Farmers Group, Inc. v. Trimble

• Decision Date: 10 December 1984
• Docket Number: No. 82SC358,82SC358
• Citation: 691 P.2d 1138
• Parties: FARMERS GROUP, INC., a California corporation, Farmers Insurance Exchange, a California corporation, and Mid-Century Insurance Company, a California corporation, Petitioners, v. R. Bruce TRIMBLE, Respondent.
• Court: Colorado Supreme Court

Page 1138

691 P.2d 1138

FARMERS GROUP, INC., a California corporation, Farmers

Insurance Exchange, a California corporation, and Mid-Century Insurance Company, a California corporation, Petitioners, v. R. Bruce TRIMBLE, Respondent.

No. 82SC358.

Supreme Court of Colorado,

En Banc.

Dec. 10, 1984.

Rector, Retherford, Mullen & Johnson, J. Stephen Mullen, Neil C. Bruce, Colorado Springs, for petitioners.

Pryor, Carney & Johnson, Thomas L. Roberts, W. Randolph Barnhart, Englewood, for respondent.

Wood, Ris & Hames, P.C., Peter W. Burg, Denver, for amicus curiae, Colorado Defense Lawyers Ass'n.

ERICKSON, Chief Justice.

We granted certiorari to consider whether evidence of intentional conduct is necessary to establish the tort of bad faith breach of an insurance contract. The court of appeals stated in Farmers Group, Inc. v. Trimble, 658 P.2d 1370 (Colo.App.1982), that to prevail on a claim of bad faith breach of an insurance contract, an insured must establish the absence of any reasonable basis for the conduct complained of, and that evidence of intentional or willful conduct, though less than that necessary to prove punitive damages, is required. The court of appeals accordingly held that pretrial dismissal for failure to state a claim upon which relief may be granted was inappropriate, and remanded for further proceedings. We affirm.

I.

In November 1978, Bruce Trimble filed an insurance claim with Farmers Group, Inc. (petitioners), the attorney-in-fact management company for various subsidiary insurance companies, after his son drove the Trimble family automobile onto a residential lot and seriously injured Robert Jensen. At the time of the incident, Trimble had obtained a number of policies from Farmers Group, Inc., including a $100,000 homeowner's liability insurance policy issued by Mid-Century Insurance Company and a $50,000 automobile liability policy issued by Farmers Insurance Exchange. The policies authorized the petitioners to investigate and settle any claim arising under the policies, and provided that the petitioners had the right and the duty to defend any action brought against the insured for claims covered by the named policies.

The petitioners promptly investigated Trimble's claim and, on November 20, 1978, mailed a letter to Trimble advising him that the "intentional act" exclusion in the Farmers Exchange policy might result in the denial of coverage. The company therefore stated that it would defend Trimble but that it was reserving all of its rights under the policy. ¹

Jensen offered to settle his suit in early 1979 for the full $50,000 limit under the Farmers Exchange policy. The petitioners rejected the settlement and did not inform Trimble of the settlement offer or of the facts learned through investigation of Jensen's claim. Thereafter, Jensen filed a civil action against Trimble, seeking $200,000 in compensatory damages and $200,000 in punitive damages based on theories of negligent entrustment and the family car doctrine. ² Petitioners retained an attorney to defend the suit and advised Trimble that he could, but need not, obtain independent counsel, because of the possibility of an adverse judgment in excess of the policy limits.

In November 1979, Jensen's attorney informed the attorney retained by the petitioners to represent Trimble that recognition of the negligent entrustment claim asserted under the Mid-Century policy was established by Douglass v. Hartford Ins. Co., 602 F.2d 934 (10th Cir.1979). ³ The petitioners responded by filing a motion for summary judgment with respect to both of Jensen's theories for relief. Although the district court initially granted the motion for summary judgment on the negligent entrustment claim, it reinstated the claim following Jensen's motion for reconsideration.

In October 1980, the petitioners filed a declaratory judgment action seeking a determination that the Mid-Century policy did not provide coverage for Jensen's negligent entrustment claim. Trimble retained an independent attorney and counterclaimed for damages, alleging misconduct in the manner in which the insurance claim was being handled. While the declaratory judgment action was pending, the underlying personal injury suit between Jensen and Trimble was settled. As a result of the settlement, Jensen received $50,000 under the Farmers Exchange policy and $12,000 under the Mid-Century policy. The district court later dismissed Trimble's amended counterclaims in the declaratory judgment action which alleged negligence, bad faith breach of an insurance contract, willful breach of contract, outrageous conduct, and implied right of action under section 10-3-1104(1)(h), 4 C.R.S. (1973).

II.

The question of the elements of liability in tort for bad faith breach of an insurance contract in a third-party context has not been previously addressed by this court. The court of appeals, in reversing the dismissal of Trimble's counterclaim alleging bad faith breach, held that the tort is recognized in Colorado and is characterized by intentional or willful conduct on the part of the insurance company. The court of appeals stated that to prevail on a claim of bad faith breach of an insurance contract, "an insured must establish the absence of any reasonable basis for the conduct complained of," and that the intent which a plaintiff must establish is not the same as the intent needed to prove punitive damages. Trimble, 658 P.2d at 1376.

The duty of the insurer to act in good faith when dealing with its insured is characterized in many jurisdictions as a duty implied by law as a covenant of the insurance contract. In Gruenberg v. Aetna Ins. Co., 9 Cal.2d 566, 575, 108 Cal.Rptr. 480, 486, 510 P.2d 1032, 1038 (1973), the California Supreme Court stated,

in every insurance contract there is an implied covenant of good faith and fair dealing. The duty to so act is [immanent] in the contract whether the company is attending to the claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.

See also Crisci v. Security Ins. Co., 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173 (1967); Comunale v. Traders and General Ins. Co., 50 Cal.2d 654, 328 P.2d 198 (1958).

The basis for liability in tort for the breach of an insurer's implied duty of good faith and fair dealing is grounded upon the special nature of the insurance contract and the relationship which exists between the insurer and the insured. The motivation of the insured when entering into an insurance contract differs from that of parties entering into an ordinary commercial contract. By obtaining insurance, an insured seeks to obtain some measure of financial security and protection against calamity, rather than to secure commercial advantage. Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 169 Cal.Rptr. 691, 620 P.2d 141 (1979); McCorkle v. Great Atlantic Ins. Co., 637 P.2d 583 (Okla.1981); see generally Jurika & Louderback, Standards for Limiting the Tort of Bad Faith Breach of Contract, 16 U.S.F.L.Rev. 187 (1982). The refusal of the insurer to pay valid claims without justification, however, defeats the expectations of the insured and the purpose of the insurance contract. It is therefore necessary to impose a legal duty upon the insurer to deal with its insured in good faith. Noble v. National American Life Ins. Co., 128 Ariz. 188, 624 P.2d 866 (1981).

The standard of conduct on the part of the insurer when dealing with claims arising under an insurance policy is shaped by, and must reflect, the quasi-fiduciary relationship that exists between the insurer and the insured by virtue of the insurance contract. Particularly when handling claims of third persons that are brought against the insured, an insurance company stands in a position similar to that of a fiduciary. See, e.g., Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 323 A.2d 495 (1974); Baxter v. Royal Indem. Co., 285 So.2d 652 (Fla.App.1973). By virtue of the insurance contract, the insurer retains the absolute right to control the defense of actions brought against the insured, and the insured is...