Is the Tort of Bad Faith Applied Equally to Insureds and Insurers?

Insurance and the Fourteenth Amendment to the U.S. Constitution

Available along with other insurance books by Barry Zalma at the Insurance Claims Library at https://www.zalma.com/blog/insurance-claims-library/

Adapted from Barry Zalma’s book, “The Law of Unintended Consequences and the Tort of Bad Faith” Available as a paperback  or Available as a Kindle book.

Insurance companies are understood to be persons who operate in the United States and are entitled to all the rights, benefits and protections of the U.S. Constitution. The Fourteenth Amendment provides in clear and unambiguous language:

No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

If the law allows an insured to sue for tort damages as a result of a breach of the covenant of good faith and fair dealing equal protection should allow an insurer to sue the insured for tort damages as a result of the breach of the same covenant. Some litigants cannot, under our system of constitutional law, be more equal than others. Yet, until a court agrees, insureds are more equal than their insurers. Under basic bad faith law an insured can obtain tort damages from an insurer acting in bad faith but the insurer may not recover tort damages from an insured acting in bad faith.

The insured’s breach of the covenant of good faith and fair dealing is also separately actionable as a contract claim and that some forms of misconduct by an insured will void coverage under the insurance policy. (Imperial Cas. & Indem. Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 182.

The court in Agricultural Ins. Co. v. Superior Court, 82 Cal.Rptr.2d 594, 70 Cal.App.4th 385 (Cal. App. 2 Dist., 1999) believed that contract remedies “adequately serve to protect an insurer from the insured’s misconduct without creating the logical inconsistencies and troublesome complexities of a defense of comparative bad faith.” In so doing the California Court of Appeal ignored the logical inconsistencies and troublesome complexities of the tort of bad faith. What is good for the insured should be good for the insurer and upheld the insured’s demurrer to the reverse bad faith tort theories, and the trial court sustained without leave to amend.

The Court of Appeal, explaining its decision stated: “An insurer has no claim against its insured in tort for breach of the covenant of good faith and fair dealing. A breach of this covenant is, at base, a breach of contract. A relationship including specialized circumstances of reliance and dependence is necessary to transmute such a contractual breach into a tort.

In Kransco v. American Empire Surplus Lines Insurance Company, 23 Cal.4th 390, 2 P.3d 1, 23 Cal.4th 951, 97 Cal.Rptr.2d 151 (Cal. 06/22/2000) the California Supreme Court agreed with Agricultural and held that “[A]n insured does not bear a risk of affirmative tort liability for failing to perform the panoply of indefinite but fiduciary-like obligations contained within the concept of ‘insurance bad faith.’ Such circumstances do not exist in the context of an insured’s responsibilities toward its insurer, or in the reciprocal context of an insurer’s legitimate expectations from its insured.”

An earlier attempt also failed when a Virgin Islands District court concluded:

[T]he only case that arguably supports a comparative bad faith defense is State Farm Fire & Casualty Co. v. Gandy, 880 S.W.2d 129 (Tex.Ct.App.1994), rev’d on other grounds,925 S.W.2d 696 (Tex.1996). In Gandy, a Texas appellate court held that the trial court erred by refusing to submit an insurer’s requested jury questions concerning contributory negligence resulting from the insured’s “comparative bad faith, negligence and/or contributory responsibility.” See id. at 137.

Gandy, however, is distinguishable since it did not involve an insurer’s refusal to defend the insured, but rather an alleged failure by the insurer to provide an adequate defense. See id. at 132.

This important distinction, coupled with the fact that the decision was ultimately reversed, weakens Gandy’s persuasive authority.

Although there is existing caselaw which supports the adoption of comparative bad faith, the clear weight of authority holds to the contrary. While Cigna argues that many of the cases cited by Texaco were decided based on the facts, not as a matter of law, the Court finds this characterization inaccurate. Thus the Court concludes, consistent with the mandates of the Virgin Islands Code, that the common law as understood throughout the United States does not recognize the affirmative defense of comparative bad faith. Accordingly Texaco’s request for partial summary judgment shall be granted. [In re Tutu Water Wells Contamination Litig., 42 V.I. 299 (D. V.I., 1999)]

To paraphrase what George Orwell opined in his novel Animal Farm some litigants are more equal than other litigants. Since both the insured and the insurer freely entered into the contract of insurance it would appear only fair if one is allowed to obtain tort damages for breach of the covenant of good faith and fair dealing the other should also have the same opportunity.

An insurer can commit the tort and is obliged to pay tort and punitive damages. An insured, who is totally evil, whose only interest in the insurance agreement is to defraud the insurer, who refuses to cooperate with the insurer’s investigation, who does everything possible to harm the insurer, cannot commit the tort. The Agricultural court did allow, if the facts were available, the insurer the right to sue and prove fraud but not the tort of bad faith.

The Agricultural decision is as logical as stating that men can commit a battery while women, cannot commit the tort of battery, regardless of how viciously the victim is battered. It is a statement that equal protection applies to all citizens of the U.S. except insurers since they can only be the tortfeasor and never the victim of the tort of bad faith.

Because of the lack of equal protection with regard to the tort of bad faith, plaintiffs’ lawyers and their clients take advantage of insurers and use their wits and energies to set up the insurer for bad faith.

In Wade v. Emcasco Insurance Co., 483 F.3d 657 (10th Cir. 04/10/2007) the Tenth Circuit recognized that the undisputed evidence in the record showed that Plaintiff’s counsel’s sole reason for rejecting the insurer’s offer of settlement made after the running of an arbitrary deadline was his hope to pursue a bad faith claim against the insurer. As a result, it refused to allow the plaintiff to pursue the bad faith case.

The Tenth Circuit also noted that although the impetus for insurance bad faith claims derives from the idea that the insured must be treated fairly and his legitimate interests protected, it is designed as a shield for insureds – not as a sword. The Tenth Circuit concluded that courts should not permit bad faith in the insurance milieu to become a game of cat-and-mouse between claimants and insurer, letting claimants induce damages that they then seek to recover, while relegating the insured to the sidelines as if only a mildly curious spectator. Clearly unfair but there has been no change in how the law of insurance bad faith has been pursued.

Logically, insureds who are wronged by their insurer should limit their recovery to contract damages. They should be compelled to waive the tort and sue in assumpsit (the common law name for breach of contract). Basic fairness should require that if the tort of bad faith must exist it must be applied fairly and equally upon both insurers and policyholders. If the law does not change the abuse of the tort of bad faith will continue to be extreme and one-sided. It is rash to assume that only an insurer can breach the covenant of good faith and fair dealing and that all policyholders are virtuous and would never do anything to breach the unwritten covenant. It is for that reason that I believe the tort must be eliminated or otherwise made fair.

If there is a tort of bad faith – as the courts of most states now hold – the Fourteenth Amendment to the U.S. Constitution requires equal protection. An insurer who is wronged by its insured should have the same right to tort damages and punitive damages for breach of the covenant as can the insured.

No litigant, in my opinion, should ever be more equal than another.