Opinion ID: 1118833
Heading Depth: 2
Heading Rank: 3

Heading: the special relationship between insurer and insured

Text: The imposition of liability in tort for bad faith breach of an insurance contract is further warranted when one considers the special relationship which exists between insurer and insured. The insurance contract has long been recognized as giving rise to a special relationship between insurer and insured (see Manhattan Fire Ins. Co. v. Weill & Ullman, 69 Va. (28 Gratt.) 389, 26 Am.Rep. 364 (1877)), which requires that the parties deal with each other fairly, honestly, and in good faith ( Germania Ins. Co. v. Rudwig, 80 Ky. 223, 235 (1882)). McCarthy, Punitive Damages in Bad Faith Cases 3d, 23 (1983); accord, e.g., Noble, supra, 624 P.2d at 867. John G. Holinka, commenting on insurance contracts, noted that it is the unique, personal (non-commercial) nature of insurance contracts which justifies the imposition of the duty of good faith and fair dealing. Holinka, Damages for Mental Suffering Caused by Insurers: Recent Developments in the Law of Tort and Contract, 48 Notre Dame Lawyer 1303 (1973). The insured-insurer relationship is one characterized by elements of public interest, adhesion and fiduciary responsibility. Seaman's Direct Buying Serv. v. Standard Oil, 686 P.2d 1158, 1166 (Cal. 1984). As Louderback and Jurika noted in Standards for Limiting the Tort of Bad Faith Breach of Contract, 16 U.S.F.L.Rev. 187 (1982): The adhesionary aspects of the insurance contract, including the lack of bargaining strength of the insured, the contracts standardized terms, the motivation of the insured for entering into the transaction and the nature of the service for which the contract is executed, distinguish this contract [insurance contract] from most other non-insurance commercial contracts. These features characteristic of the insurance contract make it particularly susceptible to public policy considerations. 16 U.S.F.L.Rev. 187, 200-01 (1982). It is in fact these adhesionary aspects of the insurance contract which have prompted this court in the past to come to the aid of the insured. Chancler v. American Hardware Mut. Ins. Co., 109 Idaho 841, 712 P.2d 542 (1985); Moss v. Mid-American Fire and Marine Ins. Co., 103 Idaho 298, 647 P.2d 754 (1982). Louderback and Jurika observed that, although the insurance companies cannot be said to be fiduciaries for their insureds in the strict meaning of the term, under certain circumstances, the insured ... [has] a right to place [his] trust and confidence in these larger entities. Louderback and Jurika, Standards for Limiting the Tort of Bad Faith Breach of Contract, MFA Mutual Insurance Co. v. Flint, 574 S.W.2d 718 (Tenn. 1978). As the Rawlings court noted: The industry itself seems to recognize these principles. Advertising programs portraying customers as being in good hands or dealing with a good neighbor emphasize a special type of relationship between the insured and the insurer  one in which trust, confidence and peace of mind have some part. Rawlings, supra, 726 P.2d at 571 n. 3. This special relationship justifies the recognition of a covenant of good faith and fair dealing. The defendant concedes that while an action sounding in tort may be applicable in third party situations due to the fiduciary relationship established when the insurer assumes control of the litigation, including the power to settle, it has no merit when the insured is bringing the action himself. This Court addressed this argument, albeit indirectly, in Sullivan, supra . In Sullivan, Justice Shepard noted correctly that the insured, by initiating a first party law suit against the insurer, does not necessarily create an adversarial relationship between himself and the insurer which abrogates the special relationship imposed by the insurance contract. In holding that the trial court was correct in issuing a summary judgment, Justice Shepard stated that the absence of any showing in the record of bad faith on the part of Allstate in failing to pay the claim submitted by the Sullivan's, [precluded an action in tort]. Id., 723 P.2d at 851 (Sullivan had alleged outrage, willful breach of contract, and bad faith in refusing to settle a claim made under a policy issued by Allstate). What Sullivan teaches, then, is that while there may be an action in tort for the willful breach of an insurance contract and for the insurer's bad faith in failing to promptly settle a valid claim, the outcome of any action will depend upon the particular facts of the case. ( See discussion, supra pp. 1015, of Anderson v. Continental Ins. Co . ). Of course the mere failure to immediately settle what later proves to be a valid claim does not of itself establish bad faith. As indicated earlier, the insured must show the insurer intentionally and unreasonably denies or delays payment... . Rawlings, supra, 726 P.2d at 572. An insurer does not act in bad faith when it challenges the validity of a fairly debatable claim, or when its delay results from honest mistakes. Id., 726 P.2d at 572-573; accord, Noble, supra, 624 P.2d at 868.