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Hillman v. Nationwide Mutual Fire Insurance (7/9/93), 855 P 2d 1321
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Notice: This is subject to formal correction before
publication in the Pacific Reporter. Readers are
requested to bring typographical or other formal errors
to the attention of the Clerk of the Appellate Courts,
303 K Street, Anchorage, Alaska 99501, in order that
corrections may be made prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
JOHN A. HILLMAN and JANET )
HILLMAN, individually and ) Supreme Court No. S-4555
JANET HILLMAN as Personal )
Representative of the Estate ) Trial Court No.
of JULIE G. HILLMAN, a ) 3AN-85-4613 Civil
deceased minor, )
)
Appellants, )
) O P I N I O N
v. )
)
NATIONWIDE MUTUAL FIRE )
INSURANCE COMPANY, )
)
Appellee. ) [No. 3971 - July 9, 1993]
______________________________)
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Anchorage,
Peter A. Michalski,
Judge.
Appearances: Michael J. Schneider,
Mestas & Schneider, P.C., Anchorage, for
Appellants. Peter J. Maassen, Burr, Pease &
Kurtz, Anchorage, for Appellee.
Before: Rabinowitz, Chief Justice,
Burke, Matthews, Compton, and Moore,
Justices.
MATTHEWS, Justice.
COMPTON, Justice, with whom BURKE,
Justice, joins, dissenting in part.
John and Janet Hillman sued their insurer, Nationwide
Mutual Fire Insurance Company (Nationwide), for bad faith in the
handling of their uninsured motorist claim filed after the death
of their daughter. The superior court granted Nationwide's
motion to dismiss the claim, concluding that the insurer's
decisions to deny coverage and to demand arbitration were
reasonable. The Hillmans appeal this decision along with the
trial court's designation of Nationwide as the prevailing party
for attorney's fee purposes. We affirm on the merits but reverse
the award of attorney's fees.
I. FACTS AND PROCEEDINGS
On August 14, 1983, while driving an ATV owned by her
father, eleven-year old Julie Hillman collided with an uninsured
pickup truck driven by William Amis. Julie died six days later
as a result of her injuries.
Nationwide had issued an automobile insurance policy to
Julie's father, John Hillman, which provided uninsured motorist
coverage up to $25,000 per person or $50,000 per occurrence.
However, when on August 10, 1984, Janet Hillman, Julie's mother,
contacted Nationwide to inquire about coverage and claim
procedures, Maury Hafford, Nationwide's local adjustor, indicated
that Nationwide had no liability. This denial was based on one
of the "coverage exclusions"in the uninsured motorist section.1
On February 7, 1985, after further inquiries by Mrs. Hillman,
Hafford referred the claim to Nationwide's legal counsel in order
to "clarify this issue of coverage for your understanding and
satisfaction," as he wrote Mrs. Hillman. When, in late March
1985, Nationwide's attorney informed Hafford that "the question
of coverage appears to be a roughly 50/50 proposition," Hafford
wrote Hillman "seeking . . . further details with regard to
Julie's accident." However, he did not relay the attorney's
opinion to Mrs. Hillman.
On April 1, 1985, the Hillmans filed a complaint
against Nationwide for bad faith. The following month Nationwide
offered the Hillmans $50,000 as a "compromise payment." The
Hillmans rejected the offer, claiming that they were entitled to
$150,000 under the insurance policy, plus medical benefits,
incidental, consequential, and punitive damages.
The following April Judge Katz granted Nationwide's
motion for summary judgment and dismissed the Hillmans' claims.
The Hillmans appealed the decision.
On July 1, 1988, this court held that the Hillmans were
covered by the Nationwide policy. Hillman v. Nationwide Mut.
Fire Ins. Co., 758 P.2d 1248, 1250 (Alaska 1988) (Hillman I). We
agreed with Nationwide's interpretation of the contractual
language. However, a majority of the court refused to give
effect to the uninsured owned motor vehicle exclusion contained
in the policy for statutory and public policy reasons. Id. at
1251-52.
Once coverage was established, Nationwide chose to
pursue the arbitration procedure mandated by the policy for
determining liability.2 Arbitration was held on January 30,
1989. The arbitrators concluded that Amis was 33% at fault with
regard to the claims related to Julie's estate. As for John and
Janet's claims for negligent infliction of emotional distress,
the panel agreed that Amis' negligence accounted for 15% of the
harm. The arbitrators awarded $92,500 to the Hillmans. Two
weeks later Nationwide paid the Hillmans $50,000, the maximum
amount of the uninsured motorist coverage provided by the policy.3
Following arbitration, the Hillmans' bad faith
litigation began anew. On June 21, 1990, Judge Michalski granted
Nationwide's motion for partial summary judgment, dismissing the
bad faith claims associated with Nationwide's denial of coverage
and decision to arbitrate.
