Hawaii Courts Adopt Middle Approach For Bad Faith Liability
by Tred R. Eyerly
When deciding which standard should be used to impose bad faith liability on insurers, the Hawaii Supreme Court looked to existing case law from other jurisdictions. The Best Place, Inc. v. Penn Am. Ins. Co., 82 Hawaii 120, 920 P.2d 334 (1996). The court considered three alternatives: imposing strict liability; utilizing a standard based on reasonableness; or requiring proof that the insurer acted willfully, maliciously, or deliberately. Id., at 133, 920 P.2d at 347.
In Best Place, the insured nightclub owner experienced a fire, destroying the nightclub. An investigation concluded that arson had been the cause. It also became apparent that the nightclub had always been a losing proposition. Many of its bills were unpaid. Further, the insured paid the policy’s premium to Penn only three days prior to the fire. Id. at 123, 920 P.2d at 337.
After the fire, Best Place submitted a claim. When the owner refused to submit to an examination under oath as required by the policy, Penn refused to make payment. Best Place then filed suit against Penn, alleging tortious breach of the covenant of good faith and faith dealing. Id. After the trial court ruled on motions in limine, Best Place filed an interlocutory appeal.
Accepting for the first time a claim for bad faith against an insurer, the Hawaii Supreme Court held, “there 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.” Id., at 132, 920 P.2d at 346.
The court then considered the appropriate standard when deciding liability for first-party bad faith claims. In surveying the landscape from other jurisdictions, the court noted “there is a significant variation in the standards by which liability is imposed. Id.
The Hawaii Supreme Court first looked to two California decisions which adopted the reasonableness standard for deciding whether bad faith was applicable. Id. at 132-134, 920 P.2d at 346-47 (analyzing Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 510 P.2d 1032, 1037 (Cal. 1973); Egan v. Mut. of Omaha Ins. Co., 598 P. 2d 452. 456-57 (Cal. 1979)). The Hawaii court then noted other jurisdictions following California. Best Place, 82 Haw. at 132, 920 P.2d at 346 (citing Nichols v. State Farm Mutual Automobile Ins. Co., 306 S.E. 2d 616 (S.C. 1983)).
Other courts impose, however, a more stringent standard for establishing tort liability in first-party cases, requiring the insured to demonstrate that the insurer's conduct was dishonest, malicious, or oppressive, and not based on misjudgment or negligence. Id. at 133, 920 P.2d at 347 (citing Aetna v. Broadway Arms, 664 S.W. 2d 463, 465 (Ark. 1984); Nat’l Savings Life Ins. Co v. Dulton, 419, So. 2d 1347 (Ala. 1982); McCorkle v. Great Atlantic Ins. Co, 637 P.2d 583, 587 (Okla. 1981)). Finally, the Hawaii Supreme Court considered the strict liability standard used by some courts when reasonable, but erroneous business judgments, are made by insurers. Id. (citing Hanson v. Prudential Ins. Co. of Am., 772 P.2d 580 (9th Cir. 1985); Opsal v. United Servs. Auto. Assn., 283 Cal Rptr. 212 (Cal. Ct. App. 1991); Olive v. Great Am. Ins. Co., 333 S.E. 2d 41 (1985); Austero v. Nat’l Cas. Co., 84 Cal. App. 3d 1, 148 Cal. Rptr. 653 (1978)).
The Hawaii Supreme Court ultimately adopted the reasonableness standard employed in Gruenberg and its progeny. Best Place, 82 Haw. at 133, 920 P.2d at 347.
Since deciding Best Place, the Hawaii Supreme Court has steadfastly adhered to the principle that an erroneous decision by the insurer is not sufficient to plead a claim of bad faith unless the decision is improper and unreasonable. See, e.g., Enoka v. AIG Hawaii Ins. Co., Inc., 109 Hawaii 537, 551, 128 P.3d 850, 864 (2006). Rejecting the most favorable approach for insureds (strict liability for erroneous decisions) and for insurers (deliberate, intentional acts denying coverage), the court has adopted a safer, middle ground for imposing bad faith liability.
About the Author: Tred R. Eyerly, with Damon Key Leong Kupchak Hastert, has over thirty years of civil litigation experience, including insurance coverage issues where he has successfully represented both insureds and insurers. Mr. Eyerly also practices in commercial litigation, employment law, and dispute resolution. Read more.
Mr. Eyerly will be presenting at the 2011 Insurance Bad Faith Claims seminar in Honolulu.
