By: Alan J. Nisberg
This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 21, #6, p. 32 (July 24, 2007).
[Editor’s Note: Alan J. Nisberg, Esquire, is a partner with the law firm of Butler Weihmuller Katz Craig LLP with offices in Florida, North Carolina and Alabama. He is an experienced trial and appellate lawyer, active in the firm’s extra-contractual, coverage and class action departments. This commentary, other than the quoted material, are the author’s opinions – not the opinions of Butler Weihmuller Katz Craig LLP nor Mealey’s Publications. Copyright © 2007 by the author. Responses are welcome.]
Etymology: Late Greek oxymOron, from neuter of oxymOros pointedly foolish, from Greek oxys sharp, keen + mOros foolish
– oxymoronic /-m&-‘rä-nik, -mo-/ adjective
Our legal system of justice has long recognized an analytical distinction between a “breach of contract” and “tortious conduct.” Our judiciary has been vested with the authority to enforce the laws involving both. Nonetheless, the two concepts are entirely distinct and the enforcement of contracts and torts is based on completely different public policy considerations.
Contracts are entered into by citizens of this great country to give a sense of transparency and definitiveness to business and commerce. Contracting parties, when dealing fairly and honestly with each other, are given due deference in their negotiations and in the enforcement of agreements reached in their business transactions. By allowing free market forces to operate independently of the will of our government, creativity, open competition, and entrepreneurial spirit thrives. With this freedom to contract, we as a nation enjoy the fruits of capitalism, and the benefits of advancements in technology, industry and commerce.
Of course, this freedom to contract is not absolute. Our legislature and judiciary are also vested with the responsibility of setting and enforcing guidelines, by which companies and individuals alike are expected to abide to ensure the public trust. It is public sentiment on what is good and right and just (based on today’s social mores) that defines the rules. This idea of equity and fair play in business is handed down by rule of law, not the contract itself. Our society’s extra-contractual principles of justice are protected by legislation (“statutory torts”) and case law (“judicial torts”) implemented by our court system.
Tort law, however, is not an attempt to impose legislative or judicial will on the actual agreements negotiated by the contracting parties. Torts are intended to protect the public interest in the course of contractual dealings, while preserving a free market for members of our society to enter into contracts that best suit them. In other words, tort law places limits upon the permissible conduct of the parties to a contract, but does not set the contract terms. Thus, contract is the law of business, whereas tort is the law of our society’s sense of justice.
On the eve of the new millennium, focusing on the oxymoronic term “tortious breach of contract,” scholars on the bench reminded us of the distinction between contract and tort.1 Indeed, our 50th state of Hawaii abolished its previously recognized concept of “tortious breach of contract.”2 In doing so, the Hawaii Supreme Court explained:
The distinction between tort and contract law is well established in common law, and distinct objectives underlie the remedies created in each area. “In construing a contract, a court’s principal objective is to ascertain and effectuate the intention of the parties” whereas, tort law is primarily designed to vindicate social policy. Given these distinct purposes, courts have historically awarded different types of damages in tort and in contract. Contract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at that time; consequential damages beyond the expectations of the parties are not recoverable.
Predictability about the cost of contractual relationships plays an important role in our commercial system. Predictability in contractual relations enables parties to estimate the financial risks and rewards of doing business and thereby encourages commercial activity.3
On the other hand, tort damages are not limited to the intended or foreseeable damages that might have been anticipated when the parties reached agreement. Unforeseen consequential and punitive damages may be awarded in tort. Courts have refused to allow such damages in contract actions.4
The Supreme Court of Hawaii went on to explain the difference between the tort of insurer bad faith and the distorted concept of tortious breach of contract. Sampling cases from courts around the nation, the Hawaii high court noted that the tort of bad faith is limited to situations where there is a special relationship characterized by elements of fiduciary responsibility, public interest, and adhesion.5 Some courts have even found this requisite “special relationship” to exist only in the insurance context, refusing to extend the tort of bad faith to other fiduciary relationships such as employment,6 or even banking.7
While most courts did not expressly distinguish the tort of bad faith from the concept of “tortious breach of contract,” the manner in which they distinguished the tort of bad faith from other claims arising out of a contractual relation “strongly suggests that they would not allow tort-type damages for a wilful, wanton or reckless breach of contract.”8Thus, the Hawaii Supreme Court noted, the idea of awarding tort damages for a breach of contract “represents an aberration in the fabric of American law.”9 The concept of “tortious breach of contract” undermines the basic principles behind the distinct theories of contract and tort law.10
With this perfectly reasoned (and strikingly revolutionary) turnabout in Hawaii, one could have expected broad recognition from the entire country that “tortious breach of contract” is contradictory in its own terms. Based on the clear historical underpinnings and present day application of different principles for the enforcement of contract and tort law in the United States, “tortious breach of contract” reflects inappropriate nomenclature for any theory of American law.
