McCullough v. Golden Rule Insurance Co.

THOMAS, Justice,

dissenting.

I, too, dissent from the disposition of this case according to the majority opinion, and I am pleased to join in the perceptive and eminently correct dissenting opinion of Justice Golden. I agree that the rule articulated in Beck v. Farmers Insurance Exchange, 701 P.2d 795 (Utah 1985), is a far better policy choice than the choice of a first-party bad faith tort cause of action as adopted in Gruenberg v. Aetna Insurance Company, 9 Cal.3d 566 , 108 Cal.Rptr. 480 , 510 P.2d 1032 (1973). I append some thoughts of my own.

My special concern is that in adopting a first-party bad faith cause of action in this instance we may have adopted it for all contractual relationships. The punitive damage claim then would have the same leverage in forcing settlements in all contract cases that it now has in personal injury and other tort cases. One must be reminded of Brer Rabbit’s adventure with the Tar-Baby. Joel Chandler Harris, Uncle Remus, His Songs and His Sayings, at 7-11 (1880), as printed in Botkin, A Treasury of American Folklore, at 653-55 (1944). Once Wyoming realizes that it is stuck to a first-party bad faith cause of action, the efforts to find the legal equivalent of a briar patch where we can extricate ourselves from the Tar-Baby will become quite intense.

While that briar patch may be perceived by many observers as very thorny, it could be as essential to us as the proverbial briar patch was for Brer Rabbit. We might find *862 it to represent a radical adjustment in the concept of punitive damages to the end that punitive damages would be invoked as a true social penalty rather than an enhanced recovery for the individual plaintiff. This approach already has been identified, and legislative models are in place. E.g. Colo.Rev.Stat. § 13-21-102(4) (1973); Fla. Stat.Ann. § 768.73(2) (West 1988); Ga.Code Ann. § 51-12-5.1(e)(2) (1987); Ill.Ann.Stat. ch. 110, para. 2-604.1 (Smith-Hurd 1987); Iowa Code Ann. § 668A.l(2)(b) (West 1987); Mo.Ann.Stat. § 537.675 (Vernon 1987); and Or.Rev.Stat. § 18.540 (1988). See Bell and Pearce, Punitive Damages and the Tort System, 22 U.Rich.L.Rev. 1 (1987). Other writers suggest this as an alternative to other reform measures such as abrogation of punitive damages altogether. Launie, The Incidence and Burden of Punitive Damages, 53 Ins.Couns.J. 46, 50-51 (1986); Sales and Cole, Punitive Damages: A Relic That Has Outlived Its Origins, 37 Vand. L.Rev. 1117, 1170 (1984).

The essence of this approach is that any award of punitive damages is directed to the appropriate sovereign to be utilized to address social problems that may, or may not, be related to the misconduct of the defendant. Since it is regarded as a penalty imposed on behalf of the sovereign, the constitutional concept of double jeopardy is invoked so that only one award of punitive damages can be made for a single act of misconduct. Plaintiff's counsel would serve as a private attorney general for this purpose and, while counsel probably would be entitled to compensation for services rendered, the fee awarded may be less than that contracted for by the client.

In achieving the result represented by the majority opinion, the plaintiffs in this litigation may have achieved a true Pyrrhic victory. The gain of the right to assert punitive damages in a breach of contract action well may cost all future plaintiffs the windfall of punitive damages in any action. The punitive and deterrent effect will be maintained for the benefit of the public, but the injured, or damaged, party will have to be content with compensatory damages only. Perhaps that is a salutary result and should be pursued by the legislature in the next legislative session.

GOLDEN, Justice, dissenting, with whom THOMAS, J., joins.

In this first-party insurance setting on a breach of contract theory, the insured recovered from the insurer $3,546.28 in policy proceeds, $10,000 for emotional distress, and $31,309.91 in attorney’s fees pursuant to W.S. 26-15-124(c) (June 1983 Repl.). 1 The legislative policy behind this statute is “to encourage [settlements] and to chill any tendencies upon the part of insurance companies to unreasonably reject claims.” State Surety Company v. Lamb Construction Company, 625 P.2d 184, 188 (Wyo.1981).

The parties to this appeal have no quarrel about the particular elements of damages for which the insured has been compensated upon proving the insurer’s breach of the implied obligation of good faith and fair dealing contained in the insurance contract. , As ably analyzed and skillfully presented to this court by appellate counsel, the true cutting edge of this certified question is whether the insured is also entitled to a chance to recover punitive damages. If the insured’s action against the insurer is identified and treated legally as a tort action, then the insured is entitled to a chance to recover punitive damages under a requisite standard of proof. On the other hand, if the insured’s action is deemed to be a breach of contract action only, then the insured is not entitled to a chance to recover punitive damages unless, according to prevailing Wyoming law, the insurer engaged in fraudulent misconduct at the inception of the insurance contract. United States Through Farmers Home Administration v. Redland, 695 P.2d 1031, 1039 (Wyo.1985).

