Pemberton v. Farmers Ins. Exchange

• Decision Date: 25 August 1993
• Docket Number: No. 23022,23022
• Citation: 109 Nev. 789,858 P.2d 380
• Parties: Sherry PEMBERTON, Appellant, v. FARMERS INSURANCE EXCHANGE, Respondent.
• Court: Nevada Supreme Court

Page 380

858 P.2d 380

109 Nev. 789

Sherry PEMBERTON, Appellant, v. FARMERS INSURANCE EXCHANGE, Respondent.

No. 23022.

Supreme Court of Nevada.

Aug. 25, 1993.

[109 Nev. 790] Crockett & Myers, Las Vegas, for appellant.

Cobb, Gugino & Williamson, Las Vegas, for respondent.

Bradley & Drendel and Thomas E. Drendel, Reno, for amicus curiae Nevada Trial Lawyers Ass'n.

Pearson & Patton, Las Vegas, for amicus curiae Defense Trial Lawyers Ass'n of Nevada.

OPINION

PER CURIAM:

The district court granted respondent Farmers Insurance Exchange's ("Farmers") motion to dismiss appellant Sherry Pemberton's bad faith claim. On appeal, Pemberton contends that the district court erroneously dismissed her bad faith claim because Nevada recognizes an implied covenant in automobile insurance policies that the insurance company will handle uninsured/underinsured motorist ("UM") claims fairly and in good faith. We agree.

Facts

On December 5, 1989, appellant Sherry Pemberton was involved in an automobile collision with John C. Grabow in Clark County, Nevada. Pemberton suffered personal injuries as a result of the accident. Pemberton claims to have incurred medical expenses in the amount of $17,217.88 and wage loss in the amount of $27,408.00, for a total of $44,464.00 in special damages.

Both parties had automobile insurance. Grabow was insured by State Farm Insurance Company with a policy limit of $15,000.00 which he tendered to Pemberton. Pemberton had UM coverage with Farmers in the amount of $100,000.00.

About one and one-half years after the accident, Pemberton through her counsel demanded the policy limits of her UM coverage from Farmers. After receiving no response to her demand, on July 31, 1991, Pemberton filed a lawsuit in the Eighth Judicial District Court against Grabow. Pemberton alleged that she was involved in an accident on December 5, 1989, and that as a result of Grabow's negligence, Pemberton suffered serious and disabling injuries, incurred medical expenses and wage loss. Pemberton informed Farmers of the lawsuit, giving Farmers an opportunity to intervene. Farmers intervened on September 12, 1991.

In the interim, Pemberton provided Farmers with wage verification and information about her medical specials. On September 3, 1991, Farmers offered Pemberton $30,000.00 to settle her UM claim. Pemberton rejected the offer, based upon her inability to work as a teacher in the future and upon what she believed a jury would award her as damages.

On September 23, 1991, an NRCP 16.1 case conference was held. After the NRCP 16.1 conference, Pemberton provided a report from her physician which stated that Pemberton's injuries prevented her from performing as a teacher at the time he treated her. Pemberton gave Farmers until October 7, 1991, to settle the claim or she threatened to file a complaint against Farmers "for bad faith failure to honor [her] entirely meritorious first party insurance claim." Apparently, Farmers failed to settle the claim by October 7, 1991, prompting Pemberton to file a complaint for bad faith against Farmers.

Subsequently, Farmers offered to settle Pemberton's UM and bad faith claims for $100,000.00 or, in the alternative, to settle the UM claim for $85,000.00 and litigate the bad faith claim. On November 21, 1991, Pemberton offered to accept $100,000.00 for the UM claim and litigate the bad faith claim or settle both claims for $110,000.00. On November 14, 1991, Pemberton accepted $100,000.00 from Farmers under her UM policy but reserved the right to pursue her bad faith claim against Farmers.

On November 21, 1991, Farmers filed a motion to dismiss Pemberton's bad faith claim. The district court granted Farmers' motion to dismiss, deferring the question of whether Nevada recognizes a bad faith claim by an insured against its insurer arising out of the handling of a UM claim to this court. This appeal followed.

Discussion

In reviewing a motion to dismiss, this court is to "determine whether or not the challenged pleading sets forth allegations sufficient to make out the elements of a right to relief." Edgar v. Wagner, 101 Nev. 226, 227, 699 P.2d 110, 111 (1985) (citations omitted). In making its determination, this court is "bound to accept all the factual allegations in the complaint as true." Marcoz v. Summa Corporation, 106 Nev. 737, 739, 801 P.2d 1346, 1347 (1990). Further, "[a] claim should not be dismissed ... unless it appears to a certainty that the plaintiff is not entitled to relief under any set of facts which could be proved in support of the claim." Hale v. Burkhardt, 104 Nev. 632, 636, 764 P.2d 866, 868 (1988) (citation omitted).

