Most bad faith cases deal with an insurance company’s duty to the insured after a loss occurs and a claim is filed. Although a case out of the Appellate Court of Illinois, Second District, is not a bad faith case, it addresses an allegation that the carrier breached its duty to the insured by selling insufficient insurance to the homeowners. Did the Illinois Appellate Court determine that an insurance company owes an insured a duty of good faith before the policy is issued? Can a subsequent bad faith case arise from such an allegation?
In Nielsen, et al. v. United Services Automobile Association, 612 N.E.2d 526 (1993), the Illinois Appellate Court reviewed the circuit court’s decision to dismiss the Insureds’ complaint against United, which included counts for the following: breach of contract, breach of custom and usage with the strength of law, breach of implied warranty, breach of fiduciary duty, and negligence. I will address the breach of contract claim in this post.
The Insureds alleged that United induced them to discontinue their then-existing homeowner’s policy by written promotional sales communications promising better insurance and service. The policy provided up to $40,000 of fire insurance coverage and personal property coverage of up to 50% of the structural fire damage coverage. For several years, United did not increase the amount of coverage provided by the policy. United then unilaterally added an “Adjusted Building Cost Endorsement” (the “Endorsement”) to the policy which increased the maximum fire insurance coverage.
While the policy was in force, a fire destroyed the Insureds’ residence and its contents. By that time, the Endorsement had increased the policy’s fire insurance coverage to a maximum of $44,000. The fire damage to the residence and its contents exceeded the policy limits for these losses by $45,000. As a result, the Insureds were underinsured.
Count I of the complaint sounds in breach of contract. Plaintiffs [the Insureds] allege that defendant breached a duty to sell plaintiffs fire insurance coverage for the “full, fair, insurable value” (full coverage) of plaintiffs’ residence. Plaintiffs contend that this duty arose from the fact that defendant sold insurance directly to plaintiffs without using brokers or local agents; that defendant should therefore be held to the same standard as a broker or local agent; and that brokers and local agents are required to sell fire insurance only in full coverage amounts.
The Illinois Appellate Court agreed with the circuit court’s finding that, as a matter of law, no such duty could arise under the contract as alleged.
To plead properly a cause of action in breach of contract, a plaintiff must allege the essential elements of the cause of action [citation omitted]. The essential elements for breach of contract are: (1) the existence of a valid and enforceable contract; (2) performance by the plaintiff; (3) breach of the contract by the defendant; and (4) resultant injury to the plaintiff [citation omitted]. A defendant’s failure to comply with a duty imposed by the contract gives rise to the breach [citation omitted]. In alleging a breach of contract by a defendant, a plaintiff’s pleadings must allege facts sufficient to indicate the terms of the contract claimed to have been breached.
The Court explained that the Insureds’ complaint did not allege facts sufficient to indicate the contract created a duty for defendant to sell the Insureds only a full coverage policy. The Insureds did not allege that they requested or that United promised to provide coverage greater than that provided by the policy, and they did not allege that the policy itself required United to provide full coverage. The Court also noted that the Insureds did not cite any authority for their contention that brokers and agents must sell only full coverage policies, nor did they cite any authority for their position that this purported duty should be imputed to a direct-sales insurer as part of an insurance contract.
The Court also pointed out that an insurer does not have a duty to review the adequacy of an insured’s coverage when a policy is renewed. On the contrary, the Court explained that insured parties have the burden to know the contents of their insurance policies. An insurer does not have a duty to suggest full coverage, even when the insurer knows the coverage provided is inadequate.
As a result, the Court affirmed the lower court’s dismissal of the Insureds’ complaint. In this case, a bad faith law suit did not follow.
This particular ruling is specific to the Appellate Court of Illinois, Second District. Other jurisdictions may have entirely different rulings based on similar facts or legal issues.