To justify the insured’s entitlement to a chance to recover punitive damages, the insured argues that the implied obligation of good faith and fair dealing is imposed by law outside the insurance contract itself. *863 The insured asserts that this implied obligation qualifies a tort duty. The insurer’s breach of that duty triggers tort damages including, if proved, punitive damages. Litigants, courts and commentators who argue for the extraneous implied obligation concept maintain it is socially desirable in order to deter insurers from engaging in unfair claims practices. In their view, the specter of punitive damages available in a tort action is the form of deterrence best suited to achieve this goal.

In contrast, the insurer maintains the implied obligation of good faith and fair dealing is an integral, not extraneous, part of the insurance contract. The insurer argues that a breach of this integral obligation triggers contract remedies and statutory remedies, chilling an insurer’s tendencies to engage in unfair claims practices.

We are asked to choose one concept or the other. The majority has chosen the extraneous implied obligation thesis of Gruenberg v. Aetna Insurance Company, 9 Cal.3d 566 , 108 Cal.Rptr. 480 , 510 P.2d 1032 (1973), and adopts the first-party bad faith tort cause of action. Since I disagree with the reasons advanced by the majority, and with the adoption of this new tort cause of action in light of existing breach of contract and statutory remedies, I respectfully dissent.

The strength of the majority opinion is seriously, perhaps fatally, compromised on the first page of the opinion when it expressly adopts the independent tort thesis of Gruenberg without analysis, and never again utters one word about the case. I do not understand decision-making that expressly declares reliance on a particular case and then forgoes any discussion about that case for the rest of the opinion. The silence is deafening. Perhaps it is explained by Gruenberg ⅛ own shaky reliance on two third-party, not first-party, cases. 2 Or, perhaps the silence is explained by the well-reasoned rejection of Gruenberg ⅛ independent tort thesis by the Utah court in Beck v. Farmers Insurance Exchange, 701 P.2d 795 (Utah 1985). We are left to speculate.

Apart from the majority’s failure to analyze Gruenberg , the majority advances essentially five reasons in support of its decision. Considered individually or cumulatively, these reasons do not convince me that the time has come in Wyoming for the adoption of the first-party bad faith tort cause of action. The first reason given by the majority is that a consistent thread of Wyoming law, from Western Casualty and Surety Company v. Fowler, 390 P.2d 602 (Wyo.1964), to Arnold v. Mountain West Farm Bureau Mutual Insurance Company, Inc., 707 P.2d 161 (Wyo.1985), makes recognition of the tort cause of action structurally consistent and expected. Western Casualty was a third-party failure-to-settle case and Arnold was an uninsured motorist policy controversy where the appeal concerned only the trial court’s refusal to instruct on punitive damages. Neither presented nor decided in either case was the question whether punitive damages may be recoverable in an insurance dispute if the conduct constituting a breach of the insurance contract rises to the level of an independent tort. The facts and issues in Western Casualty and Arnold are facially and substantively distinguishable from those here. In those cases I find no thread, and certainly no prece-dential value, with which to weave a golden garment of first-part bad faith tort. Those cases are only threads of straw and, unlike Rumpelstiltskin, 3 the majority cannot spin them into gold. The integrity of the garment woven by a thread of such questionable quality must surely be suspect.

Far more precedential and important to this controversy is Kahn v. Traders’ Insurance Company., 4 Wyo. 419 , 34 P. 1059 (1893), unexplainably ignored by the majority. In this first-party insurance case, in which this court reversed a district court *864 order that vacated a judgment in favor of the insured in an action to recover the proceeds of a fire insurance policy, this court described the implied duty of good faith and fair dealing in these terms:

Most abundant good faith is the very essence of these contracts of insurance, and that requires perfect candor and openness on the part of each of the parties. Insurance companies are just as much bound as the assured to endeavor heartily and strenuously to bring about a fair and a just and equitable settlement of loss incurred, for which they have contracted to indemnify the assured, and they have no sort of right when such loss has occurred to stand aloof and cast obstacles in the way of rather than assist in bringing about such settlement.

Id., 4 Wyo. at 471 , 34 P. at 1075 . (Emphasis added.)

