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. 13, #14, p. 21 (November 16, 1999). © Copyright Butler 1999.
Courts, commentators, lawyers and others have applied the word “fiduciary” to insurance companies and insurance claims in a loose manner. The result has been bad law and confusion over if and when an insurer is a fiduciary. This article will argue that an insurer does not, and ought not, owe a fiduciary duty to an insured who has presented a first party claim.
In Powers v. United States Auto. Assoc’n and USAA Cas. Ins. Co., 962 P.2d 596 (Nev. 1998), there was a claim for a boat that sank while crossing the Gulf of Mexico. The insured was the only person aboard at the time. According to him, an engine exhaust hose had become disconnected from the engine allowing the boat to take on water. He tried to stop it by, among other things, cutting off the hose near the through hull fitting and stuffing rags into the opening. He then radioed the Coast Guard and got into a life raft. Later a commercial fishing boat picked him up. The leaking boat sank later that night. Powers, 962 P.2d at 598.
Initially the insured told the USAA claim investigator that the hose leaked because it had “deteriorated” near the hull. Because of several inconsistencies in the insured’s account, USAA was suspicious. USAA hired a salvager to raise the boat. At that point, the insured volunteered that he had cut the hose deliberately with a knife. He explained his initial untruthfulness saying that he was afraid USAA would deny the claim summarily if he told the truth. Id.
The insured asked to be present at the raising of the boat. USAA refused. The insured asked to have the boat sealed, after the insurance company’s inspection, to protect evidence. USAA refused. Id., at 598—599.
USAA demanded, and the insured gave, an examination under oath. Id., at 599. At the examination under oath, he was shown photographs of the boat and questioned about them. He asked for copies of the photographs. USAA refused. Id., at 602.
USAA denied the claim on the grounds that the insured sank the boat intentionally and made material misrepresentations about it. It referred the matter to an insurance crime prevention institute which forwarded it to the FBI. The FBI arrested the insured after the U.S. Attorney’s Office obtained criminal charges from a grand jury of wire and mail fraud relating to the insurance claim. After a jury trial, the insured was acquitted of all criminal charges. Id., at 600.
In the meantime, the insured had sued USAA for, among other things, “breach of fiduciary relationship.” Id. At the trial of that case, he asserted that the particular breach of this alleged fiduciary relationship was USAA’s refusal to allow him to be present when the boat was raised; refusal to seal the boat after inspection to protect evidence; and refusal to give him copies of the photographs shown at the examination under oath. Id., at 602. The jury was instructed on the alleged fiduciary relationship as follows:
Plaintiff seeks damages for a breach of a fiduciary relationship between plaintiff and defendant. The duty owed by an insurance company to an insured is fiduciary in nature. In order to recover plaintiff must establish by a preponderance of the evidence that a fiduciary relationship existed between plaintiff and defendant and that defendant breached a duty to disclose known facts to plaintiff.
A fiduciary relationship exists when one has the right to expect trust and confidence in the integrity and fidelity of another.
This special relationship exists in part because, as insurers are well aware, consumers contract for insurance to gain protection, peace of mind and security against calamity.
Powers v. United States Auto. Assoc’n and USAA Cas. Ins. Co., 979 P.2d at 1286, 1288 (Nev. 1999).(1) The jury returned a verdict against USAA on, among others, the count for breach of fiduciary relationship. Cross appeals ensued. Powers, 962 P.2d 596, 600.
On appeal, USAA contended that the jury instruction on fiduciary relationship was improper because an insurer “has no fiduciary duty to pay questionable claims.” 962 P.2d at 602, citing Employers Ins. Co. of Wausau v. Albert D. Seeno Constr., 945 F.2d 284 (9th Cir. 1991). It further contended that “imposing a fiduciary duty to [on] a first party insured would require insurance companies to pay every claim presented by an insured.” Powers, 962 P.2d at 602.
The Supreme Court of Nevada did not agree. First, the Court pointed out, the basis for the alleged breach of fiduciary duty was not refusal to pay the claim. Rather, it was the refusal to allow the insured to be present when the boat was raised, refusal to seal it to protect evidence and refusal to give photographs to the insured. Id., at 603. Moreover, the Court opined, “it is clear that the jury was properly instructed that an insurer’s duty to its policyholder is, as USAA concedes, ‘akin’ to a fiduciary relationship.” Id., at 602.
