Beck v. Farmers Ins. Exchange

• Decision Date: 12 June 1985
• Docket Number: No. 18926,18926
• Citation: 701 P.2d 795
• Parties: Wayne BECK, Plaintiff and Appellant, v. FARMERS INSURANCE EXCHANGE, Defendant and Respondent.
• Court: Utah Supreme Court

Page 795

701 P.2d 795

Wayne BECK, Plaintiff and Appellant, v. FARMERS INSURANCE EXCHANGE, Defendant and Respondent.

No. 18926.

Supreme Court of Utah.

June 12, 1985.

Robert J. Debry, Salt Lake City, for plaintiff and appellant.

Don J. Hanson, Salt Lake City, for defendant and respondent.

ZIMMERMAN, Justice:

Plaintiff Wayne Beck appeals from a summary judgment dismissing his claim against Farmers Insurance Exchange, his automobile insurance carrier, alleging that Farmers had refused in bad faith to settle a claim for uninsured motorist benefits. We hold that on the record before us, Beck stated a claim for relief and a summary judgment was inappropriate. We reverse and remand for further proceedings consistent with this opinion.

Beck injured his knee in a hit-and-run accident on January 16, 1982, when his car was struck by a car owned by Ann Kirkland. Ms. Kirkland asserted that her car had been stolen and denied any knowledge of or responsibility for the accident. Beck filed a claim with Kirkland's insurer, but liability was denied on April 20, 1982.

At the time of the accident, Beck carried automobile insurance with Farmers. Under that policy, Beck was provided with both no-fault and uninsured motorist insurance benefits. On February 23, 1982, while his claim against Kirkland was pending, Beck filed a claim with Farmers for no-fault benefits. Sometime prior to May 26, 1982, Farmers paid Beck $5,000 for medical expenses (the no-fault policy limit) and $1,299.43 for lost wages.

On June 23, 1982, Beck's counsel filed a claim with Farmers for uninsured motorist benefits, demanding the policy limit, $20,000, for general damages suffered as a result of the accident. His counsel alleges that the brochure documenting Beck's damages, submitted to Farmers with the June 23rd settlement offer, established that his claim was worth substantially more than $20,000. Farmers' adjuster rejected the settlement offer without explanation on July 1, 1982.

Beck filed this lawsuit one month later, on August 2, 1982, alleging three causes of action: first, that by refusing to pay his uninsured motorist claim, Farmers had breached its contract of insurance with him; second, that by acting in bad faith in refusing to investigate the claim, bargain with Beck, or settle the claim, Farmers had breached an implied covenant of good faith and fair dealing; and third, that Farmers had acted oppressively and maliciously toward Beck with the intention of, or in reckless disregard of the likelihood of, causing emotional distress. Under the first claim, Beck sought damages for breach of contract in the amount of the policy limits; under the second, he asked for compensatory damages in excess of the policy limits for additional injuries, including mental anguish; and under the third, he sought punitive damages of $500,000.

Sometime in August of 1982, Beck's counsel contacted Farmers' counsel and offered to settle the whole matter for $20,000. This offer was rejected. Farmers filed an answer on September 1, 1982, and at the same time, moved to strike the prayer for punitive damages on the ground that they were unavailable for a breach of contract. Farmers' motion was granted. On September 29th, the trial court bifurcated the case and agreed to try the claim for failure to pay uninsured motorist benefits independent of Beck's claim alleging breach of an implied covenant of good faith and fair dealing.

Immediately after the trial judge bifurcated the case, Beck's counsel expressly revoked the previously rejected offer to settle the whole matter for $20,000. Instead, Beck offered to settle only the failure to pay the uninsured motorist benefits claim for $20,000, reserving the implied covenant or "bad faith" claim for separate resolution.

On October 20, 1982, Farmers apparently counteroffered. Negotiations proceeded, and sometime in late November, the parties agreed to settle the uninsured motorist claim for $15,000. On December 6, 1982, the parties stipulated to dismissal of that claim and specifically reserved the bad faith claim for later disposition.

In mid-December, Farmers moved to dismiss the reserved bad faith claim on two theories. First, Farmers asserted that under Lyon v. Hartford Accident and Indemnity Co., 25 Utah 2d 311, 480 P.2d 739 (1971), it "had no duty to bargain with or settle plaintiff's uninsured motorist claim and, therefore, [could not] be held liable" for breach of contract or bad faith. Second, Farmers argued that even if it had some duty to bargain or to settle the claim, the facts set forth in the pleadings on file did not establish that it had breached the duty. No memoranda or factual affidavits supported this motion.

