Opinion ID: 2567250
Heading Depth: 2
Heading Rank: 1

Heading: consequential damages for express breach of an insurance contract

Text: ¶ 6 The first certified question asks: In a first party insurance situation, may an insured recover consequential damages, other than attorney's fees, for breach of the express terms of an insurance contract? If so, what are the consequential damages that are recoverable for breach of the express terms of an insurance contract and how are they distinguished from the consequential damages for breach of the implied covenant of good faith and fair dealing that are recoverable under Beck v. Farmers Insurance Exchange, 701 P.2d 795, 801 (Utah 1985)? ¶ 7 In Beck, as discussed in further detail below, we laid out the measure of consequential damages available for an insurance company's refusal to investigate, evaluate, bargain, or settle a first-party insurance claim in good faith. 701 P.2d at 802. In doing so, we refused to adopt a tort approach for analyzing such bad faith claims, relying instead on the implied covenant of good faith and fair dealing that inheres in every contract. Id. at 799-800. We recognized that other courts had adopted the tort approach as a means of providing an insurer with incentive to promptly and faithfully fulfill its contractual obligations, but we reasoned that this practical end ... can be accomplished as well through a contract cause of action, without the analytical straining necessitated by the tort approach. Id. at 799. ¶ 8 UNUM urges us to conclude that, under Beck, the only damages available to an insured from an insurance company that breaches the express terms of the insurance contract, but not the implied covenant of good faith, are the benefits to which the insured is entitled under the policy, prejudgment interest, and reasonably foreseeable attorney's fees. UNUM argues that the goal of deterring insurance companies from bad faith conduct would be undermined if an insured is able to recover consequential damages even where bad faith cannot be proved. ¶ 9 The implication of UNUM's argument is that in Beck we established a broad range of consequential damages for bad faith breaches by insurance companies simply for policy reasons. To the contrary, we believe our opinion in Beck was firmly grounded in contract principles. However, by recognizing the unique nature and purpose of an insurance contract, id. at 802, Beck did signify an evolution in our understanding of what individuals are bargaining for when they enter into an insurance contract. In order to address the question before us, we must first clarify Beck's assessment of the nature of an insurance contract and how this assessment led to our holding in Beck regarding consequential damages. We then conclude that consequential damages are available for the breach of either the express or the implied terms of an insurance contract, but that the consequential damages available for breach of an insurance contract's express terms may be more limited in scope, based on the language of the contract and the extent to which any damages were caused by the breach.
¶ 10 Traditionally, insurance contracts were regarded as commercial contracts for money in which the insured has bargained for the insurance company's payment of a certain sum upon the occurrence of a specified event. See Kewin v. Mass. Mut. Life Ins. Co., 409 Mich. 401, 295 N.W.2d 50, 53-55 (1980) (holding that a disability income protection insurance policy contract is a commercial contract); Acquista v. N.Y. Life Ins. Co., 285 A.D.2d 73, 730 N.Y.S.2d 272, 276 (N.Y.App.Div.2001) (discussing the traditional analysis, where insurance policies are viewed as contracts for the payment of money only). In accord with this understanding of the bargain, courts employing the traditional approach have limited an insured's damages to the amount owed under the terms of the policy, plus interest. See New Orleans Ins. Co. v. Piaggio, 16 Wall. 378, 83 U.S. 378, 386, 21 L.Ed. 358 (1872) (holding that an insured was not entitled to special damages for the detention of money due to him beyond what the law allows as interest); Clark v. Life & Cas. Ins. Co., 245 Ky. 579, 53 S.W.2d 968, 969 (1932) (recognizing that the measure of recovery for the failure to pay money is the amount agreed to be paid with legal interest); Acquista, 730 N.Y.S.2d at 276 (recognizing that under the traditional analysis, the damages available for an insurer's failure to pay or provide benefits have been limited to the amount of the policy plus interest). These courts have reasoned that, because money was what the insured bargained for, the insured's receipt of the expected amount, plus interest, would suffice to place him in the position he would have been in had the contract been performed. See Kewin, 295 N.W.2d at 55 (In the commercial contract situation, ... the injury which arises upon a breach is a financial one, susceptible of accurate pecuniary estimation. The wrong suffered by the plaintiff is the same, whether the breaching party acts with a completely innocent motive or in bad faith.). ¶ 11 Crucial to the traditional understanding that insurance policies are commercial contracts for money was the assumption that the financial proceeds obtained through an insurance policy are somehow fungiblein other words, that a[n insured] has access to an alternative source of funds from which to pay that which the insurer refuses to pay. Acquista, 730 N.Y.S.2d at 276. However, [t]his is frequently an inaccurate assumption. Id. In fact, it seems clear that in many cases a large part of an insured's motivation for acquiring an insurance policy is his expectation that he may well be unable to find an alternative source of funds to cover the loss that the policy is meant to cover. ¶ 12 As a growing number of jurisdictions have recognized, the conception of an insurance policy as merely a commercial contract for money is flawed. `An insurance policy is not obtained for commercial advantage; it is obtained as protection against calamity.' The Best Place, Inc. v. Penn Am. Ins. Co., 82 Hawai`i 120, 920 P.2d 334, 342 (1996) (quoting Noble v. Nat'l Am. Life Ins. Co., 128 Ariz. 188, 624 P.2d 866, 867 (1981)). `[T]he insured's objective in buying [an insurance] company's express covenant to pay claims is security from financial loss which he [or she] may sustain from claims against him [or her] and protection against economic catastrophe in those situations in which he [or she] may be the victim.' Id. at 344 (alteration in original) (quoting Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 570 (1986)); see also Miller v. Fluharty, 201 W.Va. 685, 500 S.E.2d 310, 319 (1997) ([A] policyholder buys an insurance contract for peace of mind and security, not financial gain.... [A]ll policyholders... should get their policy proceeds promptly without having to pay litigation fees to vindicate their rights. (footnote omitted)). ¶ 13 In Beck, this court joined those jurisdictions that have rejected the traditional view of insurance contracts as commercial contracts for money. We recognized the unique nature and purpose of an insurance contract, in that insurance frequently is purchased not only to provide funds in case of loss, but to provide peace of mind for the insured or his beneficiaries. Beck, 701 P.2d at 802. Essentially, what the insured has bargained for in the context of an insurance contract includes both peace of mind and the insurance company's payment of whatever sum is owed within a reasonable period of time. See id. ¶ 14 In keeping with this modified and, we believe, more accurate assessment of the nature of insurance contracts, we concluded in Beck that, in the insurance policy context, the implied covenant of good faith and fair dealing, which inheres in all contracts, contemplates, at the very least, that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim. Id. at 801.
¶ 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.