Opinion ID: 1123012
Heading Depth: 1
Heading Rank: 5

Heading: Hough May Bring an Action Based Upon Breach of Contract and Bad Faith, But Summary Judgment Was Properly Granted With Respect to Count VI Alleging Breach of Fiduciary Duty.

Text: In addition to the torts of intentional and negligent infliction of emotional distress, conversion, and loss of consortium, Hough alleges, in Count VIII of the first amended complaint, that Pacific violated a duty of good faith owed to him. Subsequent to the motions court's grant of summary judgment to Pacific on Count VIII and the briefing on this appeal, this court, in Best Place, Inc. v. Penn America Insurance Co., 82 Hawai`i 120, 920 P.2d 334 (1996), recognized a cause of action based on violation of the duty of good faith in insurance contracts. We held 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. Best Place, 82 Hawai`i at 132, 920 P.2d at 346. Although our rulings in Best Place were directed toward the rights of the insured and not those of claimants, an employee is not merely a potential claimant in relation to his or her employer's workers' compensation insurance contract. An employee is an intended third-party beneficiary [15] of an employer's contract with an insurance company for workers' compensation coverage. The Workers' Compensation Act sets forth a compensation scheme that is based on a three-party agreement entered into by the employer, the employee, and the compensation carrier.... As between the compensation carrier and the employee, there is a promise for a promise: the carrier agrees to compensate the employee for injuries sustained in the course of employment, and the employee agrees to relinquish his common law rights against his employer. The employee is thus a party to the contract and therefore entitled to recover in that capacity. Aranda, 748 S.W.2d at 212 (citations omitted.); Franks v. United States Fidelity and Guar. Co., 149 Ariz. 291, 718 P.2d 193, 197 (Ct.App.1985) (A claim by an injured employee against the workers' compensation carrier is a first-party claim.). See also Dawes v. First Ins. Co. of Hawai`i, Ltd., 77 Hawai`i 117, 128 n. 12, 883 P.2d 38, 49 n. 12 (recognizing non-contracting parties' rights as third party beneficiaries of an insurance contract), reconsideration denied, 77 Hawai`i 489, 889 P.2d 66 (1994); Hunt v. First Ins. Co. of Hawai`i, Ltd., 82 Hawai`i 363, 367, 922 P.2d 976, 980 (App.1996) (same), cert. dismissed, 83 Hawai`i 204, 925 P.2d 374 (1996). Pacific, therefore, owed contractual duties, express and implied, to Hough, as an intended beneficiary of his employers' workers' compensation insurance contract. Accordingly, we hold that Hough may enforce these duties, see Restatement (Second) of Contracts § 304 (1981), including the duty to handle and pay claims in good faith. Under the rationale articulated in Best Place, a breach of the implied contractual duty of good faith gives rise to the independent tort cause of action for a third-party beneficiary, under the same standards and with the same limitations for punitive damages as discussed in Best Place, 82 Hawai`i at 132-34, 920 P.2d at 346-48. Consequently, summary judgment in favor of Pacific on Counts VI (breach of contract) and VIII (bad faith) was improperly granted. Although we vacate the circuit court's order granting summary judgment in favor of Pacific on Counts VI and VIII and remand for a determination of the merits of those claims, we also reiterate our cautions concerning the bad faith claim in the context of an insurance contract: [C]onduct based on an interpretation of the insurance contract that is reasonable does not constitute bad faith. In addition, an erroneous decision not to pay a claim for benefits due under a policy does not by itself justify an award of compensatory damages. Rather, the decision not to pay a claim must be in bad faith. California Shoppers Inc. v. Royal Globe Ins. Co., 175 Cal.App.3d 1, 221 Cal.Rptr. 171 (1985) (bad faith implies unfair dealing rather than mistaken judgment). Id. at 133, 920 P.2d at 347 (most citations omitted). In Count VI of the first amended complaint, Hough alleges a claim for damages based on breach of a fiduciary duty owed to him by Pacific. In Best Place, we recognized that no fiduciary relationship existed between an insurer and an insured in a first-party context. The absence of a fiduciary relationship, however, did not affect our conclusion that an insured could sue for bad faith in a first-party claim. On the other hand, it is tautological that the absence of a fiduciary relationship would preclude a claim based upon such a relationship. A employee who sues an insurer, based on the insurer's failure to pay benefits under the employer's workers' compensation insurance contract, is in a similar position to the employer. Both are in more of an adversarial than a trust relationship. Consequently, no fiduciary relationship exists between the employee and the insurer in such a situation. Accordingly, we hold that the circuit court did not err in granting summary judgment with regard to Count VI of the first amended complaint. See Best Place, 82 Hawai`i at 129, 920 P.2d at 343.