy limits. Id. at 799. By undertaking a duty to defend the insured, the insurer incurs a fiduciary duty to its insured to protect the insured's interests as zealously as it would its own; consequently, a tort cause of action is recognized to remedy a violation of that duty. Id. (citing Ammerman v. Farmer's Ins. Exch., 19 Utah 2d 261, 265-66, 430 P.2d 576, 578-79 (1967)). We explained that breach of this duty to defend may potentially expose[ ][the] insurer[ ] to consequential and punitive damages awards in excess of policy limits. Id. at 800. ¶ 26 Black urges this court to find that Allstate breached its duty to defend by failing to adequately investigate the Gallagher claim. Black argues that the duty to defend clause in his insurance policy placed a heightened, fiduciary duty upon Allstate to see that Black's best interests were protected once the Gallagher claim was submitted. Accordingly, in addition to damages to compensate him for increased premiums and decreased insurability, Black seeks punitive damages in an amount not less than $25,000. ¶ 27 We do not agree with Black that tort damages are appropriate in this case. Instead, we conclude that, in the investigation phase of the Gallagher claim, Allstate's duties to Black were contractual rather than fiduciary. This conclusion rests on our determination that an insurer's duty to defend does not arise until a formal lawsuit has been commenced against the insured. Only upon the initiation of formal legal proceedings does the insurer undertake a fiduciary duty to defend its insured by appointing counsel and thereafter zealously protecting the interests of its insured in defending or negotiating settlement of the action. While we recognize that, in insurance matters, much of the negotiation and settlement of claims occurs prior to the filing of a formal complaint, during this pre-litigation phase, the insured has not yet relinquishe[d] any right to negotiate on his own behalf. Id. at 799. Also, though an insurer's failure to settle the claim may lead to the commencement of formal legal proceedings against the insured, at this stage the insured has not yet been expose[d] ... to a judgment and personal liability in excess of the policy limits. Id. Thus, prior to the filing of a formal lawsuit, breach of an insurer's duties in handling third party claims, without more, may give rise only to a cause of action in contract, not one in tort. ¶ 28 Limiting Black's recovery in this action to contractual damages does not leave him without a meaningful remedy for Allstate's breach. As we observed in Beck, there is no reason to limit damages recoverable for breach of a duty to investigate, bargain, and settle claims in good faith to the amount specified in the insurance policy. Id. at 801. We stated that [d]amages recoverable for breach of contract include both general damages, i.e., those flowing naturally from the breach, and consequential damages, i.e., those reasonably within the contemplation of, or reasonably foreseeable by, the parties at the time the contract was made. Id. (citations omitted). We recognized that consequential damages for breach of contract may reach beyond the bare contract terms, indicating 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. Thus, while Black will be unable to recover punitive damages in this case, he may recover both general and consequential damages, which could conceivably exceed the amount of his policy limit.