After several pre-trial motions, Judge Michalski
reconsidered an earlier ruling and granted Nationwide's motion
for summary judgment on the remaining bad faith claims.4
Dismissal of the claims was based on Judge Michalski's belief
that the Hillmans failed to demonstrate that they could show
damages. After issuing the Final Judgment, the superior court
identified Nationwide as the prevailing party and awarded costs
and partial attorney's fees in the amount of $154,899.57.
This appeal followed.
II. DISCUSSION
A. Dismissal of the Hillmans' Bad Faith Claims
1. Denial of Coverage
In State Farm Fire & Casualty Co. v. Nicholson, 777
P.2d 1152 (Alaska 1989), we held that insurance companies could
be liable for the tort of bad faith in so-called "first-party"
cases -- cases in which insureds seek compensation from their own
insurers for losses which they have suffered. Id. at 1156.
We had no occasion to comprehensively define the
elements of the tort of bad faith in a first-party insurance
context in Nicholson; we have not done so in subsequent cases,
see e.g., State Farm Mut. Auto. Ins. Co. v. Weiford, 831 P.2d
1264 (Alaska 1992); nor do we do so now. In recognizing the tort
of bad faith in first-party cases, we aligned Alaska with those
jurisdictions that have followed Gruenberg v. Aetna Insurance
Co., 510 P.2d 1032 (Cal. 1973), apparently the first case to
apply bad faith as a tort in first-party cases.5 Gruenberg
articulated the tort in a manner that seemed to require unreason
able conduct and bad faith: "Accordingly, when the insurer
unreasonably and in bad faith withholds payment of the claim of
its insured, it is subject to liability in tort." Gruenberg, 510
P.2d at 1038.
A similar double requirement was imposed in Noble v.
National American Life Insurance Co., 624 P.2d 866 (Ariz. 1981),
another case on which we relied in Nicholson. The Arizona
Supreme Court adopted the standard expressed by the Wisconsin
Supreme Court in Anderson v. Continental Insurance Co., 271
N.W.2d 368 (Wis. 1978):
The Anderson Court states:
To show a claim for
bad faith, a plaintiff must show
the absence of a reasonable basis
for denying benefits of the policy
and the defendant's knowledge or
reckless disregard of the lack of a
reasonable basis for denying the
claim. It is apparent, then, that
the tort of bad faith is an
intentional one . . . .
The tort of bad
faith can be alleged only if the
facts pleaded would, on the basis
of an objective standard, show the
absence of a reasonable basis for
denying the claim, i.e., would a
reasonable insurer under the
circumstances have denied or
delayed payment of the claim under
the facts and circumstances.
271 N.W.2d at 376-77.
Under the Anderson standard an
insurance company may still challenge claims
which are fairly debatable. The tort of bad
faith arises when the insurance company
intentionally denies, fails to process, or
pay a claim without a reasonable basis for
such action.
Noble, 624 P.2d at 868.
A leading text has this to say about the standard in
first-party bad faith cases:
In third party situations, an
insurer can be liable for an excess judgment
when it has failed to settle a third party
action against its insured. However, courts
have not agreed on the standard for imposing
such liability. Some courts impose liability
for a negligent failure to settle the third
party action; others apply a "bad faith"test
that, in practical terms, amounts to a
negligence test; and a third group of courts
applies a fairly strict requirement of
subjective bad faith. A similar divergence
of views concerning the level of wrongdoing
necessary to impose tort liability on
insurers for denial of benefits appears to
exist among courts that have adopted the tort
of first party bad faith.
Although bad faith is not fully
defined in some jurisdictions, courts have
consistently held that a refusal to pay
benefits based on a reasonable interpretation
of the insurance contract is not bad faith.
Shernoff, Insurance Bad Faith Litigation, 5.02[1] at 5-6 (1992)
(footnotes omitted).
The above authorities make it clear that while the tort
of bad faith in first-party insurance cases may or may not
require conduct which is fraudulent or deceptive,6 it necessarily
requires that the insurance company's refusal to honor a claim be
made without a reasonable basis.7 Neither party takes issue with
this proposition. Instead, the Hillmans argue that summary
judgment should not have been granted because (a) reasonableness
is always a question of fact for the jury and, alternatively, (b)
under the facts and circumstances of this case there was a fact
question as to whether Nationwide had a reasonable basis for
denying the claim.
The Hillmans' argument that reasonableness always
presents a question of fact is without merit. Although questions
of reasonableness often must be resolved at trial, we have not
held that they are never an appropriate subject for summary
judgment procedures. If, when viewing the evidence most
favorably to the opponent of a motion for summary judgment, the
trial court finds that a reasonable jury could only conclude that
the challenged conduct must be characterized in one way, then
summary judgment in accordance with that conclusion should be
entered. Schneider v. Pay 'N Save Corp., 723 P.2d 619, 623
(Alaska 1986).
