Machan v. Unum Life Ins. Co. of America

• Decision Date: 17 June 2005
• Docket Number: No. 20030789.,20030789.
• Citation: 116 P.3d 342,2005 UT 37
• Parties: Gary MACHAN, Plaintiff, Appellant, and Cross-Appellee, v. UNUM LIFE INSURANCE COMPANY OF AMERICA, Defendant, Appellee, and Cross-Appellant.
• Court: Utah Supreme Court

116 P.3d 342

2005 UT 37

Gary MACHAN, Plaintiff, Appellant, and Cross-Appellee, v. UNUM LIFE INSURANCE COMPANY OF AMERICA, Defendant, Appellee, and Cross-Appellant.

No. 20030789.

Supreme Court of Utah.

June 17, 2005.

Karra J. Porter, L. Rich Humphreys, Salt Lake City, for plaintiff.

P. Bruce Badger, Scott M. Petersen, Salt Lake City, for defendant.

DURHAM, Chief Justice:

¶ 1 In this opinion we address two insurance law questions certified to us by the United States District Court for the District of Utah. The first question concerns the availability and scope of consequential damages in a first-party claim for breach of the express terms of an insurance contract. The second question asks whether an insured has a private right of action to enforce Utah Code section 31A-26-301, which requires timely payment of claims.

BACKGROUND

¶ 2 The underlying dispute in the case before the federal district court involves claims for both breach of the express terms of a disability income insurance policy and breach of the implied covenant of good faith and fair dealing. Gary Machan, employed as a corporate executive in the construction and property development industry, had purchased the policy in 1988 directly from UNUM Life Insurance Company of America (UNUM) to insure against loss of income in the event he became unable to perform the duties of his occupation.

¶ 3 Machan filed a claim for benefits under this policy in March 1999, following complications from cardiac bypass surgery. He filed an additional claim in April 2000, in which he asserted mental impairment resulting from the surgery.¹ When UNUM failed to pay his claims beyond an initial two-week period, Machan filed suit in state court. In addition to general damages, Machan sought consequential damages for, among other things, the worsening of his psychological condition, resulting in his inability to procure any gainful employment; the deprivation of, due to his inability to pay for, psychological treatment for himself and his mentally ill son; and the depletion of his assets and savings in order to meet basic living expenses. The case was removed to federal court on diversity grounds in November 2000.

¶ 4 In September 2002, before the trial date, UNUM agreed to pay Machan the monthly benefits he had requested under the policy, retroactive to March 1999. UNUM then filed a motion for summary judgment, seeking final judgment in its favor on Machan's claims for consequential damages. Having taken that motion under advisement, the federal district court certified to this court the above-mentioned two questions of state insurance law. We have jurisdiction pursuant to Utah Code section 78-2-2(1) (2002).

ANALYSIS

¶ 5 As indicated above, the questions certified to us involve, first, the availability and scope of consequential damages in a claim for breach of the express terms of an insurance contract, and, second, the availability of a private right of action under Utah Code section 31A-26-301. We address each certified question in turn.

I. CONSEQUENTIAL DAMAGES FOR EXPRESS BREACH OF AN INSURANCE CONTRACT

¶ 6 The first certified question asks:

In a first party insurance situation, may an insured recover consequential damages, other than attorney's fees, for breach of the express terms of an insurance contract? If so, what are the consequential damages that are recoverable for breach of the express terms of an insurance contract and how are they distinguished from the consequential damages for breach of the implied covenant of good faith and fair dealing that are recoverable under Beck v. Farmers Insurance Exchange, 701 P.2d 795, 801 (Utah 1985)?

¶ 7 In Beck, as discussed in further detail below, we laid out the measure of consequential damages available for an insurance company's refusal to investigate, evaluate, bargain, or settle a first-party insurance claim in good faith. 701 P.2d at 802. In doing so, we refused to adopt a tort approach for analyzing such bad faith claims, relying instead on the implied covenant of good faith and fair dealing that inheres in every contract. Id. at 799-800. We recognized that other courts had adopted the tort approach as a means of providing an insurer with incentive "to promptly and faithfully fulfill its contractual obligations," but we reasoned that this "practical end ... can be accomplished as well through a contract cause of action, without the analytical straining necessitated by the tort approach." Id. at 799.

¶ 8 UNUM urges us to conclude that, under Beck, the only damages available to an insured from an insurance company that breaches the express terms of the insurance contract, but not the implied covenant of good faith, are the benefits to which the insured is entitled under the policy, prejudgment interest, and reasonably foreseeable attorney's fees. UNUM argues that the goal of deterring insurance companies from bad faith conduct would be undermined if an insured is able to recover consequential damages even where bad faith cannot be proved.

