In Beck v. Farmers Insurance Exchange, 701 P.2d 795 (Utah 1985), the Court described some of the duties owed by an insurer to its insured, which duties depend, to some extent, on the type of coverage the insured has under his insurance policy.
In that case, the Court distinguished between two types of insurance coverage: first-party coverage, which refers to "an insurance agreement where the insurer agrees to pay claims submitted to it by the insured for losses suffered by the insured," and third-party coverage, which refers to an agreement wherein "the insurer contracts to defend the insured against claims made by third parties against the insured and to pay any resulting liability, up to the specified dollar limit." Id. at 799 n.2.
The Court held that "as parties to a contract, the insured and the insurer have parallel obligations to perform the contract in good faith, obligations that inhere in every contractual relationship." 701 P.2d at 801.
The Court stated that this "implied obligation of good faith performance contemplates, at the very least, that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim." Id.
The Court explained that "these performances are the essence of what the insured has bargained and paid for, and the insurer has the obligation to perform them. When an insurer has breached this duty, it is liable for damages suffered in consequence of that breach." Id.
In sum, the Court addressed the type of damages available for an insurer's breach of duty in a first-party situation. We held that, under first-party coverage, "the duties and obligations of the parties are contractual rather than fiduciary," and that "without more, a breach of those implied or express duties can give rise only to a cause of action in contract, not one in tort."
We also addressed in Beck the type of damages that may arise from an insurer's breach of duty with regard to third-party coverage. Specifically, we observed that "in a third-party situation, the insurer controls the disposition of claims against its insured, who relinquishes any right to negotiate on his own behalf," and that "an insurer's failure to act in good faith exposes its insured to a judgment and personal liability in excess of the policy limits." Id. at 799.
By undertaking a duty to defend the insured, "the insurer incurs a fiduciary duty to its insured to protect the insured's interests as zealously as it would its own; consequently, a tort cause of action is recognized to remedy a violation of that duty." Id.
The Court laid out the measure of consequential damages available for an insurance company's refusal to investigate, evaluate, bargain, or settle a first-party insurance claim in good faith. 701 P.2d at 802.
In doing so, we refused to adopt a tort approach for analyzing such bad faith claims, relying instead on the implied covenant of good faith and fair dealing that inheres in every contract. Id. at 799-800.
The Court recognized that other courts had adopted the tort approach as a means of providing an insurer with incentive "to promptly and faithfully fulfill its contractual obligations," but we reasoned that this "practical end . . . can be accomplished as well through a contract cause of action, without the analytical straining necessitated by the tort approach." Id. at 799.
In Beck, the Court stated:
"The implied obligation of good faith performance contemplates, at the very least, that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim. The duty of good faith also requires the insurer to deal with laymen as laymen and not as experts in the subtleties of law and underwriting and to refrain from actions that will injure the insured's ability to obtain the benefits of the contract. These performances are the essence of what the insured has bargained and paid for, and the insurer has the obligation to perform them." (Id. at 801.)
In Beck, the defendant argued that a first-party bad faith claim should be allowed only where some additional showing is made. Id. at 798.
The Court declined to limit the remedy for bad faith, holding that "the refusal to bargain or settle, standing alone, may, under appropriate circumstances, be sufficient to prove a breach." Id.
The Court reasoned that:
"An insured who has suffered a loss and is pressed financially is at a marked disadvantage when bargaining with an insurer over payment for that loss. Failure to accept a proffered settlement, although less than fair, can lead to catastrophic consequences for an insured who, as a direct consequence of the loss, may be peculiarly vulnerable, both economically and emotionally. The temptation for an insurer to delay settlement while pressures build on the insured is great, especially if the insurer's exposure cannot exceed the policy limits." Id.