The Hillmans also argue that the superior court tacitly
accepted the standard of bad faith articulated in National
Savings Life Insurance Co. v. Dutton, 419 So. 2d 1357 (Ala.
1982). In Dutton, the Alabama Supreme Court held that, except in
extraordinary circumstances, "if the evidence produced by either
side creates a fact issue with regard to the validity of the
claim . . . the [bad faith] tort claim must fail and should not
be submitted to the jury." Id. at 1362. In short, under the
Dutton test, the plaintiff must prove that plaintiff is "entitled
to a directed verdict on the contract claim and, thus, entitled
to recover on the contract claim as a matter of law." Id.
We need not address whether the superior court adopted
the Dutton standard. Dutton does not state the Alaska rule of
law. Our position is merely that where the insurer establishes
that no reasonable jury could regard its conduct as unreasonable,
the question of bad faith need not and should not be submitted to
the jury.
The Hillmans' alternative argument -- that they
presented sufficient evidence to raise a fact question as to
whether Nationwide's denial of coverage had a reasonable basis --
requires more discussion. The Hillmans argue that they presented
evidence showing that Nationwide denied coverage before making
any investigation of the facts or the law and that Nationwide
made subsequent, formal denials of coverage without having
conducted significant investigation. They also argue that
Nationwide's agents violated its guidelines and policies, which
are intended to guarantee fair, honest and reasonable claims
handling. Among others, this included violating the company
policy requiring local adjustors to consult with higher echelons
in the company before denying a death claim; failing to resolve
all reasonable doubts about coverage in favor of the policy
holder; withholding from the file any explanation for why the
policy holder was required to sign a nonwaiver agreement;
obtaining a legal opinion just to "paper the file"and for the
main purpose of denying the claim; failing to provide a policy
holder with a previously promised letter from Nationwide's
attorney regarding coverage; lying to the policy holder about
whether that letter was available; and "stonewalling"the claim
for four years because of vindictiveness towards the Hillmans'
attorneys.8 Finally, the Hillmans argue that even after
Nationwide had given its personnel the authority to concede
coverage and settle the underlying case for the $50,000 policy
limits, its Regional Claims Attorney unilaterally decided not to
do so.
In our view none of these facts suffice to raise a
factual question as to whether Nationwide's denial of coverage
lacked a reasonable basis. The denial was based on an explicit
exclusion in the policy. The question in this case is whether
Nationwide was unreasonable in treating the exclusion as valid.
As to this question, the Hillmans have directed us to no evidence
suggesting unreasonableness. We have found that "the only
reasonable interpretation"of this exclusion was that advanced by
Nationwide. Hillman I, 758 P.2d at 1250. We also concluded in
Hillman I that the exclusion was invalid on statutory and public
policy grounds. Two of the five members of this court disagreed
that the exclusion was invalid. Id. at 1255 (dissenting opinion
of Justice Burke, joined by Justice Moore). See also State Farm
Mut. Auto. Ins. Co. v. Bass, 201 S.E.2d 444, 445 (Ga. 1973)
(where appellate court was divided on interpretation of uninsured
motorist statute, "insurer was legally justified in litigating
the issue and cannot, as a matter of law, be liable for . . . bad
faith"). Further, as we acknowledged in Hillman I, a respectable
minority of jurisdictions have reached the same conclusion as the
dissent. Hillman I, 758 P.2d at 1251. The facts that Nationwide
did not follow its standard procedures in denying coverage, that
it did not forward its attorney's letter to the Hillmans, and
that its $50,000 offer was conditioned on settling all of
Hillmans' claims rather than their uninsured motorist claims, do
not suffice to create a fact question as to whether Nationwide's
decision to deny coverage lacked a reasonable basis, as they have
little or no relevance on that point. We conclude, therefore,
that there are no genuine issues of material fact as to whether
Nationwide's denial of coverage was reasonable.9
2. Demand for Arbitration
In the same order dismissing the bad faith claim
related to coverage denial, Judge Michalski also dismissed the
bad faith claim based on Nationwide's demand for arbitration.
Judge Michalski found that the arbitration demand was not in bad
faith because Nationwide "merely exercised its right." The court
reiterated the decision in its March 7, 1991 order dismissing the
Hillmans' remaining bad faith claims.
The Hillmans contend that Nationwide had no reasonable
basis to demand arbitration. Instead, they argue, Nationwide's
agents insisted on arbitration in order to discourage the
Hillmans from proceeding with their legitimate claims and because
of vindictiveness and aggravation with their attorneys.
