McCullough v. Golden Rule Ins. Co., 88-193

CourtUnited States State Supreme Court of Wyoming
Citation789 P.2d 855
Docket NumberNo. 88-193,88-193
PartiesCurtis McCULLOUGH and Judith M. McCullough, husband and wife, Petitioners, v. GOLDEN RULE INSURANCE CO., an Illinois corporation doing business in Wyoming, Respondent.
Decision Date05 April 1990

Page 855

789 P.2d 855
Curtis McCULLOUGH and Judith M. McCullough, husband and wife, Petitioners,
GOLDEN RULE INSURANCE CO., an Illinois corporation doing business in Wyoming, Respondent.
No. 88-193.
Supreme Court of Wyoming.
April 5, 1990.

Stuart S. Healy of Healy & Kinnaird, Sheridan and Glenn E. Smith, Cheyenne, for petitioners.

Stephen S. Ashley of Ashley & Ashley, San Francisco, Cal., Thomas G. Gorman of Hirst & Applegate, Cheyenne, and Guy E. McGaughey, Jr. of McGaughey & McGaughey, Lawrenceville, Ill., for respondent.

George Santini, Cheyenne, for amicus curaie, Wyoming Trial Lawyers Ass'n.

John A. Sundahl and George E. Powers, Jr. of Godfrey, Sundahl & Jorgenson, Cheyenne and G.G. Greenlee of Murane &

Bostwick, Casper, for amicus curiae, Defense Lawyers Ass'n of Wyoming, Inc.


URBIGKIT, Justice.

We consider two questions certified from the United States Court of Appeals for the Tenth Circuit:

Does an insurance company owe a duty of good faith to its policyholders not to unreasonably deny a claim for benefits under the policy, the breach of which duty gives rise to an independent tort action?

If such a tort action is permitted, in addition to showing that the claim was denied unreasonably and without proper cause, must the policyholder demonstrate that the insurance company intentionally, knowingly, or recklessly denied the claim for benefits?

The first certified question is answered "yes," but the second certified question is answered by enunciating another standard for proof of the tort of violation of the duty of good faith and fair dealing. In response, we adopt the independent tort thesis of Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032 (1973) and establish the "fairly debatable" objective standard care analysis of Anderson v. Continental Ins. Co., 85 Wis.2d 675, 271 N.W.2d 368 (1978) for any award of extra-contractual damages. The criteria for award of any punitive damages is provided by present Wyoming case law which will maintain a consistent rule in all cases and avoid differentiation between first-person or third-person insurance cases or with other punitive damage claims.

Page 856

The facts, as discerned from the certification order, disclose that this case was initiated by the medical insurance policyholder in Wyoming state district court and then removed on diversity grounds to the federal district court. The focus of the suit is a major medical health insurance policy purchased by Curtis and Judith McCullough from Golden Rule Insurance Company (Golden Rule). The policy was applied for and became effective June 1, 1983. The policy mandated a fifteen day waiting period before coverage could begin and defined a "preexisting condition" to deny coverage for any preexisting illness.

Subsequent surgical bills were incurred by Mrs. McCullough for which claims were denied by Golden Rule as preexisting. In the litigation in federal court, Golden Rule received an unfavorable jury verdict on a contract claim and a directed verdict on the companion tort bad faith claim. The basis of the directed verdict was the anticipation of the federal court that Wyoming, where this court had not previously spoken, would not adopt the first-person independent tort cause of action. McCullough appealed to the Tenth Circuit Court of Appeals from the directed verdict of the bad faith tort claim and the Tenth Circuit, noting our decision of Western Casualty and Surety Co. v. Fowler, 390 P.2d 602 (Wyo.1964), certified the legal issue pursuant to W.S. 1-13-104 through 1-13-107 for our finite resolution since clear precedent in state law did not exist on implementation of first-person independent tort complaint.


1. First Question--Recognition of Bad Faith as a Tort

The McCulloughs, supported by amicus curiae brief, 1 advance the premise that the legal duty of good faith and fair dealing arises from the contractual relationship but does not stem solely from the contract itself. Consequently, it is imposed by law and an independent tort action should be possible so the unequal bargaining power of the parties to an insurance contract is recognized in a way that would arguably deter bad faith claim practices by insurers.

