California Insurance Code Section 790.03 - Interpretation
In Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, the Supreme Court addressed the issue of whether plaintiffs may state causes of action for either breach of the implied covenant of good faith and fair dealing or violation of Insurance Code section 790.03 for unfair business practices, when the policy does not provide coverage by its terms.
The Supreme Court agreed with the Court of Appeal's conclusion that "because a contractual obligation is the underpinning of a bad faith claim, such a claim cannot be maintained unless policy benefits are due under the contract. (See, e.g., Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1153.)" (Waller, at p. 35.)
Further, the Supreme Court expressed approval of the notion that "'there can be no cause of action for breach of the covenant of good faith or of any statutory duty' because the insurer defendant had properly denied the claim under the policy." (Ibid.)
The Waller court continued: "It is clear that if there is no potential for coverage and, hence, no duty to defend under the terms of the policy, there can be no action for breach of the implied covenant of good faith and fair dealing because the covenant is based on the contractual relationship between the insured and the insurer. ( Love v. Fire Ins. Exchange, supra, 221 Cal.App.3d 1136, 1151-1153.)
As the Love court observed, its 'conclusion that a bad faith claim cannot be maintained unless policy benefits are due is in accord with the policy in which the duty of good faith is firmly rooted.' ( Id. at p. 1153.)
The legal principle is based on general contract law and the long-standing rule '"that neither party will do anything which will injure the right of the other to receive the benefits of the agreement."' ( Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573, citing Communale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658; see also Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818.)
In sum, the covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct that frustrates the other party's rights to the benefits of the agreement. ( Love, supra, 221 Cal.App.3d at p. 1153.)
Thus, as the Love court noted, when benefits are due an insured, 'delayed payment based on inadequate or tardy investigations, oppressive conduct by claims adjusters seeking to reduce the amounts legitimately payable and numerous other tactics may breach the implied covenant because' they frustrate the insured's right to receive the benefits of the contract in 'prompt compensation for losses.' (Ibid.)
Absent that contractual right, however, the implied covenant has nothing upon which to act as a supplement, and 'should not be endowed with an existence independent of its contractual underpinnings.' (Ibid.)" ( Waller v. Truck Ins. Exchange, Inc., supra, 11 Cal.4th at p. 36.)
In Coleman v. Republic Indemnity Ins. Co. (2005) 132 Cal.App.4th 403, the court held that an insurer's conduct--misleading the plaintiffs as to the applicable statute of limitations and advising the plaintiffs not to obtain the services of an attorney--did not reach the level of outrageousness necessary to support a cause of action for intentional infliction of emotional distress; the plaintiffs' claims were based on violations of statutory duties under Insurance Code section 790.03, and it was "well-settled" that the violation of those statutory duties does not in itself constitute the type of outrageous conduct that will support a cause of action for intentional infliction of emotional distress. (Coleman, supra, 132 Cal.App.4th at pp. 406, 417.)
Similarly, in Ricard v. Pacific Indemnity Co. (1982) 132 Cal.App.3d 886, allegations that the insurer refused to properly investigate a claim and accused the insured of " 'trying to put something over on' " the insurer did not constitute outrageous behavior.
Conversely, as Hailey points out, an insurer's conduct was outrageous in Fletcher v. Western National Life Ins. Co. (1970) 10 Cal.App.3d 376.
In Fletcher, the insurer "embarked upon a concerted course of conduct to induce plaintiff to surrender his insurance policy or enter into a disadvantageous 'settlement' of a nonexistent dispute by means of false and threatening letters and the employment of economic pressure based upon his disabled and, therefore impecunious, condition, (the very thing insured against) exacerbated by the insurer's malicious and bad faith refusal to pay plaintiff's legitimate claim." (Fletcher, supra, 10 Cal.App.3d at p. 392.)