Opinion ID: 1469111
Heading Depth: 1
Heading Rank: 3

Heading: Insurer Bad faith

Text: In Bibeault, an advisory opinion given to the United States District Court, this Court joined a growing number of jurisdictions and recognized the common law tort of insurer bad faith in the context of the wrongful refusal to pay an uninsured or underinsured (UM-UIM) claim. Bibeault, 417 A.2d at 319. In recognition of the imbalance in the bargaining positions of the parties to an insurance contract, we concluded that limiting an insured to recovery of the policy limits for a breach of the insurance contract, without the threat of punitive damages or awards in excess of the policy limits, would do little to promote the prompt payment of claims or to prevent an unscrupulous insurer from refusing payment or delaying settlement of legitimate claims in hopes of either avoiding payment completely or reaching a settlement for an amount substantially lower than the claim's true worth. Id. at 318. We declared that insurers doing business in Rhode Island are obligated to act in good faith in [their] relationship with [their] policyholders, and that a violation of this duty will give rise to an independent claim in tort. Id. at 319. [Where] there has been a specific finding that the insurer has in bad faith refused to pay the claims due an insured the insurer is liable for both compensatory and punitive damages. Id. However, we specifically held that not every refusal-to-pay situation amounts to bad faith, nor did we mean to imply that whenever an insurance company loses a dispute in court regarding the validity of a claim, it breaches the implied-in-law duty of good faith. Id. We determined that in cases in which a claim is `fairly debatable,' no liability in tort will arise. Id. That is, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. Id. (quoting Anderson, 271 N.W.2d at 376-77). However, an insurer's actual knowledge that there is no reasonable basis for denying a claim may be inferred and imputed to the insurer through the acts of its agents that demonstrate a reckless indifference to facts or to proofs submitted by the insured. Id. Subsequent to our holding in Bibeault, the General Assembly enacted § 9-1-33, [4] that not only codified this cause of action but also provided that the question of whether or not an insurer has acted in bad faith in refusing to settle a claim shall be a question to be determined by the trier of fact. In Bartlett, we parted company with other jurisdictions and held that the bad faith claim must be severed from the breach-of-contract claim and that no action in bad faith can lie unless and until an insured has proven a breach of the insurance contract. Bartlett, 538 A.2d at 1000. Consequently, the insurer is not required to produce its claim file until the breach-of-contract claim has been resolved, [o]therwise, privileged material may be disclosed which would jeopardize the insurance company's defense. Id. at 1001 (quoting In re Bergeson, 112 F.R.D. 692, 697 (D.Mont.1986)). Although dicta, we further expounded upon the heavy burden placed upon a plaintiff attempting to prove insurer bad faith and held that in order for a plaintiff to make out a prima facie case of bad faith refusal to pay an insurance claim, the proof offered must show that plaintiff is entitled to a directed verdict on the contract claim and, thus, entitled to recover on the contract claim as a matter of law. Id. at 1002. (quoting National Savings Life Insurance Co. v. Dutton, 419 So.2d 1357, 1362 (Ala.1982)). This breach-of-contract directed verdict standard has been applied in subsequent decisions of this Court relative to insurer bad faith. Rumford Property and Liability Insurance Co. v. Carbone, 590 A.2d 398, 400 (R.I.1991) (as part of a plaintiff's prima facie case, he or she must offer proof sufficient to entitle him or her to a directed verdict on the contract claim); Corrente v. Fitchburg Mutual Fire Insurance Co., 557 A.2d 859, 861-62 (R.I.1989) (proof offered in a bad faith claim must show that plaintiff is entitled to a directed verdict for breach of the insurance contract). It makes little sense that an insurance company may deny a claim, assert a coverage issue in a reckless and oppressive fashion, fail to timely respond to its obligations, or otherwise behave in a manner inconsistent with its implied duties of fair dealing and be insulated from tort liability for its bad faith conduct because