To their credit, some states such as Alabama,11 Hawaii,12 Idaho,13 Indiana,14 Michigan,15 Ohio,16 South Carolina,17 and Wisconsin,18 have declared outright that there is no such thing as a “tortious breach of contract.” However, the catchy simplicity of this bastard phrase continues to be recognized, even as it continues to be misinterpreted.19
In Florida, for example, the court’s have not expressly rejected the concept of “tortious breach of contract.20 Even in a widely-respected learned treatise Florida law is incorrectly cited for the proposition that tort damages are available for breach of an insurance contract.21
As recently as May 15, 2007, a Mississippi Court of Appeals was asked to decide whether “tortious breach of contract” is a viable legal cause of action in Florida. The appellant, an insured of Geico General Insurance Company, claimed that if Geico’s claim handling was grossly negligent, but did not meet the requirements of Florida’s statutory tort of “bad faith,”22 she would still be entitled to recover punitive damages for Geico’s “tortious breach of contract.” The Mississippi appellate court recognized that Florida does not have a tort for first-party insurer bad faith outside of its statutory tort. In the absence of an independent tort, the insured could not recover punitive damages.23Even a deliberate refusal to pay a legitimate claim will not justify a punitive damages award. 24 The conduct must “rise to the level of deliberate, overt, and dishonest dealings….”25 Thus, the Mississippi appellate court concluded that Florida would not allow extra-contractual damages except by the statutorily created tort of “bad faith” or some independent tort recognized by Florida’s common law such as fraud, misrepresentation, or intentional infliction of emotional distress. Implicit in this ruling is the conclusion that Florida does not recognize a common law action for “tortious breach of contract.” However, the Mississippi appellate court did not explicitly address the point.
Similarly, in a 2005 decision, Connecticut has left open the “possibility” of a claim for “tortious breach of contract” in the insurance context.26 So, what is the basis for this confusion?
The concept of good faith and fair dealing has been misinterpreted in judicial scholarship by age old language suggesting that the implied duty of good faith and fair dealing “sounds in both tort and contract.” In Gruenberg v. Aetna Insurance Company, 9 Cal.3d 566, 510 P.2d 1032 (1973) the California Supreme Court stated:
The duty of an insurer to deal fairly and in good faith with its insured is governed by our decisions in Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173, and Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 328 P.2d 198. We explained that this duty, the breach of which sounds in both contract and tort, is imposed because ‘[t]here is an implied covenant of good faith and fair dealing in every contract (including insurance policies) that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.’
* * *
[I]n the case before us we consider the duty of an insurer to act in good faith and fairly in handling the claim of an insured, namely a duty not to withhold unreasonably payments due under a policy. . . . That responsibility is not the requirement mandated by the terms of the policy itself to defend, settle, or pay. It is the obligation, deemed to be imposed by the law, under which the insurer must act fairly and in good faith in discharging its contractual responsibilities. Where in so doing, it fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing.
27In the absence of a judicial or legislative tort, however, this implied covenant of good faith and fair dealing only impacts the parties’ rights to enforce the contract and recover contract damages. The concept of good faith and fair dealing has been extended into the law of tort to promote public policy.28 In an action based in tort, however, the concept of “bad faith” allows for extra-contractual remedies such as unanticipated consequential and punitive damages. This is precisely why the two principles – contract versus tort – must be readily distinguishable.
The Supreme Court of Wisconsin succinctly stated the inherent problem with referring to the tort of bad faith as a ” tortious breach of contract”:
While that term may be a convenient shorthand method of denominating the intentional conduct of a contracting party when it acts in bad faith to avoid its contract obligations, it is confusing and inappropriate, because it could lead one to believe that the wrong done is the breach of the contract. It obscures the fact that bad faith conduct by one party to a contract toward another is a tort separate and apart from a breach of contract per se and it fails to emphasize the fact that separate damages may be recovered for the tort and for the contract breach.”29
In truth, the failure to pay what is owed under a first-party insurance policy is simply a breach of contract. Recovery of any additional damages not within the original contemplation of the parties to the agreement can only be awarded in tort.
So, when will our legal scholars finally dispose of this oxymoronic term “tortious breach of contract?”
1 See e.g., Francis v. Lee Enterprises, Inc. d/b/a KGMB, 971 P.2d 707 (Hawaii 1999); Erlich v. Menezes, 21 Cal. 4th 543, 981 P.2d 978 (Cal. 4th 1999).
2 See Francis, 971 P.2d at 709 (“Although [appellant] correctly states the rule relating to tortious breach of contract announced in Dold v. Outrigger Hotel, 54 Haw. 18, 501 P.2d 368 (1972), we believe, for the reasons discussed infra, that the rule was improvidently created, and today we abolish it.”).
3 Francis, 971 P.2d at 712—13 (citations and quotations omitted).
5 Francis, 971 P.2d at 711. Other courts limiting the tort of bad faith to quasi-public, fiduciary, or other special relationships include Erlich, supra.; Barry v. Posi-Seal Int’l, 40 Conn. App. 577, 587—88 (1996); Pickett v. Lloyd’s, 621 A.2d 445 (N.J. 1993);White v. Unigard Mutual Insurance Co., 730 P.2d 1014 (Idaho 1986); Christian v. American Home Assur. Co., 577 P.2d 899 (Okla. 1977).