However, the insurance policy covered the Hillmans
"only to the extent the uninsured motorist was liable." Based on
evidence from the initial police report, Nationwide could reason
ably conclude that Amis was only partially responsible for the
accident.10 The subsequent findings of the arbitrators, that
Julie was 66% at fault for the accident and her parents 85% at
fault for their emotional distress, lend additional support to
Nationwide's claim that its demand for arbitration was
reasonable. See Sullivan v. Allstate Ins. Co., 723 P.2d 848, 850
(Idaho 1986) (a subsequent arbitrator's decision that a claimant
was partially negligent was clear evidence that an insurer's
denial of liability was not in bad faith). Consequently,
Nationwide's decision to demand arbitration was reasonable and
therefore not in bad faith.
B. Award of Attorney's Fees
An award of attorney's fees will be reversed if the
trial court's determination is an abuse of discretion or
"manifestly unreasonable." Luedtke v. Nabors Alaska Drilling,
Inc., 768 P.2d 1123, 1138 (Alaska 1989). Designation of the
prevailing party "is committed to the broad discretion of the
trial court." Apex Control Systems, Inc. v. Alaska Mechanical,
Inc., 776 P.2d 310, 314 (Alaska 1989).
The determination will be affirmed on
appeal "unless it is shown that the court
abused its discretion by issuing a decision
which is arbitrary, capricious, manifestly
unreasonable, or improperly motivated."
Howard S. Lease Constr. Co. & Assoc. v. Holly, 725 P.2d 712, 720
(Alaska 1986) (quoting City of Yakutat v. Ryman, 654 P.2d 785,
793 (Alaska 1982)).
After the Final Judgment was issued, Judge Michalski
awarded Nationwide approximately $155,000 in costs and partial
attorney's fees.11 The Hillmans argue that the trial court abused
its discretion when it determined that Nationwide was the
prevailing party. The Hillmans claim that since they prevailed
on two of the three issues in the case, coverage and liability,
but not on bad faith, they were the "prevailing party."
Civil Rule 82(a) directs that attorney's fees be
awarded to the prevailing party.12 "[T]he prevailing party is the
one 'who has successfully prosecuted or defended against the
action, the one who is successful on the "main issue" of the
action and "in whose favor the decision or verdict is rendered
and the judgment entered."'" Day v. Moore, 771 P.2d 436, 437
(Alaska 1989) (quoting Adoption of V.M.C., 528 P.2d 788, 795 n.14
(Alaska 1974)).
This court has recognized that "it is not an immutable
rule that the party who obtains an affirmative recovery must be
considered the prevailing party." Owen Jones & Sons, Inc. v.
C.R. Lewis Co., 497 P.2d 312, 313-14 (Alaska 1972). We have been
cited to two cases13 where the party who obtained an affirmative
recovery was held not to be the prevailing party by the trial
court and this decision was affirmed on appeal. The cases are
Owen Jones and Hutchins v. Schwartz, 724 P.2d 1194 (Alaska 1986).
In Hutchins, the plaintiff sought $275,000 in compensatory
damages. After a trial the jury returned a verdict in favor of
the plaintiff, awarding some $1,900, which in turn had to be
reduced by 40% because of the plaintiff's comparative negligence.
Id. at 1204. Thus the plaintiff's affirmative award was only
approximately $1,100. This recovery is so small in comparison
with what was sought that it may properly be considered de
minimis. The verdict essentially was a defense verdict.14
Owen Jones may not be so easily distinguished. There,
Jones-Western, a contractor, sued its subcontractor, C.R. Lewis
Co., to recover approximately $120,000 in progress payments that
Jones-Western had paid C.R. Lewis in connection with construction
of a building that was destroyed by an earthquake before it was
completed. The subcontractor counterclaimed for services
rendered and materials furnished before the collapse. The trial
court held that Jones-Western was not entitled to recover
progress payments and that the subcontractor had a claim in
quantum meruit for the reasonable value of the services and
materials supplied prior to the earthquake. The trial court
fixed this sum at approximately $142,000. Thus, the
subcontractor would have been entitled to an affirmative recovery
of some $22,000 except for the fact that it salvaged some
materials from the building after the earthquake on which the
court placed a value of $30,000. Because of this, Jones-Western
was left with a small affirmative recovery. We described this
recovery in Owen Jones as merely "incidental": "This recovery
based on the accounting can be classified as an incidental
recovery which will not be a sufficient recovery to bar a party
who has defended a large claim from being considered a prevailing
party." Owen Jones, 497 P.2d at 314, n.5. We also noted that
the "main issue"in the case below was whether the subcontractor
had an obligation to refund the progress payments. The
subcontractor prevailed on this issue. Id. at 314. Accordingly,
we affirmed the trial court's holding that the subcontractor was
the prevailing party. Id.
In reaching our conclusion in Owen Jones, we distin
guished Buza v. Columbia Lumber Co., 395 P.2d 511 (Alaska 1964).
