Opinion ID: 1205488
Heading Depth: 3
Heading Rank: 3

Heading: Recognizing the Tort of Bad Faith in the Insurance Context

Text: The tort remedy recognized in Dold was premised on a tortious breach of contract theory. Penn contends, therefore, that allowing tort damages for breach of the implied covenant of good faith and fair dealing is unnecessary in this jurisdiction because of the availability of a tort remedy in a breach of contract action, i.e., tortious breach of contract. We disagree. Under Dold, compensatory tort damages are available for certain wilful or reckless contractual breaches. In addition, our decision in Dold implied that we would allow punitive damages in a tortious breach of contract action under the proper factual situation. However, the tort of bad faith is not a tortious breach of contract, but rather a separate and distinct wrong which results from the breach of a duty imposed as a consequence of the relationship established by contract. Anderson v. Continental Ins. Co., 85 Wis.2d 675, 271 N.W.2d 368, 374 (1978). Therefore, the tort of bad faith allows an insured to recover even if the insurer performs the express covenant to pay claims. As such, an insurer could be liable for the tort of bad faith for certain conduct where it would not be liable for a tortious breach of contract. Accordingly, we conclude that the tortious breach of contract action we established in Dold is distinguishable from the tort of bad faith. If the implied covenant of good faith and fair dealing, implied in all contracts, is the legal principle underlying the adoption of a bad faith tort cause of action in the insurance context, a logical concern is that such a holding will open the floodgates for tort actions based upon the breach of any contract. See Kewin v. Massachusetts Mutual, 409 Mich. 401, 295 N.W.2d 50 (1980). However, [b]ecause of the nature of first-party insurance contracts, that concern is unfounded. The public interest in insurance contracts, the nature of insurance contracts, and the inequity in bargaining power between the insurer and the policyholder all serve to distinguish insurance contracts from other types of contracts. Braesch v. Union Ins. Co., 237 Neb. 44, 464 N.W.2d 769, 774 (1991). Moreover, [t]ort actions for breach of covenants implied in certain types of contractual relationships are most often recognized where the type of contract involved is one in which the plaintiff seeks something more than commercial advantage or profit from the defendant. When dealing with an innkeeper, a common carrier, a lawyer, a doctor or an insurer, the client/customer seeks service, security, peace of mind, protection or some other intangible. These types of contracts create special, partly noncommercial relationships, and when the provider of the service fails to provide the very item which was the implicit objective of the making of the contract, then contract damages are seldom adequate, and the cases have generally permitted the plaintiff to maintain an action in tort as well as contract. Rawlings, 151 Ariz. at 159, 726 P.2d at 575 (citing W. Prosser & W. Keeton, Law of Torts § 92 at 660-61 (5th ed. 1984)). We agree that the policy considerations surrounding the adoption of the tort of bad faith in the insurance context are atypical and will not necessarily extend to all types of contracts. Thus, the availability of a tort recovery for breach of the implied covenant of good faith and fair dealing may be justified in actions brought on insurance contracts, but not necessarily in actions brought on other types of contract. We are also persuaded that there are sound reasons for recognizing a cause of action in tort for breach of the implied covenant of good faith and fair dealing in the insurance context. Adopting the tort of bad faith is consistent with the case law and statutory provisions dealing with insurer misconduct in this jurisdiction. In addition, the special relationship between insurer and insured is, as the Rawlings court observed, atypical, and the adhesionary aspects of an insurance contract further justify the availability of a tort recovery. Finally, a bad faith cause of action in tort will provide the necessary compensation to the insured for all damage suffered as a result of insurer misconduct. Without the threat of a tort action, insurance companies have little incentive to promptly pay proceeds rightfully due to their insureds, as they stand to lose very little by delaying payment. Accordingly, we hold that there is a legal duty, implied in a first- and third-party insurance contract, that the insurer must act in good faith in dealing with its insured, and a breach of that duty of good faith gives rise to an independent tort cause of action. The breach of the express covenant to pay claims, however, is not the sine qua non for an action for breach of the implied covenant of good faith and fair dealing. Rawlings, 151 Ariz. at 157, 726 P.2d at 573. The implied covenant is breached, whether the carrier pays the claim or not, when its conduct damages the very protection or security which the insured sought to gain by buying insurance. Id. Because the instant case involves a first-party insurance contract, we now address the proper standard for imposing liability in the first-party context.