Opinion ID: 1205488
Heading Depth: 2
Heading Rank: 2

Heading: Bad Faith Cause of Action for Insurer Misconduct

Text: This court has never explicitly recognized a bad faith cause of action for insurer bad faith. Its recognition, however, is wholly consistent with the case law in this jurisdiction, as well as the statutory provisions dealing with insurer misconduct.
In Gossinger v. Association of Apartment Owners, 73 Haw. 412, 835 P.2d 627 (1992), in which we held that a mistake as to the nature and extent of an insured's injury was not a proper basis for the insured to rescind a release agreement, we quoted with approval the following language from Justice Spear's dissent in Williams v. Glash, 789 S.W.2d 261 (Tex.1990): Insurers are now faced with a Hobson's choice. If they settle claims promptly, they are not protected from the later assertion of unknown claims. If they refuse to settle until all injuries are known, then they face potential liability under a bad faith claim. Gossinger, 73 Haw. at 424-25 n. 5, 835 P.2d at 634 n. 5 (emphasis added and citation omitted). In Stratis v. Pacific Ins. Co., Ltd., 7 Haw. App. 1, 739 P.2d 251 (1987), an insured brought an action against its insurer alleging breach of contract and bad faith settlement of the insurance claim. The jury found in favor of the defendant insurance company and the plaintiff appealed, challenging, inter alia, the trial court's refusal of plaintiff's proffered jury instructions. Among the instructions refused by the trial court was the following: An insurer may breach the covenant of good faith and fair dealing in an insurance contract when it fails to properly investigate [the] insured's claim. Id. at 10, 739 P.2d at 257. On appeal, the ICA held that the trial court properly refused the instruction because it was not obligated to accept an instruction that did not state the law with substantial correctness. Id. The ICA reasoned, however, that the jury instruction was incorrect because it failed to contain a qualifying clause, [6] not because it stated a cause of action that this jurisdiction would not recognize. In Colonial Penn Ins. Co. v. First Ins. Co. of Hawai`i, 71 Haw. 42, 780 P.2d 1112 (1989), an injured claimant sued a third-party tortfeasor's insurer for bad faith denial of no-fault benefits. This court affirmed the trial court's order granting the insurer's motion for summary judgment on grounds that the actions of the insurer did not constitute bad faith in its denial of no-fault benefits. We held that the trial court was correct because the insurer denied payment of benefits based on an unsettled question of law. In so holding, we implicitly recognized that an insurer may be liable for bad faith under the appropriate circumstances. [7]
There is an abundance of statutory law regulating the insurance industry in Hawai`i. The Hawai`i Legislature has recognized that the insurance industry affects the public interest, and, therefore, insurers are obligated to act in good faith. Under HRS § 431:1-102 (1993), [t]he business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception and practice honesty and equity in all insurance matters. Upon the insurer, the insured and their representatives rests the duty of preserving inviolate the integrity of insurance. (Emphasis added.) This obligation of good faith is consistent with other provisions that contemplate a cause of action for insurer bad faith. For example, in the no-fault (automobile) insurance context, HRS § 431:10C-315 (1993) sets forth the applicable statute of limitations for a bad faith cause of action against an insurer as follows: Statute of limitations. (a) No suit shall be brought on any contract providing no-fault benefits or any contract providing optional additional coverage more than, the later of: .... (4) Two years after the entry of a final judgment in, or dismissal with prejudice of, a tort action arising out of a motor vehicle accident, where a cause of action for insurer bad faith arises out of the tort action. (Emphasis added.) In addition, HRS § 624-25.5(b) (1993), which relates to medical and peer review proceedings, provides in relevant part: Proceedings and records of medical, dental and optometric peer review committees and hospitals. . . . . (b) Neither the proceedings nor the records of peer review committees, or hospital or clinic quality assurance committees shall be subject to discovery.... The prohibition relating to discovery or testimony shall not apply to the statements made by any person in attendance at the meeting who is a party to an action or proceeding the subject matter of which was reviewed at the meeting, or to any person requesting hospital