Often we associate bringing a bad faith claim against an insurer with a breach of contract claim. If a party is not aggrieved to the point of a breach of a contract, how could they maintain a bad faith action? The Supreme Court of South Carolina answered that question in Tadlock Painting Company v. Maryland Casualty Company,1 and Nichols v. State Farm Mututal Automobile Insurance Company.2
In Tadlock, a third-party action, the insured, Tadlock Painting Company, caused damage to several automobiles with “overspray”—which is paint the wind picks up and carries off during spray painting. While Tadlock was painting at a job site (Cargill), overspray paint was deposited over Cargill’s employees’ cars. After a lengthy negotiation with the insurance company, which saw Tadlock lose Cargill as a customer, they settled each of the 90 claims for under $500 (the deductible amount).
Tadlock then brought a bad faith action against Maryland Casualty Company. The jury awarded Tadlock $15,552 actual damages and $200,000 punitive damages.
In Nichols, a first-party action, the insured brought a bad faith action against State Farm for refusal to pay first-party benefits under the policy. Nichols’ 1969 Chevy Corvette was stolen from a parking lot. When recovered, it had sustained heavy damage. Nichols filed a claim with State Farm who refused to pay. This caused the car to not be repaired for seven months.
Nichols then filed a Breach of Contract and a Bad Faith claim against State Farm. The jury awarded Nichols $10,000 for actual damages and $10,000 for punitive damages.
Both Tadlock and Nichols cited to a California case, Gruenberg v. Aetna Insurance Company.3 The Gruenberg court stated that a State should recognize an action for bad faith in an insurer’s handling of a claim for first party benefits. They went on to say that an implied covenant of good faith and fair dealing that neither party will do anything to impair the other’s rights to receive benefits under the contract. Breach of this duty by an insurer’s bad faith refusal to settle the claim of its insured renders the insurer liable in tort for all consequential damages; actual damages are not limited by the contract.
Following the reasoning in Gruenberg, the Nichols court held:
[I]f an insured can demonstrate bad faith or unreasonable action by the insurer in processing a claim under their mutually binding insurance contract, he can recover consequential damages in a tort action. Actual damages are not limited by the contract. Further, if he can demonstrate the insurer’s actions were willful or in reckless disregard of the insured’s rights, he can recover punitive damages.4
Similarly, the Tadlock court recognized a cause of action for breach of the implied covenant of good faith and fair dealing by an insured against his or her insurer for consequential damages allegedly suffered because of the insurer’s bad faith handling of third-party claims.5
I leave you with a quote from one of the leaders of good faith, Mahatma Gandhi: “Nothing can be more hurtful to an honorable man than that he should be accused of bad faith.”
1 Tadlock Painting Co. v. Maryland Cas. Co., 322 S.C. 498 (S.C. 1996).
2 Nichols v. State Farm Mut. Auto. Ins. Co., 279 S.C. 336 (S.C. 1983).
3 Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566 (1973).
4 Nichols, at 340.
5 Tadlock, at 504.