Golden Rule, also buttressed by amicus curiae brief, 2 strenuously argues that the implied duty of good faith and fair dealing is a simple contractual duty which prevents an independent tort action. On the first question, Golden Rule's gravamina, in addition to public policy concerns, are that legislative preemption has occurred and the theoretical bases of first-party bad faith actions are not sound. The preemption argument is that the Wyoming legislature has preempted the field by enacting the Unfair Trade Practices Act, W.S. 26-13-101 through 26-13-124 and an attorney's fees and interest recovery statute, W.S. 26-15-124(c) 3. The attack on the utilization of first-party bad faith cuts to the fundamental difference between third-party and first-party situations focusing on the adversarial nature of first-party relationships where it is argued no fiduciary relationship develops, no relationship of trust or reliance on the contract appears, and no indicia of agency becomes present. Unlike the third-party situation, both the insured and the insurer in the first-party context are parties to the contract and their rights should be controlled solely by the insurance policy.

The DLA brief, in relation to the first question, essentially argues in parallel to the contentions of Golden Rule, but broadens

Page 857

the preemption argument to encompass the entire Wyoming Insurance Code in W.S. 26-1-101 through 26-38-106. It stresses that any recognition of first-party bad faith as a tort "can only disturb the balance that has been struck by the Wyoming Legislature." Also, it broaches the view that Arnold v. Mountain West Farm Bureau Mut. Ins. Co., Inc., 707 P.2d 161 (Wyo.1985) is controlling and should answer the first question in the negative. Justification in logic is presented by all litigants but, aside from their roots in economic interest, the direct inquiry is should Wyoming have the insurance company duty of good faith and fair dealing first-party tort cause of action and, if so, what should be the standard for application of the cause of action and with what effect on potential award of punitive damages.

While a majority of states have adopted this cause of action, 4 the label attached to it and the standards to determine bad faith differ among the jurisdictions. The approaches divide into four main categories: (1) recognized as an independent tort; 5 (2) labeled as contractual but allowing a broader range of damages which may include punitives; 6 (3) characterized as contractual and confining to strictly benefit of the bargain damages; 7 or (4) established statutorily. 8

Page 858

8 Despite the diversity among the jurisdictions, we believe the superior view recognizes the existence of the independent tort for violation of a duty of good faith and fair dealing in insurance policy application by the carrier to its insured.

Wyoming law has a consistent thread running from the 1964 case of Western Casualty and Surety Co., 390 P.2d 602 involving the third-party situation of a failure to settle and Arnold, 707 P.2d 161 involving first-party uninsured motorist coverage, so that recognition of the independent action for the tort of first-party bad faith would be structurally consistent and could be expected. 9 Additionally, this court in Tate v. Mountain States Tel. and Tel. Co., 647 P.2d 58, 63 (Wyo.1982) held:

There are certain classes of contracts which create a relation out of which certain duties arise as implied by law independently of the express term of the contract. If the negligent breach of contract is also a breach of such duty the remedy is ex contractu and ex delicto. * * * Such is the situation in this case. Of course, a double recovery is not allowed.

The insurance contract is one of these special classes of contracts so that this duty of good faith and fair dealing imposed by law arises from the contractual relationship. Anderson, 271 N.W.2d at 374; Hilker v. Western Automobile Ins. Co. of Ft. Scott, Kan., 204 Wis. 1, 231 N.W. 257 (1930). See also Hoiness-LaBar Ins. v. Julien Const. Co., 743 P.2d 1262 (Wyo.1987); Hursh Agency, Inc. v. Wigwam Homes, Inc., 664 P.2d 27, 32 (Wyo.1983), liability could lie either for breach of contract or negligent default of duty imposed by contract; and Hagar v. Mobley, 638 P.2d 127, 137 (Wyo.1981), where duty arose from statutory standards imposed on real estate brokers.

The fear that recognition of this cause of action will blur the distinction between traditional theories of tort and contract is unsound.

The fear that such a holding would eliminate the "barrier" between tort and contract and lead generally to the awarding of punitive damages in all breach of contract cases is unwarranted. Permitting an insured to maintain a cause of action in tort is justified primarily on the basis of the "public service" nature of the insurance business and the unequal bargaining relationship between insurer and insured. These circumstances do not exist in all, or even in most, contracts.

Roberts v. Western-Southern Life Ins. Co., 568 F.Supp. 536, 555 n. 44 (N.D.Ill.1983). See also Hoskins v. Aetna Life Ins. Co., 6 Ohio St.3d 272, 452 N.E.2d 1315 (1983). Additionally, this court has at least inferentially recognized that insurance contracts involve unequal bargaining power by adoption of the rate of construction favoring the insured. See Aetna Ins. Co. v. Lythgoe, 618 P.2d 1057 (Wyo.1980) and Alm v. Hartford Fire Ins. Co., 369 P.2d 216 (Wyo.1962). See also Comment, Establishing the Tort of Bad Faith in Wyoming, XX Land & Water L.Rev. 625, 628 (1985), which recites the inequality of bargaining power thesis. See Neal v. State Farm Ins. Companies...

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