Buza was a suit brought for conversion of a quantity of logs.
The plaintiff sought the return of the logs, worth some $8,000,
plus compensatory and punitive damages of $31,000. After a trial
the plaintiff was awarded the logs, but no damages. We held,
nonetheless, that the plaintiff was the prevailing party,
defining that term to mean the party "who successfully prosecutes
the action or successfully defends against it, prevailing on the
main issue, even though not to the extent of the original
contention." Buza, 395 P.2d at 514.
In Owen Jones we distinguished Buza as follows:
The main issue in that case was the
ownership of a quantity of logs, and the
plaintiff proved his right to the logs
although he was not able to obtain
compensating or punitive damages.
The instant case differs because
the recovery of appellants was based only on
an accounting for materials salvaged by the
appellee. It was clear that the main issue
had been resolved against appellants when the
court found that appellee had no obligation
to refund its progress payments under the
contract . . . .
Owen Jones, 497 P.2d at 314 (footnote omitted).
In our view the present case more closely resembles
Buza than Owen Jones. Here, as in Buza, plaintiff prevailed on
the basic liability question and received an affirmative recovery
based on its successful litigation of that question, which was
substantial in amount. Owen Jones is distinguishable because the
plaintiff's affirmative recovery there was based on a minor
accounting issue, not on the liability theory which plaintiff
tried unsuccessfully before the court.
In the present case, the Hillmans are no doubt
disappointed that they did not receive compensatory and punitive
damages against the insurance company on their claim of bad
faith. Nonetheless, they prevailed against vigorous opposition
on their claim of policy coverage and received $50,000 on that
claim. This recovery cannot be classified as an incidental one
unrelated to the main focus of the litigation in this case. We
conclude therefore that the trial court erred in refusing to
designate the Hillmans as the prevailing party.15 Accordingly the
award of attorney's fees must be reversed and this case remanded
so that an award of reasonable attorney's fees may be made in
favor of the Hillmans.
III. CONCLUSION
We affirm the decision of the superior court granting
Nationwide's motion for summary judgment on the Hillmans' bad
faith claims. Nationwide's decisions to deny coverage and then
to demand arbitration were reasonable. In light of our decision,
there is no reason to consider the damages issue.16
The superior court's designation of Nationwide as the
prevailing party was an abuse of discretion. Since the Hillmans
prevailed on two of the three issues central to the case and won
a substantial affirmative recovery based on these issues, they
were the prevailing party. The trial court should make a new
award reflecting this determination.
The superior court's decision granting summary judgment
on the bad faith claims is AFFIRMED. The award of attorney's
fees is REVERSED and REMANDED.
COMPTON, Justice, with whom, BURKE, Justice, joins,
dissenting in part.
While declining to comprehensively define the elements
of the tort of bad faith, the court has actually eliminated the
implied covenant of good faith and fair dealing in insurance
contracts. The court concludes that summary judgment is
appropriate if the insurer has a reasonable (colorable)
contractual basis for denying liability. In other words, the
insurer may enforce a contractual basis for denying liability
regardless of any subjective bad faith. Because the court's
analysis is contrary to law and not supported by policy, and
because a reasonable jury could find that Nationwide acted with
subjective bad faith, I dissent.
The court concludes that the tort of bad faith in the
context of first party insurance claims necessarily includes a
requirement that the insurer's refusal to honor the claim be made
without a reasonable basis. It should be noted that the Hillmans
do not accept this proposition, because contrary to the court's
conclusion, the Hillmans do not accept that a reasonable basis
can exist if actions are motivated by improper purposes. The
Hillmans argue that because evidence was presented that shows
Nationwide's denial was motivated by self serving, dishonest and
improper purposes, summary judgment was inappropriate. "Where
the record supports plaintiff's contention that acts or omissions
by the carrier were for a bad-faith purpose or motive, the matter
should be submitted to a jury for its determination." Thus the
issue is properly before us.
Until today the covenant of good faith and fair
dealing, which we have implied in every contract including
insurance contracts, has imposed duties above and beyond express
contractual duties. Guin v. Ha, 591 P.2d 1281, 1291 (Alaska
1981). The additional duties imposed by the covenant of good
faith and fair dealing were not eliminated when this court
accepted the argument that in insurance contracts, a breach of
the covenant sounds in tort. "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."
Gruenberg v. Aetna Insurance Company, 510 P.2d 1032, 1037 (Cal.
1973).
The covenant of good faith and fair dealing requires
that the party act with both subjective good faith and objective
fairness. Luedtke v. Nabors Alaska Drilling, Inc., 834 P.2d
1220, 1225 (Alaska 1992). It is objectively reasonable to rely
on contractual rights. Contractual rights, therefore, provide a
reasonable basis for a position. But this does not end our
inquiry. The covenant of good faith and fair dealing requires
that contractual rights be pursued with subjective good faith.
