Bad Faith & Damages & The Tort of Bad Faith

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In 1958 the California Supreme Court, with the best of intentions, changed centuries of contract law in Comunale v. Traders & General Insurance Company, 50 Cal. 2d 654, 328 P.2d 198 (Cal. 07/22/1958) and made an insurer’s breach of contract, under particularly egregious circumstances, a tort and allowed damages more than those allowed under contract common law.

Finding that there is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement the court concluded that the principle was applicable to policies of insurance. The implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case even if the express terms of the policy do not impose such a duty.

The Comunales were treated badly. The insurer failed to consider the interests of its insureds and by so doing – by failing to accept a reasonable settlement offer – violated the duty of good faith owed to the Comunales and allowed them, for the first time in a breach of an insurance contract case, to recover tort damages.

The first cases finding a tort of bad faith dealt with third party liability policies until 1972 when the California Supreme Court decided Gruenberg v. Aetna Insurance Company, Civ. 38919, 103 Cal.Rptr. 887, 27 Cal.App.3d 616 (1972) applying the tort of bad faith to first party property claims.

State legislatures have enacted Unfair Claim Settlement Acts to legislate what the Communale court created.

In addition, California, and other states, have created their own set of Unfair Claims Settlement Practices Regulations. W The Regulations do not deal with the fact that almost every insurance claim is unique and is like a square peg trying to be fit into a round hold.

Since all insurance claims are unique the claims handling of an individual claim may not fit within the requirements of the Fair Claims Settlement Practices Regulations, plaintiffs’ lawyers, invariably seek tort and punitive damages because of the claimed failure to fulfill the minimum standards.

ZALMA OPINION

The tort of bad faith proves the concept that the road to Hell is paved with good intentions. The cure of bad faith conduct by insurers led to an abuse of the business of insurance by fraudsters, insureds and lawyers who got rich off tort damages including punitive damages.

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