Implied Covenant of Good Faith

In this issue of first impression, Pemberton contends that under Nevada law there is an implied covenant in automobile insurance policies that the insurance company will handle UM claims fairly and in good faith. Specifically, Pemberton argues that an insurance company owes a duty of good faith and fair dealing to its insureds who assert UM claims.

Farmers contends that in the UM context the insured and the insurer are in an adversarial relationship which is inconsistent with the existence of an implied duty of good faith and fair dealing. Farmers argues that once a UM claim is filed the insurer is no longer a "friendly" person, thus, the insurer becomes an adversary, since the insurer steps into the shoes of the tortfeasor.

Nevada law recognizes the existence of an implied covenant of good faith and fair dealing in every contract. A.C. Shaw Construction v. Washoe County, 105 Nev. 913, 914, 784 P.2d 9, 10 (1989); Ainsworth v. Combined Ins., 104 Nev. 587, 592, 763 P.2d 673, 676 (1988). An insurer fails to act in good faith when it refuses "without proper cause" to compensate the insured for a loss covered by the policy. United States Fidelity & Guaranty Co. v. Peterson, 91 Nev. 617, 620, 540 P.2d 1070, 1071 (1975). Such conduct gives rise to a breach of the covenant of good faith and fair dealing. 91 Nev. at 620, 540 P.2d at 1071. This breach or failure to perform constitutes "bad faith" where the relationship between the parties is that of insurer and insured. See generally K Mart Corp. v. Ponsock, 103 Nev. 39, 732 P.2d 1364 (1987).

Pemberton's argument that Nevada should recognize a duty of good faith in insurance contracts dealing with an insured and his or her insurer as to a UM claim is based upon a treatise by Alan Widiss which states the following:

For approximately fifteen years--from the introduction of the uninsured motorist coverage in the mid 1950s until the early 1970s--there was little discussion in appellate court decisions addressing questions about the liability of an insurer for failing to deal in good faith and fairly with an insured seeking indemnification under the uninsured motorist coverage. To the extent that there was any reference in judicial opinions to an insurer's conduct in terms of either "good faith" or "bad faith" in the handling of uninsured motorist insurance claims, it was to the effect that there was no justification for the imposition of punitive damages. Toward the end of this period, however, there were comments in several judicial decisions which suggested the insurers were subject to the obligation of good faith and fair dealing. For example, in a 1969 Nevada Supreme Court decision that involved uninsured motorist coverage, the court manifests an attitude towards an insurer's obligation which probably was representative of that held by many judges in the 1960s and 1970s.

An insurance policy is not an ordinary contract. It is a complex instrument, unilaterally prepared and seldom understood by the insured. The parties are not similarly situated. The company and its representatives are expert in the field; the insured is not. For this reason we do not hesitate to place the burden of affirmative action upon the insurance company. When notified of a claim it should investigate with reasonable dispatch; demand arbitration if that is its desire and settlement can't be reached; consent to suit against the uninsured motorist when notified of its pendency; or seek leave to intervene and present its contentions. Multiple litigation is not desirable. In short, the insurance company may not ignore its insured and then seek refuge in the fine print of its policy.

2 Alan Widiss, Uninsured and Underinsured Motorist Insurance § 20.3, at 153-54 (2d ed. 1992) (quoting Allstate Insurance Co. v. Pietrosh, 85 Nev. 310, 316, 454 P.2d 106, 110 (1969)) (citation omitted; footnote omitted) [hereinafter Widiss].

In Pietrosh, Allstate sought a declaratory judgment, seeking to deny its liability on a judgment the insured obtained from the uninsured driver. 85 Nev. at 311-12, 454 P.2d at 108. The insured pursued the suit against the tortfeasor without the permission of the insurer, although the insurer had notice of the suit, and it was free to intervene. The insurer argued that because the insured sued without permission of the insurer in violation of the contract, the judgment had no effect on the insurer. 85 Nev. at 312, 454 P.2d at 108. This court held that the insurer was liable for the judgment. 85 Nev. at 316, 454 P.2d at 111. Further, this court stated that an insured who is injured by an uninsured driver has several options in Nevada:

[h]e [or she] may settle his [or her] claim with his [or her] insurance company; settle with the insured motorist; arbitrate with his [or her] insurance company; sue his [or her] insurance company; sue the uninsured motorist; or sue both, joining them as codefendants.

85 Nev. at 313, 454 P.2d at 108. This court held that the insurer was bound by the judgment, and that permission to sue was not required. 85 Nev. at 316, 454 P.2d at 110. Widiss relies upon this court's statement, that an option of an insured is to sue the insurer, to suggest that Nevada recognizes an action of liability for the failure of the insurance company to settle an...