it fortuitously survives a motion for judgment as a matter of law, yet is ultimately found to have breached the insurance contract. Such a holding conflicts with the public policy of this state that imposes implied-in-law obligations of good faith and fair dealing upon insurers doing business in Rhode Island. In recent years, this Court has had occasion to address the refusal or negligent failure of an insurance company to make a timely offer of settlement in the context of both third-party claims, in which the insurer is obligated to defend its insured against liability to third-parties, Asermely v. Allstate Insurance Co., 728 A.2d 461 (R.I.1999), [5] and in first-party claims, where the insured has made a claim against its own carrier for compensation arising out of injuries received from a UM-UIM driver. Skaling v. Aetna Insurance Co., 742 A.2d 282 (R.I.1999). Recently, this Court has held that insurers owe their insureds a fiduciary obligation with respect to protecting the insured from excess liability in the context of third-party claims. Fraioli v. Metropolitan Property and Casualty Insurance Co., 748 A.2d 273, 275 (R.I.2000); Asermely, 728 A.2d at 464. Thus, an insurer has a fiduciary obligation to act in the `best interests of its insured in order to protect the insured from excess liability' and to refrain from conduct that demonstrates `greater concern for the insurer's monetary interest tha n the financial risk attendant to the insured's situation.' Asermely, 728 A.2d at 464 (quoting Medical Malpractice Joint Underwriting Association of Rhode Island v. Rhode Island Insurers' Insolvency Fund, 703 A.2d 1097, 1102 (R.I.1997)). We have made it abundantly clear that the duty of good faith and fair dealing includes an affirmative duty to engage in timely and meaningful settlement negotiations and to make and consider offers of settlement consistent with an insurer's fiduciary duty to protect its insured from excess liability. In Asermely, although we concluded that Allstate did not act in bad faith given the extent of the comparative negligence by the plaintiff, (see note 5 ante ), we held that Allstate must bear the risks attendant to its failure to settle a claim within the policy limits. Asermely, 728 A.2d at 464. The rule we announced in Asermely provides that an insurer is liable for a judgment that exceeds the policy limits unless the insurer can demonstrate that it made a definite pretrial offer to settle the claim within the policy limits and that the claimant declined the offer. Id. Thus, the risk of miscalculating the merits of a claim and proceeding to trial falls upon the insurer, the entity that controls the litigation and with whom the insured has contracted. Id. In Skaling I, we distinguished Factory Mutual Liability Insurance Co. of America v. Cooper, 106 R.I. 632, 262 A.2d 370 (1970), and Allstate Insurance Co. v. Pogorilich, 605 A.2d 1318 (R.I.1992), and held that prejudgment interest is recoverable against a UM-UIM insurer in a first-party breach-of-contract claim even where it exceeds the policy limits. Skaling I, 742 A.2d 291-93. Our holding in Skaling I was based on the fact that the defendant insurer breached its contract with its insured thereby forcing the insured to resort to expensive litigation to enforce his rights under the contract. See id. at 292. [C]onsequently, the damage award as embodied in the judgment is squarely within the plain language of § 9-21-10, that provides for the imposition of prejudgment interest on civil judgments for pecuniary damages. Skaling I, 742 A.2d at 292. Further, in Bolton v. Quincy Mutual Fire Insurance Co., 730 A.2d 1079, 1080-81 (R.I.1999), we were confronted with the question of whether an insurer's unexplained refusal to respond to a request by its insured to settle with the underinsured tortfeasor constituted bad faith as a matter of law, and held that the denial of a request by an insured to settle with the tortfeasor must be based on objective and reasonable criteria that is discoverable by the insured in a subsequent bad faith claim. Also see Bibeault, 417 A.2d at 319. In situations in which an ins urer refuses permission to settle with the UM-UIM tortfeasor or fails to settle with its own insured, it exposes itself to a claim for bad faith if it acts in the absence of realistic and objectively measurable criteria that supports its decision to deny the claim for UM-UIM benefits or refuse to settle with its insured.