Since good faith is the very essence of a contract of insurance, that good faith is an integral part of the contractual relationship. It cannot be, then, extraneous to that relationship, arising independently and imposed by law. Rather, the obligation is imposed by the parties themselves and is woven within the fabric of their contractual relationship. Kahn is controlling authority for that principle of law. In failing to treat Kahn and in relying on Western Casualty and Arnold , which are easily distinguished and not in point, the underpinnings of the majority opinion are seriously compromised. Kahn’s theses that good faith is the very essence of an insurance contract and that the parties to the contract are obligated to deal fairly, justly and equitably with each other, arise from the consensual nature of the relationship. This was recognized in Beck in which the court rejected Gruenberg and refused to adopt the independent tort. In Beck the court held that the insured and insurer as parties to the contract have “parallel obligations to perform the contract in good faith, obligations that inhere in every contractual relationship.” Beck, 701 P.2d at 801 . Pointing out the analytical weaknesses of Gruenberg’s tort approach, Beck observed that in the third-party insurance setting a fiduciary relationship between insurer and insured exists which does not exist in the first-party insurance setting, where the insurer-insured relationship is, practically speaking, adversarial in nature. Thus, it is conceptually unsound to transfer the third-party rationale to justify the first-party thesis.

The second reason given by the majority in support of its decision is that the insurance contract is one of those special classes of contracts that create a relationship out of which certain duties arise as implied by law independently of the express terms of the contract. As authority for this proposition, the majority offers Tate v. Mountain States Telephone and Telegraph Company, 647 P.2d 58 (Wyo.1982).

I have several problems with the majority’s use of Tate in this context. First, Tate was a telephone company case, not a first-party insurance ease. Second, Kahn , a first-party insurance case, as controlling authority, holds that the parties’ duties to deal with each other in good faith is the very essence of the insurance contract. Since those reciprocal duties are integral to the contractual relationship, they cannot arise as implied by law independently of, or extraneous to, that contract. Therefore, in the insurance contract context, Tate is not authoritative in light of Kahn . Third, the majority does not bother to explain how or why the insurance contract is one of those special classes of contracts referred to in Tate . “Bold assertion masquerades as reasoning. The object, quite clearly, is not to persuade, but to prevail.” Webster v. Reproductive Health Services, — U.S. -, -, 109 S.Ct. 3040, 3072 , 106 L.Ed.2d 410, 449 , (1989) (Blackmun, J., concurring in part and dissenting in part, with whom Brennan, J. and Marshall, J., join).

The third reason given by the majority is that recognition of the tort cause of action is justified on the bases of the public service nature of the insurance business and the unequal bargaining relationship between insurer and insured. On this latter basis, the majority claims that this court, by adopting a rule of contract construction favoring the insured, at least inferentially recognized that insurance contracts involve *865 unequal bargaining power. I find no analysis in the cited Wyoming cases involving rules of insurance contract construction that expresses the “unequal bargaining power” rationale. Instead, I find that this court applies the same general rules of contract construction routinely in cases involving different types of contracts, not just insurance contracts. Consequently, I question whether the majority can legitimately draw that inference. The rule favoring the insured is invoked only when ambiguity exists, simply because the insurer wrote the contract. This is consistent with the general rule in all contract eases where the contract is construed against the party who wrote it. The rule favoring the insured is not invoked because of the insurer’s perceived greater bargaining power. None of our past insurance contract cases advance that rationale.

I find it telling that the majority also primarily relies on Hilker v. Western Automobile Insurance Co. of Ft. Scott, Kan., 204 Wis. 1 , 231 N.W. 257 (1930), reh., 204 Wis. 1 , 235 N.W. 413 (1931), decided before the surge of state governmental regulation of the insurance business in the form of legislation, administrative rule-making, and judicially created doctrines. One of the aims of that regulation is to avoid the insurer’s overreaching. K. Abraham, Distributing Risk, 37-43 (Yale University Press 1986); R. Keeton, Basic Text on Insurance Law, 537-43 (West Pub.Co. 1971). Without a moment’s consideration of Wyoming’s statutory scheme of governmental regulation of the insurance business conducted in this state and its effect on the public service and greater bargaining power aspects of the issue at hand, the majority simply declares that the first-party bad faith tort is justified in Wyoming. “This ‘it-is-so-because-we-say-so’ jurisprudence constitutes nothing other than an attempted exercise of brute force; reason, much less persuasion, has no place.” Webster , — U.S. at -, 109 S.Ct. at 3075 , 106 L.Ed.2d at 458 . I find no analysis whatsoever of why this new cause of action is justified in this state. Cutting to the heart of the matter, I find no analysis of why the specter of punitive damages is the treatment of choice to check the insurer’s tendencies to engage in unfair claims practices. The majority opinion simply does not demonstrate that existing breach of contract remedies along with the statutory remedies of imposition of attorney's fees and interest on the amount of the judgment are inadequate or are not achieving the desired objective of chilling the insurer’s bad faith tendencies.