In Mitford v. de Lasala, 666 P.2d 1000, 1007 (Alaska 1983), even
though the employment at will contract allowed the firing of
Mitford for no reason at all, "the circumstances surrounding
Mitford's termination give rise to an inference that he was fired
. . . for the purpose of preventing him from sharing in future
profits," thereby violating the duty of good faith and fair
dealing. In Loyal Order of Moose v. International Fidelity
Insurance Co., 797 P.2d 622, 629 (Alaska 1990), we noted that
while the surety had a contractual right to demand arbitration,
"the demand for arbitration may not itself be made in bad faith,
or serve to defeat an otherwise timely and sufficient bad-faith
claim."
We have
declined to
hold that a
breach of the
covenant of
good faith and
fair dealing
sounds in tort
in the context
of employment
contracts.
However,
because of the
special nature
of insurance
contracts, a
breach of the
covenant of
good faith and
fair dealing in
first party
insurance
claims does
sound in tort.
State Farm Fire
& Cas. Co. v.
Nicholson, 777
P.2d 1152, 1156-
57 (Alaska
1989).
The adhesionary aspects of the insurance
contract, including the lack of bargaining
strength of the insured, the contract's
standardized terms, the motivation of the
insured for entering into the transaction and
the nature of the service for which the
contract is executed, distinguish this
contract from most other non-insurance
commercial contracts. These features
characteristic of the insurance contract make
it particularly susceptible to public policy
considerations.
Id., quoting Louderback & Jurika, Standards for Limiting the Tort
of Bad Faith Breach of Contract, 16 U.S.F.L. Rev. 187, 200-01
(1982). The reason for holding that such claims sound in tort is
because "an action in tort provides a remedy for harm done to
insureds though no breach of an express contractual covenant has
occurred and where contract damages fail to adequately compensate
insureds." Id., quoting White v. Unigard Mutual Insurance Co.,
730 P.2d 1014, 1017-18 (Idaho 1986).
Nicholson is consistent with our policy that because of
the special nature of insurance contracts, they are particularly
susceptible to public policy considerations. Hillman v.
Nationwide Mutual Fire Ins. Co., 758 P.2d 1248, 1250 (Alaska
1988) (invalidating uninsured motor vehicle exclusion on the
basis of public policy); CHI of Alaska, Inc. v. Employers
Reinsurance Corp., 844 P.2d 1113 (Alaska 1993) (granting an
insured the unilateral right to select independent counsel in
cases where an insurer has reserved its rights, despite the
insurer's express contractual right to select counsel); Estes v.
Alaska Ins. Guar. Ass'n, 774 P.2d 1315 (Alaska 1989) (concluding
that a time limitation on commencement of suit will only be
enforced on a showing of prejudice); Alaska Energy Authority v.
Fairmont Insurance Co., 845 P.2d 420 (Alaska 1993) (concluding
that the failure to file suit within the time limitation of the
contract does not bar a claim without a showing of prejudice).
In spite of these cases, this court now concludes that
as long as there exists a reasonable contractual basis for a
denial of liability, a bad faith claim sounding in tort will fail
regardless of any evidence of subjective bad faith. The court
interprets our adoption of Gruenberg as "seem[ing]" to require
proof of both objectively unfair conduct and subjective bad
faith. Gruenberg was the first case to hold that a breach of the
covenant of good faith and fair dealing sounds in tort, giving
the plaintiff broader remedies than those in contract. While in
Gruenberg there may have been evidence of both unfair conduct and
bad faith, the court clearly articulated "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." 510 P.2d at 1037 (emphasis added).
Instead of providing more protection for an insured by
adopting the proposition that a bad faith claim may sound in
tort, in fact we are providing less protection. In the context
of first party insurance claims, the court has actually limited
the covenant of good faith and fair dealing by imposing a twofold
requirement which it has not required in any other contract. The
covenant of good faith and fair dealing is meaningless if
existence of a reasonable contractual basis for denial of
liability is alone sufficient to defeat a bad faith claim.17
This is contrary to our previous holdings. For
example, in State Farm Mutual Auto Insurance Co. v. Weiford, 831
P.2d 1264, 1266 (Alaska 1992), we reaffirmed that "bad faith
claims brought by insured persons against their insurance
companies may be brought in tort as well as in contract." We
vacated the award of punitive damages because "the $20,000 offer
clearly was reasonable. While the suspect note to the file might
be reflective of bad motive, since the offer in question was
reasonable, the note cannot independently form the basis for a
punitive damages award." Id. at 1268. However, we noted that
"the crux of Weiford's bad faith case was the testimony of her
expert, George Broatch. Broatch testified that no single act of
State Farm amounted to bad faith, but that cumulatively State
Farm's actions did: 'It--to me it was a matter of the company
philosophy. I don't really have any quarrel with the day to day
handling of the file particularly.'" Id. at 1267. We concluded
"that there was sufficient evidence to support a jury finding
that State Farm acted in bad faith." Id. at 1269. The court is
correct in rejecting the Hillmans' assertion that reasonableness
is always a question of fact for the jury. But the proper
question is whether a reasonable jury could conclude that
Nationwide acted unreasonably, i.e. either objectively unfairly
or with subjective bad faith.