In footnote four to the opinion the Court went on to say that, if the instruction was erroneous, it was harmless error. Id., at 603, n.4. This is because, said the Court, the jury’s finding of a breach of fiduciary relationship merely buttressed the finding of bad faith. Moreover, the Court was “not adopting a new cause of action based on an insurance company’s failure to put its insured’s interests above its own; [the court was] merely recognizing that breach of the fiduciary nature of the insurer-insured relationship is part of the duty of good faith and fair dealing.” Id.
On re-hearing, the Supreme Court of Nevada vacated footnote four in its entirety. “[W]e state unequivocally that the jury instruction given by the district court on breach of a fiduciary relationship was not error.” Powers, 979 P.2d at 1288. The Court reiterated its assertion that the insurer’s duty is “akin” to a fiduciary relationship. Id.
The Powers case is bad law. It appears to create a tort that is not a tort, but merely a component of another duty; a “tortoid” as Chief Justice Springer called it in dissent. 962 P.2d at 608. And the name of this non-tort is breach of fiduciary duty to disclose known facts.
There is not and cannot be a fiduciary duty of an insurer to “disclose known facts” to an insured in the investigation of a first party claim – or any suspicious claim. For one thing, as discussed below, the parties to a first party claim have the arm’s length relationship of debtor and creditor. There is no place for fiduciary duties in such a relationship.
More importantly, a “duty to disclose known facts” would eviscerate an insurer’s ability to investigate and defend itself against fraud. As Chief Justice Springer observed, in the face of such a duty “insurance companies must hasten to open up their investigative files and not to ‘refuse’ any requests for material contained in their files.” Id., at 618.
During fraud investigations of the kind instituted by USAA in this case, one would think that refusal to provide photographs or permit the person being investigated to be present during the investigation would be a rather and accepted circumstance. It is hard to envision a tort action’s arising out of such normal, expected conduct on the part of insurance fraud investigators.
In considering the existence vel non of a fiduciary relationship between insurer and insured, many courts have, like both published opinions in Powers, used the vague and useless word “akin.”
What does the phrase “akin to a fiduciary relationship” mean? Few of the cases say. One exception, Henry v. Assoc’d Indem. Corp., 217 Cal. App. 3d 1405, 1408 (1990), involved a house which was collapsing slowly due to subsidence of the soil under it. The insurer denied coverage under the exclusion for “settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls, floors, roofs or ceilings.” The insured sued for, among other things, breach of fiduciary duty. Id., at 1409.
The trial court dismissed the complaint for failure to state a cause of action. On appeal, the Court of Appeal of California tested the order of dismissal. As to the breach of fiduciary duty count, the Court acknowledged the relationship between an insurer and an insured is “akin to a fiduciary relationship.” Id., at 1418, quoting State Farm Fire & Cas. Co. v. Superior Court, 216 Cal. App. 3d 1222, 1226. The Court went on to observe: “[h]owever, the protection afforded by that relationship is not unlimited (citation omitted), and the insurer has no duty totally to disregard its own interests when they conflict with the insured’s interests (citations omitted).” Id., at 1418—1419.
As for the specific allegations in the Henry case, the Court held they were insufficient to establish the necessary “holding out” to create a fiduciary relationship. The allegations did not “reveal anything other than an ordinary arm’s length business relationship between the insured and the insurers and its agents.” Accordingly, the Court affirmed the dismissal of that particular count. Id., at 1419.
If, in the first party context, the relationship between insured and insurer truly is not fiduciary, then why the need to invoke that concept? In the opinion of this writer there is none. As the Powers court conceded the “akin” duty does not support an independent tort. Nor does it add anything meaningful to the duty of good faith and fair dealing. Thus, it is superfluous.
There are other, more broad, reasons why an insurer, when handling a first party claim, ought not be held to the standard of a fiduciary. One is that the relationship between insurer and insured in a first party claim is nothing like the traditional relationship between fiduciary and principal or beneficiary.
Fiduciary. The term is derived from the Roman law, and means (as a noun) a person holding the character of a trustee, or a character analogous to that of a trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires. A person having duty, created by his undertaking, to act primarily for another’s benefit in matters connected with such undertaking. As an adjective it means of the nature of a trust; having the characteristics of a trust; analogous to a trust; relating to or founded upon a trust or confidence.
Black’s Law Dictionary Fifth Edition (1979).
Traditionally, then, a fiduciary is one having great or exclusive control over the interest or property of another. Examples are an executor of an estate, a receiver in bankruptcy, a trustee of a trust and a stock transfer agent. All these are true fiduciaries.
These relationships are quite different from the one between first party insurance claimant and insurer.