6 Barry, supra.
7 Bankers Trust Co. v. Brown, 107 P.3d 609 (Okla. 2004).
8 Francis, 971 P.2d at 712.
9 Francis, 971 P.2d at 712.
11 Vincent v. Blue Cross-Blue Shield of Alabama, Inc., 373 So.2d 1054 (Ala. 1979).
12 Francis, 971 P.2d at 713 (Hawaii 1999)(“[T]here is a legal duty, implied in a first- and third-party insurance contract, that the insurer must act in good faith in dealing with its insured, and a breach of that duty of good faith gives rise to an independent tort cause of action. The breach of the express covenant to pay claims, however, is not the sine qua non for an action for the breach of the implied covenant of good faith and fair dealing.”).
13 White v. Unigard Mutual Insurance Co., 730 P.2d 1014 (Idaho 1986).
14 Bartlett v. State Farm Mut. Auto. Ins., 2002 WL 31741473 (S.D. Ind. 2002)(“Indiana also does not recognize a cause of action for tortious breach of contract. Rather, there is a cause of action for breach of contract and “a cause of action for the tortious breach of an insurer’s duty to deal with its insured in good faith.”)(citations omitted).
15 Schaeffer v. Potter, 2007 WL 1153013 (E.D. Mich. 2007)(“[T]he concept of “tortious” breach of contract is not well accepted. Certainly, no Michigan court has ever recognized such a claim.”).
16 Motorists Mutual Insurance Company v. Said, 590 N.E.2d 1228 (Ohio 1992)(“The tort of bad faith is not a tortious breach of contract, for no matter how willful or malicious the breach, it is no tort to breach a contract.”)
17 Payne v. FMC Corp., Civ. A. No. 1:90—882—6., 1991 WL 352415 (D.S.C. 1991)(“[P]laintiff’s claim for tortious breach of contract … is not cognizable under South Carolina law.”).
18 Pum v. Wisconsin Physicians Service Insurance Corporation, 727 N.W.2d 346 (Wis.App.,2006)(“The tort of bad faith is a separate intentional wrong which results from breach of a duty imposed by a contractual relationship. It is not a tortious breach of contract.”)(citation omitted).
19 See e.g., Opperman v. Nationwide Mut. Fire Ins. Co., 515 So.2d 263, 267 (Fla. Dist. Ct. App.1987)(stating that the cause of action for insurer bad faith has been described as a “tortious breach of contract, citing 16A Appleman, Insurance Law and Practice, § 8877.25 (1981); But Cf. Pickett v. Lloyd’s, 621 A.2d 445 (N.J. 1993)(“[O]ne of the leading cases … described “tortious breach of contract” as “a convenient shorthand method of denominating the intentional conduct of a contracting party when it acts in bad faith to avoid its contract obligations. … [W]e view the cause of action as sounding more in contract than in tort….”).
20 Opperman, supra. (see footnote 18 above).
21 See 14 Couch on Ins., § 204.23 (Relationship of Tort to Tortious Breach of Contract); 14 Couch on Ins. § 198:10 (Public Policy; Independent Tort)(citing Rubio v. State Farm Fire & Cas. Co., 662 So. 2d 956 (Fla. 3d DCA 1995) for the proposition that “insurer’s violation of legal duty to deal with its insureds in good faith gives rise to cause of action for tortious breach of contract.”)
22 See Fla. Stat. § 624.155.
23 Bellemere v. Geico General Insurance Company, — So.2d —-, 2007 WL 1412955, Case No. 2005-CA-00472-COA (Miss.App., May 15, 2007), citing T.D.S. v. Shelby Mutual Insurance Co., 760 F.2d 1520 (11th Cir.1985).
24 Id., at *4 citing Indus. Fire & Casualty Ins. Co. v. Romer, 432 So.2d 66, 68 (Fla.Dist.Ct.App.1983), superseded on other grounds by statute, Fla. Stat. § 624.155.
25 Id., citing Smith v. Std. Guar. Ins. Co., 435 So.2d 848, 849 (Fla.Dist.Ct.App.1983), superseded on other grounds by statute, Fla. Stat. § 624.155.
26 See e.g., Lawrence v. Harrington, 2005 WL 1758619 (Conn.Super. 2005), citing Barry v. Posi-Seal Int’l, 40 Conn. App. 577, 587—88 (1996).
27 Accord Christian v. Am. Home Assur. Co., 577 P.2d 899, 904 (Okla. 1978), quoting Gruenberg v. Aetna Insurance Company, 9 Cal.3d 566, 510 P.2d 1032 (1973)(underlining added).
28 For a detailed historical and policy discussion of the evolution of the implied covenant of good faith and fair dealing from contract to tort, see Nisberg, Alan J., The Implied Covenant of Good Faith and Fair Dealing (A Contractual Concept Expanded To Promote Public Policy), Mealey’s Litigation Report on Insurance Bad Faith, February 21, 2006.
29 Accord Motorists Mut., 590 N.E.2d at 695, n.2, citing Anderson v. Continental Ins. Co., 85 Wis.2d 675, 686, 271 N.W.2d 368, 374 (1978).