In reviewing a grant of summary judgment we view the
facts in the light most favorable to the non-prevailing party.
Loyal Order of Moose, 797 P.2d at 628. The Hillmans presented
evidence that Nationwide denied coverage before making an
investigation of the facts or law. Nationwide violated its
internal guidelines and policies which guarantee fair, honest and
reasonable claims handling. Specifically, Nationwide: (1)
failed to follow internal procedures when local adjustors failed
to consult with higher echelons in the company before denying the
death claim; (2) failed to resolve all reasonable doubts about
coverage in favor of the policy holder; (3) failed to explain why
a nonwaiver agreement was required; (4) obtained a legal opinion
in order to justify denying the claim; (5) failed to provide the
Hillmans with previously promised information from its attorney;
(6) lied about whether a letter from its attorney was available;
(7) stonewalled for four years because of alleged vindictiveness
toward the Hillmans' attorneys; and, (8) even after authority to
concede coverage and settle the case was granted, the Regional
Claims Attorney unilaterally decided not to settle.
Taking these assertions as true,18 a reasonable jury
could conclude that by failing to investigate, lying to the
policy holder and stonewalling for four years, Nationwide acted
with subjective bad faith. The grant of summary judgment was
improper. Yet this court concludes that as long as Nationwide
had a reasonable contractual basis for denying liability,
evidence of bad faith and unfair dealings "have little or no
relevance."
The court applies this same standard to the question of
arbitration. Again, on summary judgment we view the facts in a
light most favorable to the non-prevailing party. Loyal Order of
Moose, 797 P.2d at 628. The Hillmans claim Nationwide insisted
on arbitration in order to discourage the Hillmans from
proceeding with their legitimate claims, and because of
vindictiveness and aggravation with Hillmans' attorneys. Again,
a reasonable jury could conclude that Nationwide acted with
subjective bad faith. Yet because Nationwide's insurance policy
contained an arbitration provision, "Nationwide's decision to
demand arbitration was reasonable and therefore not in bad
faith." This conclusion ignores Loyal Order of Moose, 797 P.2d
at 629, which specifically states that even though a surety may
have a right to arbitration, "the demand for arbitration may not
itself be made in bad faith, or serve to defeat an otherwise
timely and sufficient bad-faith claim." The court's conclusion
again effectively eliminates the covenant of good faith and fair
dealing.
The Hillmans presented evidence from which a reasonable
jury could conclude Nationwide acted with subjective bad faith.
There are genuine issues of material fact which preclude summary
judgment.
_______________________________
1 The pertinent exclusion stated that
[t]his Uninsured Motorists insurance
does not apply as follows:
. . . .
4. It does not apply to bodily injury
suffered while occupying a motor vehicle
owned by you or a relative living in your
household, but not insured for Uninsured
Motorist coverage under this policy. It does
not apply to bodily injury from being hit by
any such vehicle.
(Emphasis deleted.)
2 In Hillman I, we rejected the Hillmans' argument that
Nationwide had waived its right to arbitration. Hillman I, 758
P.2d at 1253. The trial court held that although "'Nationwide
acted in bad faith in failing to disclose the availability of the
arbitration procedure in four separate pieces of correspondence
to Mrs. Hillman,' arbitration should proceed because the Hillmans
were represented by counsel who 'simply made a calculated
decision to attempt to obtain relief through the court system,
knowing that the policy actually required dispute resolution
through arbitration.'" Id. The court added that since "'none of
the litigants herein has clean hands,' '[t]he balance tips in
favor of submitting appropriate issues to the contractually
mandated arbitration process.'" Id. We found no error in the
trial court's reasoning or conclusion.
3 On June 12, 1989, Judge Gonzalez granted Nationwide's
motion for partial summary judgment and barred the Hillmans from
recovering arbitration damages for emotional distress. The
arbitration award was consequently reduced to $55,000.
4 What these claims consisted of is not brought into focus
in the briefs before us.
5 The jurisdictions that have followed Gruenberg are listed
in William M. Shernoff, et al., Insurance Bad Faith Litigation,
5.01 at 5.3 n.4 (1984 and Supp. 1992).
6 The Wisconsin Supreme Court may have modified the Anderson
standard. In Fehring v. Republic Insurance Co., 347 N.W.2d 595
(Wis. 1984), the court held that proof that a reasonable insurer
would not have acted as the defendant did under the circumstances
establishes bad faith.