Farmers' motion was opposed by affidavits of Beck, his counsel, and a former insurance adjuster who worked for Beck's counsel as a paralegal. In his affidavit, Beck's counsel recited the dates and terms of the various settlement offers and the fact that they had been rejected without counteroffer. Beck's affidavit stated that he had accepted the $15,000 offer only because of financial pressures caused by the substantial expenses he had incurred in the ten months since the accident. The paralegal's affidavit stated that he had been an insurance adjuster for 19 years and that he had reviewed the settlement documentation submitted to Farmers in June when the claim was first filed. He expressed the opinion that a reasonable and prudent insurance company would have valued the claim at between $30,000 and $40,000 and attempted to settle the matter within weeks after the initial offer. The paralegal charged that the "only reason for such a substantial delay in settling this claim would be to put Mr. Beck in a situation of financial need and stress so that he would accept the first settlement offer," a tactic he characterized as acting in bad faith. Farmers filed no rebuttal affidavits, and the trial court granted Farmers' motion without specifying the basis for its holding.

Beck asks this Court to overrule Lyon and permit an insured to sue for an insurer's bad faith refusal to bargain or settle. He points out that many states now allow a tort action for breach of an insurer's duty to deal fairly and in good faith with its insured. Assuming that we abandon Lyon, Beck argues that the affidavits submitted in opposition to Farmers' motion for summary judgment were sufficient to create a genuine issue of material fact as to whether Farmers breached an implied covenant of good faith and fair dealing.

Farmers does not now contend, as it did below, that it had no duty to bargain or settle. Instead, it argues that under Lyon, an insurer cannot be held liable for bad faith simply because it refused to bargain or to settle a claim; rather, it argues, to sustain such a claim a plaintiff must produce evidence of bad faith wholly apart from the "mere failure" to bargain or settle.

Our ruling in Lyon left an insured without any effective remedy against an insurer that refuses to bargain or settle in good faith with the insured. An insured who has suffered a loss and is pressed financially is at a marked disadvantage when bargaining with an insurer over payment for that loss. Failure to accept a proffered settlement, although less than fair, can lead to catastrophic consequences for an insured who, as a direct consequence of the loss, may be peculiarly vulnerable, both economically and emotionally. The temptation for an insurer to delay settlement while pressures build on the insured is great, especially if the insurer's exposure cannot exceed the policy limits. See Lawton v. Great Southwest Fire Insurance Co., 118 N.H. 607, 392 A.2d 576, 579 (1978); Harvey & Wiseman, First Party Bad Faith: Common Law Remedies and a Proposed Legislative Solution, 72 Ky.L.J. 141, 146, 167-69 (1983-84) (hereinafter cited as "First Party Bad Faith"); Note, The Availability of Excess Damages for Wrongful Refusal to Honor First Party Insurance Claims--An Emerging Trend, 45 Fordham L.Rev. 164, 164-67 (Oct. 1976) (hereinafter cited as "Availability of Excess Damages").

In light of these considerations, we now conclude that an insured should be provided with a remedy. However, we do not agree with plaintiff that a tort action is appropriate. Instead, we hold that the good faith duty to bargain or settle under an insurance contract is only one aspect of the duty of good faith and fair dealing implied in all contracts and that a violation of that duty gives rise to a claim for breach of contract. ¹ In addition, we do not adopt the limitation suggested by Farmers, but hold that the refusal to bargain or settle, standing alone, may, under appropriate circumstances, be sufficient to prove a breach.

We recognize that a majority of states permit an insured to institute a tort action against an insurer who fails to bargain in good faith in a "first-party" situation, ² adopting the approach first announced by the California Supreme Court in Gruenberg v. Aetna Insurance Co., 9 Cal.3d 566, 510 P.2d 1032, 108 Cal.Rptr. 480 (1973). See, e.g., Bibeault v. Hanover Insurance Co., R.I., 417 A.2d 313 (1980); Craft v. Economy Fire & Casualty Co., 572 F.2d 565 (7th Cir.1978) (applying Indiana law); MFA Mutual Insurance Co. v. Flint, Tenn., 574 S.W.2d 718 (1978). Apparently, these courts have taken this step as a matter of policy in order to provide what they perceive to be an adequate remedy for an insured wronged by an insurer's recalcitrance. These courts have reasoned that under contract law principles, an insurer who improperly refuses to settle a first-party claim may be liable only for damages measured by the maximum dollar amount of the insurance provided by the policy, and such a damage measure provides little or no incentive to an insurer to promptly and faithfully fulfill its contractual obligations. Accordingly, these courts have adopted a tort approach in order to allow an insured to recover extensive consequential and punitive damages,...