Opinion ID: 183511
Heading Depth: 1
Heading Rank: 3

Heading: Breach of Contract and Breach of the Implied Covenant of Good Faith and Fair Dealing

Text: In Utah, a plaintiff may sue on a contract for: (1) breach of the contract's express terms; and/or (2) breach of the covenant of good faith and fair dealing, which is an implied duty that inheres in every contractual relationship. See generally Machan v. UNUM Life Ins. Co. of Am., 116 P.3d 342 (Utah 2005); Beck v. Farmers Ins. Exch., 701 P.2d 795, 798, 801 (Utah 1985). While the former claim is confined to the obligations imposed by the contract itself, the latter is not so constrained. See Campbell v. State Farm Mut. Auto. Ins. Co., 840 P.2d 130, 140 (Utah 1992) (It is true that the insurer's principal duty, under the express terms of the insurance contract, is to pay the liability that the insured incurs, up to a specified dollar limit. The implied duty of good faith and fair dealing goes beyond the bare contract, however, and gives meaning and substance to the insurer's obligations.). Instead, the implied obligation of good faith performance 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. Beck, 701 P.2d at 801. Given the reach of the implied covenant of good faith and fair dealing, damages for its breach are broad and may extend beyond any amount owed under the policy's express terms. Id. at 801-02. Utah courts often refer to these damages as consequential damages. See Billings v. Union Bankers Ins. Co., 918 P.2d 461, 466 (Utah 1996); Machan, 116 P.3d at 345-46. It is somewhat unclear, however, the extent to which consequential damages are permitted for a claim alleging breach of express contract. See, e.g., Billings, 918 P.2d at 466, 468 (holding that an expanded consequential damage measure should be available only for breach of the implied covenant, not . . . for breach of the express terms of the contract but that [a]ttorney fees may be recoverable as consequential damages flowing from an insurer's breach of either the express or the implied terms of an insurance contract); Saleh v. Farmers Ins. Exch., 133 P.3d 428, 435 n. 4 (Utah 2006) (discussing attorney fees as part of a claim for express breach of contract and stating that this court has historically limited the availability of consequential damages to breaches of the covenant of good faith and fair dealing. The admittedly unclear language suggesting the contrary in Billings does not change that policy.); Machan, 116 P.3d at 344 (Consequential damages are available for the breach of either the express or the implied terms of an insurance contract, but . . . 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.). The district court in this case properly granted summary judgment to USAA on the Blakelys' claim for breach of express contract because USAA fully complied with the terms of the policy. Although the Blakelys point to USAA's refusal to pay the amount of loss they claimed prior to their invocation of the appraisal demand clause, nothing in the policy required USAA to do so. Instead, the policy provided for a mechanismthe appraisal processto determine the amount of loss when USAA and the insured could not reach an agreement. USAA complied with that provision and timely paid the Blakelys in accordance with the clause. Indeed, the Blakelys admit that with the payment of the appraisal award, no further amounts are either claimed or owing under the terms of the policy, and the Blakelys do not identify any provision in the insurance policy they contend USAA violated. [1] Because USAA complied with all of the express terms of the policy held by the Blakelys, including the appraisal demand clause, USAA is entitled to summary judgment on the Blakelys' claim for breach of express contract. [2] Unlike the cause of action for breach of express contract, the Blakelys' claim for breach of the implied covenant of good faith and fair dealing was not part of USAA's motion for summary judgment. Instead, at the same pretrial conference during which the parties argued the summary judgment motion as to the breach of contract claim, counsel for USAA suggested that the district court dismiss the cause of action for breach of the implied covenant of good faith and fair dealing as frivolous under Fed.R.Civ.P. 16. See Fed. R.Civ.P. 16(c)(2)(A) (At any pretrial conference, the court may consider and take appropriate action on the following matters: (A) formulating and simplifying the issues, and eliminating frivolous claims or defenses. (emphasis added)). USAA contended that the evidence demonstrated that its view of the loss was fairly debatable and thus the Blakelys could not succeed on their claim. See Saleh, 133 P.3d at 435 (If a claim brought by an insured against an insurer is fairly debatable, failure to comply with the insured's demands cannot form the basis of bad faith.). At the end of the conference, the district court agreed with USAA's position and dismissed the claim. [3] We review a dismissal under Rule 16 based on frivolity for abuse of discretion. Cf. Conkle v. Potter, 352 F.3d 1333, 1335 n. 4 (10th Cir.2003) (reviewing frivolity dismissals under 28 U.S.C. § 1915(e)(2)(B)(i) for abuse of discretion). The Blakelys' claim for breach of the implied covenant of good faith and fair dealing is not frivolous. [A] complaint . . . is frivolous where it lacks an arguable basis either in law or in fact. See Neitzke v. Williams, 490 U.S. 319, 325, 109 S.Ct. 1827, 104 L.Ed.2d 338 (1989); Denton v. Hernandez, 504 U.S. 25, 33, 112 S.Ct. 1728, 118 L.Ed.2d 340 (1992) (describing frivolous claims as fanciful, fantastic, and delusional, and holding a finding of factual frivolousness is appropriate when the facts alleged rise to the level of the irrational or the wholly incredible, whether or not there are judicially noticeable facts available to contradict them). In this case, the Blakelys alleged and put forth the following evidence suggesting that USAA acted unreasonably in taking its initial position regarding the loss amount: the appraisal award was nearly three times, or $200,000 more, than USAA's initial payout of $93,322.20; USAA's adjuster refused to communicate with the Blakelys; USAA's adjuster claimed that he could not smell smoke when the smell proved noticeable in the house three years later; USAA delegated adjustment of the contents claim to a non-adjuster; and USAA refused to pay for any repairs other than structural ones. Although we express no opinion on the ultimate merits of the Blakelys' claim for breach of the implied covenant of good faith and fair dealing, or whether the evidence is sufficient to withstand any other type of dispositive motion, it is abundantly clear that this claim is not wholly incredible. Indeed, until the pretrial conference during which USAA first raised its Rule 16 argument, USAA had taken the position that there may be fact issues sufficient [for the bad faith claim] to go to a jury. See Aplt.App. at 1338. Accordingly, we conclude that the district court abused its discretion in dismissing the claim as frivolous under Rule 16.