7 In Loyal Order of Moose v. International Fidelity
Insurance Co., 797 P.2d 622 (Alaska 1990), a case involving the
somewhat analogous relationship between a surety and its obligee,
we stated: "A surety may satisfy its duty of good faith to its
obligee by acting reasonably in response to a claim by its
obligee, and by acting promptly to remedy or perform the
principal's duties where default is clear." Id. at 628. In a
footnote, we quoted an Arizona decision, Dodge v. Fidelity and
Deposit Co. of Maryland, 778 P.2d 1240 (Ariz. 1989), which uses
language mirroring the rule of law employed in today's opinion:
"So long as a surety acts reasonably in response to a claim made
by its obligee, the surety does not risk bad faith tort
liability." Loyal Order of Moose, 797 at 627 n.8.
8 The Hillmans maintain that Nationwide's District Claims
Manager and its Regional Claim Attorney concede that Nationwide
failed to follow its own policies and procedures in all these
respects.
9 This conclusion is consistent with State Farm Mutual
Automobile Insurance Co. v. Bass, 201 S.E.2d 444 (Ga. 1973) and
Aetna Casualty & Surety Co. v. Superior Court, 778 P.2d 1333
(Ariz. App. 1989). In both cases, courts found that an insurer
was not liable for bad faith when it denied coverage to an
insured on the basis of an uninsured motorist exception which was
later held invalid. See also Hanson v. Prudential Insurance Co.
of America, 772 F.2d 580 (9th Cir. 1985) (applying California
law).
10 The report stated that Julie had "failed to yield when
entering Long Lake Road from a side road." The Hillmans note
that the information available to Nationwide when it insisted on
arbitration was insufficient to prove that Amis was not at all at
fault. This is true but irrelevant. Nationwide was entitled to
arbitration if it could reasonably maintain that Amis was not
completely at fault.
11 The total consisted of $44,448.57 in costs and $110,451.00
in fees. The attorney's fees award was 40% of the total amount
of attorney's fees Nationwide incurred after July 1988.
12 Alaska R. Civ. P. 82(a)(2) states:
In actions where the money judgment
is not an accurate criterion for determining
the fee to be allowed to the prevailing side,
the court shall award a fee commensurate with
the amount and value of legal services
rendered.
13 Buoy v. ERA Helicopters, Inc., 771 P.2d 439 (Alaska 1989),
is not a case in which the plaintiff received an affirmative
recovery. The $141,676 jury verdict the plaintiff received in
that case was reduced to nothing because of prior settlements
which the plaintiff had made. Id. at 441.
14 In addition, in Hutchins the defendant had made an offer
of judgment under Civil Rule 68 for $35,000 and therefore under
that rule he was in any case entitled to attorney's fees incurred
after the date of the offer. Id. at 1203.
15 The fact that Nationwide made an offer of settlement of
$50,000 is irrelevant to the question of who the prevailing party
is since this offer was not made under Civil Rule 68. Myers v.
Snow White Cleaners & Linen Supply, Inc., 770 P.2d 750, 753
(Alaska 1989) ("no offers not in compliance with Civil Rule 68
should be considered in determining questions of costs and
attorney's fees").
16 In addition, we decline to address the Hillmans' claim
that several of the superior court's evidentiary rulings were an
abuse of discretion. Even if the superior court's rulings
concerning the admissibility of evidence during trial were
erroneous, such error was harmless where the case was never
submitted to the jury.
17. This court stated in State Farm Mutual Auto Insurance
Co. v. Weiford, 831 P.2d 1264, 1266 (Alaska 1992), that an
insured may bring a bad faith claim "in tort as well as in
contract." The duty of good faith and fair dealing implied in
every contract requires the insurer to act with subjective good
faith and objective fairness, unlike the tort of bad faith which,
as now defined, permits the insurer to act with subjective bad
faith. If Weiford is still a correct statement of the law, then
the proper disposition of this case would be to remand it to the
superior court for further proceedings. The Hillmans should be
permitted to proceed on a claim based on a breach of the implied
covenant of good faith and fair dealing arising out of the
contractual relationship, distinct from a claim based on the tort
of bad faith. They have set forth specific facts which, viewed
in a light most favorable to them, raise genuine issues of
material fact. Contractual damages based on a breach of the
implied covenant of good faith and fair dealing may be narrower
in scope than tort damages, yet some relief may be available to
the Hillmans. However, the correctness of the statement in
Weiford is now doubtful, despite this court's assertion that it
is declining to "comprehensively"define the elements of the tort
of bad faith.
18. While the Hillmans have not at this point presented
convincing evidence of their assertions, they have set forth
specific facts which, viewed in the light most favorable to the
Hillmans, raise a genuine issue of fact.
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