Opinion ID: 1427999
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Heading: Current California Law Regarding Tort Remedies for Breach

Text: By now it is well established that a covenant of good faith and fair dealing is implicit in every contract. ( Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683, 254 Cal.Rptr. 211, 765 P.2d 373 ( Foley ); Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 940, 132 Cal.Rptr. 424, 553 P.2d 584; Brown v. Superior Court (1949) 34 Cal.2d 559, 564, 212 P.2d 878.) The essence of the implied covenant is that neither party to a contract will do anything to injure the right of the other to receive the benefits of the contract. [7] ( Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, 460, 113 Cal.Rptr. 711, 521 P.2d 1103; Brown v. Superior Court, supra, 34 Cal.2d at p. 564, 212 P.2d 878.) Because the covenant of good faith and fair dealing essentially is a contract term that aims to effectuate the contractual intentions of the parties, compensation for its breach has almost always been limited to contract rather than tort remedies. ( Foley, supra, 47 Cal.3d at p. 684, 254 Cal.Rptr. 211, 765 P.2d 373; see Freeman & Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85, 94, 44 Cal.Rptr.2d 420, 900 P.2d 669; Hunter v. Up-Right, Inc. (1993) 6 Cal.4th 1174, 1180, 26 Cal. Rptr.2d 8, 864 P.2d 88 ( Hunter ).) At present, this court recognizes only one exception to that general rule: tort remedies are available for a breach of the covenant in cases involving insurance policies. ( Hunter, supra, 6 Cal.4th at pp. 1180-1181, 26 Cal.Rptr.2d 8, 864 P.2d 88; Foley, supra, 47 Cal.3d at p. 684, 254 Cal.Rptr. 211, 765 P.2d 373.) In the insurance policy setting, an insured may recover damages not otherwis available in a contract action, such as emotional distress damages resulting from the insurer's bad faith conduct (see Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 580, 108 Cal.Rptr. 480, 510 P.2d 1032) and punitive damages if there has been oppression, fraud, or malice by the insurer (see Civ.Code, § 3294). As our decisions acknowledge, tort recovery in this particular context is considered appropriate for a variety of policy reasons. Unlike most other contracts for goods or services, an insurance policy is characterized by elements of adhesion, public interest and fiduciary responsibility. ( Foley, supra, 47 Cal.3d at pp. 684-685, 254 Cal.Rptr. 211, 765 P.2d 373, citing Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 820, 169 Cal.Rptr. 691, 620 P.2d 141 ( Egan ); see Barrera v. State Farm Mut. Automobile Ins. Co. (1969) 71 Cal.2d 659, 668, fn. 5, 79 Cal.Rptr. 106, 456 P.2d 674.) In general, insurance policies are not purchased for profit or advantage; rather, they are obtained for peace of mind and security in the event of an accident or other catastrophe. (See Foley, supra, 47 Cal.3d at p. 684, 254 Cal.Rptr. 211, 765 P.2d 373; Egan, supra, 24 Cal.3d at p. 819, 169 Cal.Rptr. 691, 620 P.2d 141; Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 434, 58 Cal.Rptr. 13, 426 P.2d 173.) Moreover, an insured faces a unique economic dilemma when its insurer breaches the implied covenant of good faith and fair dealing. ( Foley, supra, 47 Cal.3d at p. 692, 254 Cal.Rptr. 211, 765 P.2d 373.) Unlike other parties in contract who typically may seek recourse in the marketplace in the event of a breach, an insured will not be able to find another insurance company willing to pay for a loss already incurred. ( Ibid. ) In addition, we have observed that the tort duty of a liability insurer ordinarily is based on its assumption of the insured's defense and of settlement negotiations of third party claims. ( Crisci v. Security Ins. Co., supra, 66 Cal.2d at p. 432, fn. 3, 58 Cal.Rptr. 13, 426 P.2d 173.) The assumption of those responsibilities obligates the insurer to give at least as much consideration to the welfare of its insured as it gives to its own interests so as not to deprive the insured of the benefits of the insurance policy. ( Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 659, 328 P.2d 198; see Egan, supra, 24 Cal.3d at p. 818, 169 Cal.Rptr. 691, 620 P.2d 141.) Significantly, this court has never recognized the availability of tort remedies for breaches occurring in the context of a construction performance bond or any other so-called contract of suretyship. (See Pacific M. & T. Co. v. Bonding & Ins. Co. (1923) 192 Cal. 278, 285, 219 P. 972 [a bond given to guarantee the faithful performance of a contract is a contract of suretyship].) It appears only three Court of Appeal decisions  General Ins. Co. v. Mammoth Vista Owners' Assn. (1985) 174 Cal.App.3d 810, 220 Cal.Rptr. 291 ( Mammoth Vista) , Pacific-Southern Mortgage Trust