¶ 9 The implication of UNUM's argument is that in Beck we established a broad range of consequential damages for bad faith breaches by insurance companies simply for policy reasons. To the contrary, we believe our opinion in Beck was firmly grounded in contract principles. However, by recognizing "the unique nature and purpose of an insurance contract," id. at 802, Beck did signify an evolution in our understanding of what individuals are bargaining for when they enter into an insurance contract. In order to address the question before us, we must first clarify Beck's assessment of the nature of an insurance contract and how this assessment led to our holding in Beck regarding consequential damages. We then conclude that consequential damages are available for the breach of either the express or the implied terms of an insurance contract, but that the consequential damages available for breach of an insurance contract's express terms may be more limited in scope, based on the language of the contract and the extent to which any damages were caused by the breach.

A. The Nature and Purpose of an Insurance Contract

¶ 10 Traditionally, insurance contracts were regarded as commercial contracts for money in which the insured has bargained for the insurance company's payment of a certain sum upon the occurrence of a specified event. See Kewin v. Mass. Mut. Life Ins. Co., 409 Mich. 401, 295 N.W.2d 50, 53-55 (1980) (holding that "a disability income protection insurance policy contract is a commercial contract"); Acquista v. N.Y. Life Ins. Co., 285 A.D.2d 73, 730 N.Y.S.2d 272, 276 (N.Y.App.Div.2001) (discussing the "traditional analysis," where "insurance policies are viewed as contracts for the payment of money only"). In accord with this understanding of the bargain, courts employing the traditional approach have limited an insured's damages to the amount owed under the terms of the policy, plus interest. See New Orleans Ins. Co. v. Piaggio, 16 Wall. 378, 83 U.S. 378, 386, 21 L.Ed. 358 (1872) (holding that an insured was not entitled to "special damages for the detention of money due to him beyond what the law allows as interest"); Clark v. Life & Cas. Ins. Co., 245 Ky. 579, 53 S.W.2d 968, 969 (1932) (recognizing that "the measure of recovery for the failure to pay money is the amount agreed to be paid with legal interest"); Acquista, 730 N.Y.S.2d at 276 (recognizing that under the traditional analysis, "the damages available for an insurer's failure to pay or provide benefits have been limited to the amount of the policy plus interest"). These courts have reasoned that, because money was what the insured bargained for, the insured's receipt of the expected amount, plus interest, would suffice to place him in the position he would have been in had the contract been performed. See Kewin, 295 N.W.2d at 55 ("In the commercial contract situation, ... the injury which arises upon a breach is a financial one, susceptible of accurate pecuniary estimation. The wrong suffered by the plaintiff is the same, whether the breaching party acts with a completely innocent motive or in bad faith.").

¶ 11 Crucial to the traditional understanding that insurance policies are commercial contracts for money was the assumption that the financial proceeds obtained through an insurance policy are somehow fungible—in other words, "that a[n insured] has access to an alternative source of funds from which to pay that which the insurer refuses to pay." Acquista, 730 N.Y.S.2d at 276. However, "[t]his is frequently an inaccurate assumption." Id. In fact, it seems clear that in many cases a large part of an insured's motivation for acquiring an insurance policy is his expectation that he may well be unable to find an alternative source of funds to cover the loss that the policy is meant to cover.

¶ 12 As a growing number of jurisdictions have recognized, the conception of an insurance policy as merely a commercial contract for money is flawed. "`An insurance policy is not obtained for commercial advantage; it is obtained as protection against calamity.'" The Best Place, Inc. v. Penn Am. Ins. Co., 82 Hawai`i 120, 920 P.2d 334, 342 (1996) (quoting Noble v. Nat'l Am. Life Ins. Co., 128 Ariz. 188, 624 P.2d 866, 867 (1981)). "`[T]he insured's objective in buying [an insurance] company's express covenant to pay claims is security from financial loss which he [or she] may sustain from claims against him [or her] and protection against economic catastrophe in those situations in which he [or she] may be the victim.'" Id. at 344 (alteration in original) (quoting Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 570 (1986)); see also Miller v. Fluharty, 201 W.Va. 685, 500 S.E.2d 310, 319 (1997) ("[A] policyholder buys an insurance contract for peace of mind and security, not financial gain.... [A]ll policyholders... should get their policy proceeds promptly without having to pay litigation fees to vindicate...