Opinion ID: 1205488
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Heading: Standard for First-Party Bad Faith Cause of Action in Tort

Text: Although a majority of jurisdictions recognize a first-party bad faith cause of action, there is a significant variation in the standards by which liability is imposed. In Gruenberg, the court stated that an insurer may face liability under a bad faith tort action if it fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy. Gruenberg, 108 Cal.Rptr. at 485, 510 P.2d at 1037. However, the court did not enunciate a precise standard for determining insurer bad faith in first-party situations. Similarly, in Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 157 Cal.Rptr. 482, 620 P.2d 141 (1979), the Supreme Court of California utilized a general standard by which it held an insurer liable for its failure to properly investigate a disability claim. The court stated that in the context of disability policies, an insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation of its denial. Id. 157 Cal.Rptr. at 486-87, 598 P.2d at 146. Some courts that have adopted the tort of bad faith impose a standard similar to the Gruenberg and Egan approach, see e.g., Nichols v. State Farm Mutual Automobile Ins. Co., 279 S.C. 336, 306 S.E.2d 616 (1983) ([I]f an insured can demonstrate bad faith or unreasonable action by the insurer in processing a claim under their mutually binding insurance contract, he [or she] can recover consequential damages in a tort action.). Other courts impose a very stringent standard for establishing tort liability in first-party cases. See, e.g., Aetna v. Broadway Arms, 281 Ark. 128, 664 S.W.2d 463, 465 (1984) (requiring plaintiffs to demonstrate that the insurer's conduct was dishonest, malicious, or oppressive and not based on misjudgment or negligence); National Savings Life Ins. Co. v. Dutton, 419 So.2d 1357 (Ala. 1982) (plaintiff must be entitled to a directed verdict on the contract claim); McCorkle v. Great Atlantic Ins. Co., 637 P.2d 583, 587 (Okla.1981) (liability for the intentional tort of bad faith requires a clear showing that the insurer unreasonably, and in bad faith, withheld payment of the claim of its insured). We believe that the appropriate test to determine bad faith is the general standard set forth in Gruenberg and its progeny. Under the Gruenberg test, the insured need not show a conscious awareness of wrongdoing or unjustifiable conduct, nor an evil motive or intent to harm the insured. An unreasonable delay in payment of benefits will warrant recovery for compensatory damages under the Gruenberg test. See McCormick v. Sentinel Life Ins. Co., 153 Cal.App.3d 1030, 200 Cal.Rptr. 732 (1984). However, conduct based on an interpretation of the insurance contract that is reasonable does not constitute bad faith. See, e.g., Hanson v. Prudential Ins. Co. of Am., 772 F.2d 580 (9th Cir.1985) (applying California law); Opsal v. United Servs. Auto. Ass'n., 283 Cal. Rptr. 212 (Cal.Ct.App.1991); Olive v. Great Am. Ins. Co., 76 N.C.App. 180, 333 S.E.2d 41 (1985). 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. Austero v. National Cas. Co., 84 Cal.App.3d 1, 148 Cal.Rptr. 653 (1978). 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).