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Dunlap v. State Farm Fire and Casualty Co.7/5/2005
lied covenant of good faith and fair dealing on a different basis. We find, for the reasons next set forth, that it could be.
C. The Insurer's Implied Covenant of Good Faith and Fair Dealing
The requirement that all parties to an insurance contract act in "good faith" toward one another spans at least three centuries of American legal thought. By the twentieth century, courts and commentators clarified the doctrine, steadily referring to the newly-coined "implied covenant of good faith and fair dealing." Despite its evolution, the term "good faith" has no set meaning, serving only to "exclude a wide range of heterogeneous forms of bad faith." The covenant is "best understood as a way of implying terms in the agreement," whether employed to analyze unanticipated developments or to fill gaps in the contract's provisions. Existing contract terms control, however, such that implied good faith cannot be used to circumvent the parties' bargain, or to create a "free-floating duty...unattached to the underlying legal document." Thus, one generally cannot base a claim for breach of the implied covenant on conduct authorized by the terms of the agreement.
Recognized in many areas of the law, the implied covenant attaches to every contract, including contracts of insurance.
Stated in its most general terms, the implied covenant requires "a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits" of the bargain. Thus, parties are liable for breaching the covenant when their conduct frustrates the "overarching purpose" of the contract by taking advantage of their position to control implementation of the agreement's terms. This Court has recognized "the occasional necessity" of implying contract terms to ensure the parties' "reasonable expectations" are fulfilled. This quasi-reformation, however, "should be rare and fact-intensive" exercise, governed solely by "issues of compelling fairness." Only when it is clear from the writing that the contracting parties "would have agreed to proscribe the act later complained of . . . had they thought to negotiate with respect to that matter" may a party invoke the covenant's protections.
As noted earlier, the implied covenant of good faith and fair dealing doctrine applies to insurance contracts. But, in that context, the case law frequently (and unfortunately) equates a lack of good faith with the presence of bad faith, and the parameters of an action for "bad faith" refusal to pay insurance proceeds are well settled. Thus, in this case, State Farm's refusal to cooperate with the Dunlaps did not subject it to liability for bad faith, because its conduct did not involve the failure or refusal to pay an insurance claim. Moreover, even if this were deemed to be a failure-to-pay case, State Farm reasonably relied on the exhaustion provision. The question thus becomes whether the scope of the duty arising out of the covenant of good faith and fair dealing is limited to the insurance company's obligation to fairly and promptly process and pay its insured's claims.
The answer to that question is no. State Farm learned the answer to that question in a case decided in another jurisdiction. In Schwartz v. State Farm Fire and Casualty Company, two people were seriously injured by an uninsured motorist. Andrew Schwartz, one of the injured, had a primary policy with another insurance company, and a $2 million umbrella policy with State Farm. The excess policy "applied only when ... there is payment by your underlying coverage." Elliot Weinstein, the other injured party, was covered by Schwartz's policies
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