The legal relationship existing between the insured and his insurer on claims for collision damages or damages caused by uninsured motorists is that of debtor and creditor in which no fiduciary relationship is present. It would be a strange quirk in the law to hold that each time a debtor fails or refuses to pay demands made upon it by a creditor, the debtor would be liable for both compensatory and punitive damages even though his failure or refusal was motivated by spite, malice, or bad faith.
Baxter v. Royal Indem. Co., 285 So.2d. 652, 657 (Fla. 1st DCA 1973), superseded by statute, Time Ins. Co. v. Burger, 712 So. 2d 389 (Fla. 1998).
As USAA asserted in Powers above, if an insurer is required to behave like a true fiduciary, it would have to put the interest of the insured above its own in every instance. The result would be to require insurance companies to pay every claim presented, as presented. Powers, 962 P.2d at 602. This would leave a first party insurer with little or no room to test exaggerated, inflated and even fraudulent claims. Obviously that result is untenable.
Another reason why an insurer ought not be held to a fiduciary standard in a first party insurance claim is that it injects confusion into claims handling. The law of bad faith already varies greatly from state to state. In some it is based on common law tort principles. In others it arises from the duty of good faith and fair dealing in contracts. In still others it is codified by statute. See, Craig and Caceres, Recovery Of Damages For Emotional Distress In Tort, Contract, And Statutory Bad Faith Actions, Mealey’s Litigation Report: Insurance Bad Faith, Volume 12 Number 6 (July 21, 1998).
Naturally the standard of care varies also from jurisdiction to jurisdiction. In some, an insurer cannot be liable for bad faith if its decisions and actions were “fairly debatable.” See, e.g., Rawlings v. Apodaca, 726 P.2d 565 (Ariz. 1986). In others, the totality of the circumstances must be taken into consideration. See, e.g., State Farm Mut. Auto. Ins. Co. v. LaForet, 658 So. 2d 55 (Fla. 1995).
Needless to say, if some related, but different, standard is overlaid, confusion will be the inevitable result. For example, the Uniform Fiduciaries Act, promulgated by the Commissioners On Uniform State Laws, has been codified in more than twenty five states. The act encompasses concepts of good and bad faith. It does not define bad faith. However it contains the following definition of good faith. “A thing is done ‘in good faith’ within the meaning of this Act when it is in fact done honestly, whether it be done negligently or not.” Uniform Fiduciaries Act §1(2).
Surely an insurer is entitled to a more or less clear idea of the standard of conduct to which it must adhere in order not to be in bad faith. The engrafting of a superfluous fiduciarism on the law cannot promote such clarity. It necessarily will create confusion.
The absence of a fiduciary duty in a first party claim is not to be confused with the possibility of a fiduciary relationship in the sale of insurance. In such cases, if there is the necessary holding out, grossly unequal bargaining position, etc. some courts have found a fiduciary relationship. E.g., Bartgis, 969 P.2d 949, 956 n.3 (finding a fiduciary duty in a sale of medical insurance). But see Goshen v. The Mut. Life Ins. Co. Of New York, et al., 1997 N.Y. Misc. LEXIS 486, 1997 (finding no fiduciary duty in a sale of “vanishing premium” life insurance). That issue is governed by the facts of each case and is not the subject of this paper.
The relationship of insured and insurer in a first party claim also is distinguishable from the relationship in a third party claim. There, once a liability carrier has been called upon to defend and indemnify its insured, it has indeed assumed a duty more like that of a traditional fiduciary. To a great extent, the fate of the insured is out of his or her control and in the control of the insurer. The insured has contracted away control of the defense and settlement. Thus
[t]he fiduciary duty required of a insurer in a third-party claim arises only when the insured [sic] is required to represent the insured’s position against a third party. (Citation omitted).
In a first-party claim, as in this case, the insurer occupies the same arm’s-length position in relation to an insured that it occupies when the insurer challenges an insured’s coverage of casualty losses.
North Iowa State Bank v. Allied Mut. Ins. Co., 471 N.W.2d. 824, 829 (Iowa 1991).
In first party claims, insurers ought not be deemed fiduciaries. Their relationship to the insured is unlike that of a true fiduciary relationship such as trustee and beneficiary. It is an arm’s length relationship. Also, to make first party carriers into fiduciaries would render it nearly impossible for them to investigate exaggerated and fraudulent claims, or even to assert policy exclusions, without incurring exposure to extracontractual damages. Finally, to do so would add layers of confusion to good faith claims handling.