Parties to Insurance Contract Alone Can Commit Bad Faith

Attorneys May Not Be Sued for the Tort of Bad Faith

For many years lawyers for policy holders have sued insurer's lawyers for the tort of bad faith to avoid federal court. I was sued dozens of times in spurious lawsuits claiming that drafting a denial letter was sufficient to sue me personally as the lawyer for an insurer for the tort of bad faith. In so doing the suits almost invariably drove a conflict between the lawyer and his or her client although the lawyer was not a party to the contract of insurance.

The California Supreme Court resolved the issue in a case called Jerome Gruenberg v. Aetna Insurance Company et al., 9 Cal.3d 566, 510 P.2d 1032, 108 Cal.Rptr. 480, Supreme Court of California, In Bank. (June 11, 1973.)

FACTS

Gruenberg sued his insurers and their lawyers for the tort of bad faith after his claim for fire damage to his bar, the Brass Rail, was damaged by fire. The insurers engaged the services of defendant P. E. Brown and Company (Brown). Carl Busching, a claims adjuster employed by Brown, went to the Brass Rail to investigate the fire and inspect the premises. While he was there, he stated to an arson investigator of the Los Angeles Fire Department that plaintiff had excessive coverage under his fire insurance policies. Eventually the premises were locked, and nothing was removed until November 14, 1969, when Busching authorized the removal of the rubble and debris.

Gruenberg was eventually charged in a felony complaint with the crimes of arson (Pen.Code, § 448a) and defrauding an insurer (Pen.Code, § 548).

Defendant insurance companies also retained attorney Donald Ricketts who demanded in writing that plaintiff appear on December 12, 1969, to submit to an examination under oath and to produce certain documents. On November 26, 1969, plaintiff's attorney responded by letter to Ricketts explaining that he had advised plaintiff not to make any statements concerning the fire loss while criminal charges were pending. The letter also requested that the insurers waive the requirement of an examination until the criminal charges lodged against plaintiff were concluded. Ricketts refused the request and warned that failure to appear for the examination would void coverage under the policies. Gruenberg did not appear and Rickets, on behalf of the insurers denied the claim.

The charge against Gruenberg were dismissed by the magistrate for lack of probable cause.

DISCUSSION

The Supreme Court only ruled on the sufficiency of these allegations which of course must be sustained by proper proof.

Plaintiff alleged that Brown, the insurance adjusting firm, and its employee, Busching, and Cummins, the law firm, and its employee, Ricketts, were the agents and employees of defendant insurers and of each other and were acting within the scope of that agency and employment when they committed the acts attributed to them. Gruenberg contended that these non-insurer defendants breached only the duty of good faith and fair dealing.

The Supreme Court concluded that the non-insurer defendants were not parties to the agreements for insurance; therefore, they are not, as such, subject to an implied duty of good faith and fair dealing. Moreover, as agents and employees of the defendant insurers, they cannot be held accountable on a theory of conspiracy.

Plaintiff sufficiently pleaded a cause of action against the insurers for breach of the covenant. However,  since the remaining defendants were not subject to the implied duty arising from the contractual relationship, the complaint does not state sufficient facts to constitute a cause of action against them and that the judgment of dismissal in their favor was proper.

ZALMA OPINION

The tort of bad faith is a mix of contract and tort. One cannot commit the tort unless that person or entity is a party to the contract of insurance. Therefore, the lawyers and adjusters were dismissed since they were charged with a tort they could not commit. I personally was sued multiple times as the lawyer for an insurer who denied a claim only to defeat those suits with a motion for summary judgment and a declaration that "I am not now, nor have I ever been, an insurer." I then, in an attempt to stop spurious lawsuits, sued the lawyers who filed suits against me for malicious prosecution. I would recommend the same to any lawyer sued for bad faith, a tort that an insurer's lawyer cannot commit.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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