Opinion ID: 877680
Heading Depth: 1
Heading Rank: 3

Heading: the imposition of punitive damages:

Text: The title companies attack the imposition of punitive damages on two grounds. First, they argue that punitive damages cannot be imposed where the underlying cause has been a breach of contract. Second, they argue that because no actual damages were found because of their act of bad faith, there was no basis to impose punitive damages. The trial court found that the refusal of the title companies to defend O'Neil I and O'Neil II was not only a breach of contract but also was an act of bad faith. Specifically, the trial court found that the refusal was: a breach of contract which sustains the award of actual damages [and that the] refusal to defend was an act done without justification, was willful, malicious, oppressive, and constituted bad faith.  (Emphasis added.) Based on this conclusion, the trial court ordered the title companies to pay $15,000 punitive damages to Lipinski. The title companies have not challenged the evidence on which the trial court based its decision to impose punitive damages. Rather, they argue that punitive damages were imposed for a breach of contract and that section 27-1-221, MCA, prohibits imposition of punitive damages arising from a breach of contract. That statute provides: In any action for a breach of an obligation not arising from contract where the defendant has been guilty of oppression, fraud, or malice, actual or presumed, the jury, in addition to the actual damages, may give damages for the sake of example and by way of punishing the defendant. (Emphasis added.) The title companies argue that if there had been no contract there would have been no breach, and therefore section 27-1-221, MCA, prohibits the assessment of punitive damages. The title companies concede that punitive damages can be awarded to an insured for breach of duty owed to its insured, but they argue that it can only be done where, independent of its contract, the insurance company has violated a provision of the insurance code. Because no insurance code violation exists here they argue therefore that punitive damages cannot be imposed. But this Court has never held that punitive damages can be imposed against an insurance company only if it has violated a provision of the insurance code. The trial court held that the title companies, in refusing to defend Lipinski, acted in bad faith. We hold that this is a basis, independent of contract, and independent of the insurance code, on which punitive damages can properly be assessed. In seeking to distinguish First Security Bank v. Goddard (1979), 181 Mont. 407, 593 P.2d 1040, the title companies fail to meet the issue of whether they have an independent duty of good faith in dealings with their insureds. In Goddard, we stated: It is the breach of the statutory requirement, a duty independent of the insurance contract, that gives rise to that liability in the case at bar.  593 P.2d at 1047. (Emphasis added.) From this holding the title companies jump to the unsupportable conclusion that punitive damages can only be assessed against an insurance company where, aside from a contract breach, there has been a violation of the insurance code. But that is not our holding in Goddard. In fact, we clearly sent a message in Goddard that an insurer may well have a duty independent of contract, and independent of statute, to act in good faith with its insureds. 593 P.2d at 1047. Further we held in Weber v. Blue Cross of Montana (1982), Mont. 643 P.2d 198, 39 St.Rep. 245, that Blue Cross, technically not an insurance company under the majority analysis, had a duty of acting in good faith with those for whom it provided coverage. 643 P.2d at 203, 39 St.Rep. at 252. It would be more than anomalous to now hold that insurance companies do not have this duty of good faith when dealing with their insureds. Should there be any doubt, we now expressly hold that insurance companies have a duty to act in good faith with their insureds, and that this duty exists independent of the insurance contract and independent of statute. Any statements in our cases, to the extent they may be or appear to be in conflict with this holding, are expressly overruled. The title companies' second argument is that punitive damages could not be awarded because the trial court did not find separately as a result of a prima facie tort arising from an act of bad faith that Lipinski had sustained any actual damage. Rather, the trial court found the actual damages based on a breach of the contract. The trial court's conclusion of law stated: The refusal to defend ... constituted a breach of contract, which sustains the award of actual damages granted above [the court allowed recovery of costs incurred in defending O'Neil I and O'Neil II ]. In addition, said refusal to defend was an act done without justification, was willful, malicious, oppressive, and constituted bad faith on the part of the Defendants ... Because the award was based on actual damages the title companies argue that punitive damages cannot be sustained because there was no actual damages flowing from the prima facie tort of bad faith. We note first that the statute section 27-1-221, supra, does not require actual damages to flow from the commission of the tort before punitive damages can be assessed. Nor have the title companies cited any authority for their argument. It is true here that the trial court awarded actual damages based on a breach of contract; however, the court could as easily have held that the damages flowed from the commission of the prima facie tort of bad faith, and therefore a basis for actual damages would clearly exist from the commission of the tort. It is likewise clear that if a basis for actual damages exists in the record, the fact that none are awarded, does not prevent the assessment of punitive damages. Brown v. Grenz (1953), 127 Mont. 49, 257 P.2d 246. Also see Fauver v. Wilkoske (1949), 123 Mont. 228, 211 P.2d 420. The title companies' argument exalts from over substance. The trial court did not simply hold that the title companies had breached their contract with Lipinski; the trial court held that the title companies were in bad faith in refusing to defend Lipinski. In other words, the title companies by the terms of the contract, had a clear duty to defend Lipinski, and in breaching that clear duty the title companies acted in bad faith. The damages which Lipinski incurred in defending O'Neil I surely flowed from that act of bad faith. The simple fact is that there would have been no damages if the title companies had acted in good faith, for if they acted in good faith they would have defended O'Neil I and Lipinski would have incurred no costs. Despite our holding on the issue of punitive damages, we must vacate the award and remand for a further determination of the amount of damages to be assessed. The trial court in assessing punitive damages, awarded a lump sum of $15,000 as damages for refusal to defend O'Neil I and O'Neil II. The O'Neil II lawsuit was prompted by Lipinski's failure to honor the terms of the O'Neil I settlement, and we hold that the title companies had no duty to defend that lawsuit. Accordingly, punitive damages must be assessed based on the refusal of the title companies to defend O'Neil I only.