Opinion ID: 1199575
Heading Depth: 2
Heading Rank: 4

Heading: There is a genuine issue of material fact as to State Farm's potential liability for bad faith.

Text: The circuit court granted summary judgment against the Delmontes on all claims contained in their complaint. The Delmontes' complaint contained an allegation of bad faith in State Farm's handling of the defense in the underlying action. State Farm did not move for summary judgment on the bad faith claim, and the circuit court did not address this issue in either of the orders granting partial summary judgment. On the record before us, there is potential liability based on the claim of bad faith that cannot be finally determined until the circuit court has ruled on the malpractice claim against Watanabe. If Watanabe's conduct of the defense breached its duties toward its client, the Delmontes, then Watanabe may be liable for its breach. In addition, if such a breach was causally induced by State Farm's actions, then State Farm may potentially be liable for a breach of its duty of good faith and fair dealing. [13] Because the Delmontes have presented evidence that raises a genuine issue of material fact as to State Farm's liability under this theory, and because State Farm's motions for summary judgment did not pray for judgment on this claim, it was erroneous for the circuit court to enter judgment on it. We held in Finley that [A]n attorney who follows the ... requirements of the HRPC must: (1) consult with the client as to the means by which the objectives [of the representation] are to be pursued; (2) not allow the insurer to interfere with the attorney's independence of professional judgment or with the clientlawyer relationship; and (3) not allow the insurer to direct or regulate the lawyer's professional judgment in rendering legal services. Only if these requirements are met will the representation of an insured, paid for by an insurer with a conflicting interest in the outcome of the litigation, comport with the mandates of the HRPC. 90 Hawai`i at 33, 975 P.2d at 1153 (emphasis and some brackets in original). We do not express any opinion as to the validity of the Delmontes' malpractice claim against Watanabe. That is still to be determined in later proceedings. However, the bad faith complaint against State Farm may not finally be resolved until the claims against Watanabe have been determined. There is conflicting evidence in the record as to whether Komeiji was allowed to exercise his professional judgment in handling the Delmontes' case. The circuit court's determination that State Farm did not have a duty to defend the Delmontes does not foreclose the possibility of a cognizable bad faith claim. An insurer may be liable for the improper conduct of the defense of its insured even though it is ultimately determined that the insurer had no duty to defend or indemnify under the terms of the policy. Insurance Bad Faith Litigation § 3.15[2] (Matthew Bender 1998). Thus, for example, if the insurer assumes the defense and, through mishandling of the defense, causes actual harm to the insured, a bad faith claim is cognizable despite a later declaration that the insurer did not have a duty to defend in the first instance. Having assumed the defense, the insurer is under a duty to undertake the defense in good faith until such time as there are clear grounds for withdrawal. In the event of a significant question regarding coverage, the insurer may seek a declaratory judgment. However, in the interim, the insurer must undertake the defense in good faith. In Finley, we adopted an enhanced standard of good faith in a reservation of rights situation. On remand, the circuit court must apply this standard to the Delmontes' bad faith claim against State Farm. [A]n insurance company must fulfill an enhanced obligation to its insured as part of its duty of good faith. Failure to satisfy this enhanced obligation may result in liability of the company[.] This enhanced obligation is fulfilled by meeting specific criteria. First, the company must thoroughly investigate the cause of the insured's accident and the nature and severity of the plaintiff's injuries. Second, it must retain competent defense counsel for the insured. Both retained defense counsel and the insurer must understand that only the insured is the client.... Finally, an insurance company must refrain from engaging in any action which would demonstrate a greater concern for the insurer's monetary interest than for the insured's financial risk. Finley, at 36-37, 975 P.2d at 1156-1157 (quoting Tank v. State Farm Fire & Casualty Co., 105 Wash.2d 381, 715 P.2d 1133 (1986)) (emphasis in original). In addition to State Farm's alleged interference with the representation, the Delmontes raise two additional bases for their bad faith claim against State Farm. First, the Delmontes claim that State Farm engaged in bad faith by refusing to contribute to settlement. For the reasons enumerated above, we reject this argument. State Farm did not have a duty to contribute to settlement. Second, the Delmontes point to State Farm's actions in contacting the Zandees in an attempt to mold the complaint to avoid triggering State Farm's duty to defend. We do not approve of this conduct by State Farm. As State Farm was informed by its own counsel, this overt act against the interests of its insured could be construed as bad faith. However, in this particular case, the Delmontes apparently were not damaged by State Farm's actions. The circuit court denied the Zandees' motion to amend the complaint, and State Farm continued to defend the Delmontes until the resolution of the trial. A cognizable claim of tortious bad faith requires a showing of damage causally related to State Farm's actions. For the foregoing reasons, we vacate the circuit court's grant of summary judgment in favor of State Farm on the Delmontes' bad faith claim.