Co. v. Insurance Co. of North America (1985) 166 Cal.App.3d 703, 212 Cal.Rptr. 754 ( Pacific-Southern ) and Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co. (1987) 189 Cal.App.3d 1072, 234 Cal.Rptr. 835 ( Downey )  have addressed tort claims in the suretyship setting. Those cases, however, provide little guidance. In Mammoth Vista, the only one of the three decisions that involved a construction performance bond, the Court of Appeal determined that a surety was subject to liability in tort for violations of Insurance Code section 790.03, subdivision (h), which prohibits unfair and deceptive claims settlement practices in the business of insurance. Mammoth Vista does not aid Talbot's position. In the first place, Mammoth Vista expressly refrained from deciding whether a surety is subject to a common law tort action for breach of the covenant of good faith and fair dealing. (See 174 Cal.App.3d at pp. 822-827, 220 Cal.Rptr. 291.) Second, the availability of tort recovery in the insurance policy cases derives from policy considerations pertaining to the particular characteristics of such contracts and the relationship between the contracting parties; it has never been predicated upon the existence of legislation regulating the insurance business. [8] Finally, Mammoth Vista 's reasoning has been undermined by Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58, which held that Insurance Code section 790.03, subdivision (h), does not create a private cause of action in tort against insurers who commit the unfair practices enumerated in that provision. The other two decisions, Pacific-Southern, supra, 166 Cal.App.3d 703, 212 Cal. Rptr. 754, and Downey, supra, 189 Cal. App.3d 1072, 234 Cal.Rptr. 835, likewise are unhelpful. Both cases involved fidelity bonds, not performance bonds, and the appellate courts there simply found sufficient evidence of bad faith or malicious conduct by the defendant sureties. ( Pacific-Southern, supra, 166 Cal.App.3d at pp. 715-716, 212 Cal.Rptr. 754; Downey, supra, 189 Cal.App.3d at pp. 1096-1097, 234 Cal.Rptr. 835.) While both decisions recited the general rule that insurers acting unreasonably and in bad faith toward their insureds are subject to liability in tort, the courts apparently assumed, in the absence of litigation on the point, that the foregoing rule applied in the context of fidelity bonds. Fidelity bonds, however, are two-party contracts between an insurer and an employer that protect against employee dishonesty. It is generally recognized that fidelity bonds resemble traditional contracts of insurance more than surety bonds involving a tripartite relationship between a surety, a principal and an obligee. (See 6 Levy et al., Cal. Torts (1998) § 81.33[3], p. 81-131; 1 Couch on Insurance (3d ed.1995) §§ 1:13, 1:16, pp. 1-25, 1-29 (Couch) [fidelity bond is essentially one of indemnity for the personal loss to the employer (fns. omitted) ].) It is firmly established that the insurance policy cases represent `a major departure from traditional principles of contract law.' ( Freeman & Mills, Inc. v. Belcher Oil Co., supra, 11 Cal.4th at p. 94, 44 Cal.Rptr.2d 420, 900 P.2d 669, citing Foley, supra, 47 Cal.3d at p. 690, 254 Cal.Rptr. 211, 765 P.2d 373.) Thus, we have cautioned courts to exercise great care in considering whether to extend `the exceptional approach taken in those cases' to `another contract setting.' (11 Cal.4th at p. 94, 44 Cal.Rptr.2d 420, 900 P.2d 669.) In Foley, supra, 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373, this court rejected the concept of tort recovery for an employer's breach of the implied covenant of good faith and fair dealing. We concluded that the employment relationship is not sufficiently similar to that of insurer and insured to warrant judicial extension of the proposed additional tort remedies in view of the countervailing concerns about economic policy and stability, the traditional separation of tort and contract law, and... the numerous protections against improper terminations already afforded employees. ( Id. at p. 693, 254 Cal.Rptr. 211, 765 P.2d 373.) [9] The question here is whether the exceptional approach thus far reserved for breaches in the insurance policy setting should be extended to breaches in the context of a surety bond given to assure performance on a construction contract. [10] Talbot argues, in essence, that a performance bond is a form of insurance and that breaches in the performance bond context justify the same extraordinary remedies that are available in insurance policy cases. Transamerica, on the other hand, argues that performance bonds are fundamentally different from insurance policies and fail to warrant similar treatment. We proceed to consider these points.