staff privileges, or in any action against an insurance carrier alleging bad faith by the carrier in refusing to accept a settlement offer within the policy limits. (Emphasis added.) A strong argument against the adoption of a bad faith cause of action is that the statutory remedies provided by the legislature are adequate, and additional remedies are unnecessary. See Spencer v. Aetna Life & Cas. Ins. Co., 227 Kan. 914, 611 P.2d 149, 153 (1980) and the cases cited therein. The premise behind this argument is that the statutory scheme regulating the insurance industry provides sufficient incentive to insurers to perform their obligations in good faith. However, the viability of this contention necessarily depends on the applicable state statutory scheme. We therefore turn to the relevant provisions of the Hawai`i Revised Statutes. Article 13 of the Hawai`i Insurance Code addresses the subject of unfair methods of competition and unfair and deceptive acts and practices in the business of insurance. [8] In order to deter insurer misconduct, cease and desist orders pursuant to HRS §§ 431:13-201 and -202 provide administrative penalties for unfair claims practices. However, HRS § 431:13-107 delegates all enforcement authority exclusively to the insurance commissioner. [9] Therefore, Article 13 of the Hawai`i Insurance Code does not authorize a private cause of action pursuant to its administrative remedies. See Genovia v. Jackson National Life Ins. Co., 795 F.Supp. 1036, 1044 (D.Haw.1992). The existing administrative remedies, however, are not exclusive. Indeed, HRS § 431:13-202(b) (1993) provides that [n]o order of the Commissioner pursuant to this section or order of court to enforce it shall in any way relieve or absolve any person affected by the order from any other liability, penalty, or forfeiture required by law. This provision clarifies any question as to Article 13's preemptive effect. In addition, we glean from the legislature history of HRS § 431:13-202(b) that the legislature deemed the existing administrative remedies inadequate. A relevant Senate Committee report provides as follows: Your committee finds that this bill would prevent an insurance carrier, engaged in unfair claim settlement practices, from claiming that the cease and desist provision is an exclusive remedy. Furthermore, the current cease and desist remedy is inadequate because the administrative procedure could be lengthy thereby allowing an insurance carrier to continue to engage in unfair and deceptive practices during the pendency of the administrative hearing; the revocation of an insurance carrier's license by the commissioner is not likely to occur since this would have a detrimental effect on innocent policy holders; and the administrative procedures do not afford compensation to the individual damaged by the insurance carrier. Sen.Stand.Comm.Rep. No. 607, in 1987 Sen. Journal, at 1146. The relevant House Committee Report states: Your Committee finds that the current administrative procedure for cease and desist orders by the Insurance Commissioner are inadequate and do not afford compensation to the individual damaged by the carrier's unfair claim settlement practices. Therefore, your Committee emphasizes its accord with the provisions of this bill clarifying that the cease and desist order is not the exclusive remedy. Hse.Stand.Comm.Rep. No. 1518, in 1987 House Journal, at 1802. With respect to subsequent legislation intended to clarify any lingering ambiguities, a Senate Committee stated: This bill and Act 97, Session Laws of Hawai`i 1987, are not intended to indicate legislative support or objection to the recognition of a statutory private cause of action with respect to violations of Article 13 of the Insurance Code. This bill and Act 97 are also not intended to impair the court's ability to recognize or decline to recognize such a right. Sen.Stand.Comm.Rep. 1715, in 1989 Sen. Journal, at 1423. Based on the foregoing, we reject the contention that the statutory scheme regulating the insurance industry in Hawai`i furnishes insureds with an adequate remedy and provides sufficient incentive to insurers to perform their obligations in good faith. Because: (1) there is case law in this jurisdiction, as well as various statutory provisions contemplating a cause of action for insurer bad faith; and (2) recognizing a bad faith cause of action would not contravene the legislative intent with respect to the remedies for insurer misconduct, we hold that Hawai`i now recognizes a bad faith cause of action in the first-party insurance context. We now address the appropriate theories under which an insured may bring a bad faith cause of action.