The fourth reason advanced in the majority opinion is that a tort protected duty provides “additional impetus for good faith.” As with the other reasons offered by the majority, its analysis of this reason is deficient. We are given neither explanation nor demonstration of why this “additional impetus” is necessary in Wyoming. As the majority opinion notes, Wyoming generally recognizes the benefit of the bargain damages in breach of contract eases. In Robert W. Anderson Housewrecking and Excavating, Inc. v. Board of Trustees, School District No. 25, Fremont County, Wyoming, 681 P.2d 1326, 1333 (Wyo.1984), this court said:

Damages for breach of contract are calculated to put the plaintiff in the same position as if the contract had been performed, less proper deductions. The damage should compensate for the loss which would have been prevented by a full performance of the contract.

Earlier, in Panhandle Eastern Pipeline Company v. Smith, 637 P.2d 1020, 1027 (Wyo.1981), this court recognized that “the rules of law on recovery of damages for breach of contract have to be very flexible.” The court quoted favorably from 5 Corbin on Contracts, § 1002, at 33 (1964), to the effect that contract damages rules “must be regarded merely as guides to the court, leaving much to the feeling of the court created by the special circumstances of the particular case.” Thus, Corbin informs us:

There is sufficient authority to justify the statement that damages will be awarded for mental suffering caused by the wanton or reckless breach of a contract to render a performance of such a character that the promisor had reason *866 to know when the contract was made that a breach would cause such suffering, for reasons other than mere pecuniary loss.

Id. at § 1076, at 429. See, e.g., the first-party insurance cases of Cassady v. United Insurance Company, 370 F.Supp. 388 (W.D.Ark.1974); Kewin v. Massachusetts Mutual Life Insurance Company, 409 Mich. 401 , 295 N.W.2d 50 (1980); and Beck . I am in agreement with that said in Beck : “In an action for breach of a duty to bargain in good faith, a broad range of recoverable damages is conceivable, particularly given the unique nature and purpose of an insurance contract.” Beck, 701 P.2d at 802 . In view of the broad range of compensatory damages available in a contract action and in view of the statutorily provided remedies of interest on the judgment and attorney’s fees, I believe sufficient motivation presently exists to stifle an insurer’s bad faith tendencies without the further imposition of the specter of punitive damages under an independent tort cause of action.

The final reason given by the majority opinion is expressed in terms of rejection of a notion of statutory preemption. Thus, since Wyoming’s statutory remedies, in the form of W.S. 26-13-124 (Cum.Supp.1988) and 25-15-124(c) and the entire insurance code, 4 do not provide the same scope of remedies as found in the bad faith tort remedy, the majority simply declares, without benefit of justification, that an increased scope of remedies is desired. That increased scope is punitive damages. As with its analysis of the other four reasons, the majority offers no persuasive explanation why this increased scope of remedies is necessary. Once again, “bald assertion masquerades as reasoning.”

In conclusion, I am not convinced that Wyoming must adopt the first-party bad faith tort to accomplish what is already being accomplished under existing Wyoming law. I am reminded that “the danger to the jury system from society and its representative members of the legislature, arises from uncontrolled litigative excesses, unjustified in the logic of the law of tort or by the facts of the case. There is an abrogation of judicial responsibility which is uniformly resulting nationwide in attacks on the jury system. The vitality and suitability of the jury system remains unchallenged, but it is the timidity of the judiciary to control excesses that is being called into account.” (Urbigkit, J., dissenting, in Clarke v. Vandermeer, 740 P.2d 921, 929 (Wyo.1987), quoting Resnik, Failing Faith: Adjudicatory Procedure in Decline, 53 U.Chi.L.Rev. 494, 556 (1986)).

. Formerly W.S. 26-15-126.

. Comunale v. Traders & General Insurance Company, 50 Cal.2d 654 , 328 P.2d 198 (1958): and Crisci v. Security Insurance Company of New Haven, Connecticut, 66 Cal.2d 425 , 58 Cal.Rptr. 13 , 426 P.2d 173 (1967).

. Rumpelstiltskin, A Comparative Anthology of Children’s Literature (Holt, Rinehart and Winston, Inc. 1972).

. W.S. 26-1-101 through 26-33-111 (June 1983 Repl.).