Findley v. Time Ins. Co.

• Decision Date: 05 December 1978
• Docket Number: No. 78-122,78-122
• Citation: Findley v. Time Ins. Co., 264 Ark. 647, 573 S.W.2d 908 (Ark. 1978)
• Parties: Ellen R. FINDLEY, Administratrix, Appellant, v. TIME INSURANCE COMPANY, Appellee.
• Court: Arkansas Supreme Court

Page 908

573 S.W.2d 908

264 Ark. 647

Ellen R. FINDLEY, Administratrix, Appellant, v. TIME INSURANCE COMPANY, Appellee.

No. 78-122.

Supreme Court of Arkansas, In Banc.

Dec. 5, 1978.

Rehearing Denied Jan. 8, 1979.

Spears, Sloan & Johnson by James A. Johnson, Jr., West Memphis, for appellant.

Rieves, Rieves & Shelton by Frank C. Elcan II, West Memphis, for appellee.

GEORGE ROSE SMITH, Justice.

Within the past ten years a few court decisions, primarily in California, have recognized what may be referred to as the tort of bad faith. Under those decisions an insurance company, in addition to its liability on the contract, may also be liable to its insured in tort for breach of an implied duty to deal fairly and in good faith with the insured in the settlement of a claim under the policy. A recent discussion of the cases may be found in a Comment, "The Tort of Bad Faith: A Perspective Look at the Insurer's Expanding Liability," 8 Cumberland L.Rev. 241 (1977).

In the case at bar the appellee issued a major medical insurance policy to the appellant's decedent, Delores A. Wolfe, who died after her complaint was filed. The complaint first sought a contractual recovery for certain hospital and medical expenses, plus the statutory penalty and attorney's fees. In paragraph 12 of the complaint the insured also sought to assert a cause of action in tort for actual and punitive damages arising from the insurance company's asserted bad faith in dealing with its insured, the plaintiff. The trial court sustained the defendant's demurrer to that paragraph and dismissed the cause of action in tort. The rest of the case has not yet been tried. The order of dismissal is appealable. Ark.Stat.Ann. § 27-2101(2) (Supp.1977). The only question now before us is whether paragraph 12 of the complaint states a cause of action in tort.

The tort allegations of paragraph 12 can best be viewed in the context of the decisions recognizing the tort of bad faith, upon which the plaintiff relies. For that reason we postpone for the moment a summary of paragraph 12.

The tort of bad faith is actually an extension of the well-established rule by which a liability insurance company may be accountable in tort for its failure to settle a claim within the policy limits. Members Mutual Ins. Co. v. Blissett, 254 Ark. 211, 492 S.W.2d 429 (1973). In such cases the insurer is confronted with a conflict of interest. Suppose, for example, that the insurer has issued a $10,000 automobile liability policy. As the result of a traffic collision the insured is sued for $25,000. The plaintiff offers to settle for $10,000. If the insurance company refuses to settle for more than $8,000, it is risking only $2,000 of its own money against the possibility that its insured may be held liable for the full $25,000, a loss of $15,000 above the protection of the policy. That conflict of interest has led the courts to hold, as we did in Blissett and earlier cases, that the insurance company may be liable for fraud, bad faith, or negligence if it fails to investigate and settle a claim against its insured.

The landmark decision extending the doctrine of the failure-to-settle cases is Fletcher v. Western Nat. Life Ins. Co., 10 Cal.App.3d 376, 89 Cal.Rptr. 78, 47 A.L.R.3d 286 (1970). There the insurance company was guilty of clear-cut bad faith in refusing to recognize a claim for disability under a policy of disability insurance. The insured suffered an injury to his back in an accident. As the proof ultimately showed, the company was chargeable with bad faith and actual dishonesty in its determination not to pay a claim to which it had no defense. It first sought to treat the claim as one for sickness, instead of accidental injury, which would have reduced its possible liability from a maximum of 30 years to a maximum of two years. That contention was based on the absurd possibility that the insured, instead of having been accidentally injured, might have contracted glanders from a horse. The company then accused the insured of having deliberately misrepresented his condition in the application for the insurance, but it later admitted that there was no basis in fact for that false accusation. The court held that the insurance company was liable for $60,000 in compensatory damages and $180,000 in punitive damages.

A similar case, involving affirmative misconduct on the part of the insurance company, is Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032 (1973). That was a suit on a fire insurance policy. The complaint alleged that the defendant, in seeking to avoid payment of a valid claim, had conspired with the police to have the claimant charged with arson, on the representation that he was over-insured and thus had a motive for arson. It was also asserted that the insurer, knowing that the insured would not appear for an examination while the criminal charge was pending, had used his failure to appear as a ground for denying liability. The Supreme Court of California held that the complaint stated a cause of action in tort.

Perhaps the most extreme statement of the new doctrine is to be found in the opinion of an intermediate California court in Egan v. Mutual of Omaha Ins. Co., 63 Cal.App.3d 659, 133 Cal.Rptr. 899 (1976), where the court, citing a refusal-to-settle case, made this statement: "In short, when an insurer decides to withhold payment on a policy of insurance, it proceeds at its own risk." There the court upheld awards of $123,600 in compensatory damages and.$2.5 million in punitive damages. The view that the insurer always acts at its peril was disclaimed in Christian v. American Home Assurance Co., 577 P.2d 899 (Okl.,1978).

We do not agree with the view that whenever an insurance company denies a claim, it exposes itself to an action in tort. As the Supreme Court of Kansas has succinctly stated Mere refusal to pay insurance cannot constitute wanton or malicious conduct when, as here, an actual controversy exists with respect to liability on the policy. If this were not the rule punitive or exemplary damages could be recovered in every action involving a refusal to pay an insurance policy.

Moffet v. Kansas City Fire & Marine Ins. Co., 173 Kan. 52, 244 P.2d 228 (1952).

In the case at bar we actually need not pass upon the extreme view expressed in the Egan case, Supra, because such a situation is not presented. We are fundamentally in agreement with the position taken by the North Carolina court in Newton v. Standard Fire Ins. Co., 291 N.C. 105, 229 S.E.2d 297 (1976):

We need not now decide whether a bad faith refusal to pay a justifiable claim by an insurer might give rise to punitive damages. No bad faith is claimed here, nor are any facts alleged from which a finding of bad faith could be made. Insurer's knowledge that plaintiff was in a precarious financial position in view of his loss does not in itself show bad faith on the part of the insurer in refusing to pay the claim, or for that matter, that the refusal was unjustified. Had plaintiff claimed that after due investigation by defendant it was determined that the claim was valid and defendant nevertheless refused to pay or that defendant refused to make any investigation at all, and that defendant's refusals were in bad faith with an intent to cause further damage to plaintiff, a different question would be presented.

We are slow to impose upon an insurer liabilities beyond those called for in the insurance contract. To create exposure to such risks except for the most extreme circumstances would, we are certain, be...