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UNREASONABLE DELAY IN CLAIM PAYMENT: EVENTUAL PAYMENT DOES NOT RELEASE INSURER FROM BAD FAITH LIABILITY


By Mike Abourezk and Marialee Neighbours

In South Dakota, the eventual payment of a plaintiff's insurance claim does not extinguish the wholly separate tort claim of bad faith. The South Dakota Supreme Court specifically embraced this principle in Champion v. U.S.F.& G. when it concluded:

. . .an insurer's violation of its duty of good faith and fair dealing constitutes a tort, even though it is also a breach of contract. Such tortious conduct is demonstrated where there is unreasonable delay in performing under a contract, including delays in settlement under a liability policy.

399 N.W.2d at 322, citing 16 J.A. Appleman and J. Appleman, Insurance Law and Practice, § 8878.15 at 422-24 (1981)(emphasis added).

Another South Dakota Supreme Court case, Grynberg v. Citation Oil & Gas Corp., 573 N.W.2d 493 (S.D.1997), is instructive on this issue. In Grynberg, the plaintiff alleged claims of fraud, breach of contract and punitive damages. The action arose out of a contract.

In that case, the Court held that it was not a sufficient remedy to permit the intentional tortfeasor, a party to a contract, to simply pay back what is owed under the contract:

In the so-called breach of contract actions that smack of tort we do not think it is enough just to permit the defendant to pay that which the contract required him to pay in the first place. If this were the law, defendant has all to gain and nothing to lose. If he is not caught in the fraudulent scheme, then he is able to retain the resulting dishonest profits. If he is caught, he has only to pay back that which he should have paid in the first place.

Id. at 502.

Emphasizing the appropriateness of punitive damages in such cases, the Court said:

To hold otherwise would give parties to a contract a license to steal, undercutting one of the very policy reasons for withholding punitives, i.e., to "encourage reliance on business agreements." Supra, 17. The twin purposes of punitive damages--deterrence and punishment--are well served in a contract where one party commits an intentional tort like deceit.

Id.

Although Grynberg involved intentional torts of fraud and deceit, its reasoning is just as applicable to insurance bad faith cases.

Other Jurisdictions

Other jurisdictions agree with the rationale expressed in Champion and Grynberg. For instance, in Rawlings v. Apodoca, the Arizona Supreme Court recognized that an insurer's eventual payment of a claim did not release it from bad faith liability:

Thus, in first-party cases also, the insured's eventual performance of the express covenant-by paying the claim-does not release it from liability for bad faith.

726 P.2d 565, 572 (Ariz. 1986).

Continuing, the Court said:

Failure to perform the express covenant to pay the claim is not the sine qua non for an action for breach of the implied covenant of good faith and fair dealing.

Id. at 573 (emphasis in original).

Finally, the Court concluded:

The implied covenant is breached whether the carrier pays the claim or not, when its conduct damages the very protection or security which the insured sought to gain by buying insurance.

Id. (citation omitted). See also Deese v. State Farm Mutual Auto. Ins. Co., 838 P.2d 1265,1269 (Ariz. 1992) (fact that insurer ultimately paid claim did not relieve it of potential liability for bad faith based on its use of improper claims practices); Ania v. Allstate Ins. Co.,161 F.Supp.2d 424, 430 (E.D. Pa. 2001) (bad faith applies equally to unreasonable delay in payment-for all practical purposes, delay functions as equivalent of denial); Maduff v. Life Ins. Co. Of Virginia, 657 F.Supp. 437 (N.D. Ill. 1987) (defendant's motion to dismiss denied because defendant had not justified its failure to pay the plaintiff-two and one-half month delay could be vexatious and unreasonable).

South Dakota Statutes

Several South Dakota statutes impose duties on insurance companies to respond promptly to insurance claims.

S.D.C.L. § 58-33-67 (1) provides that insurers must acknowledge and act within thirty days upon communications with respect to claims.

S.D.C.L. § 58-33-67 (3) provides that it is an unfair practice and a violation of South Dakota statute for an insurance company to fail to give a reasonably prompt and reasonable explanation of the basis for non-payment of a claim.

S.D.C.L. § 58-20-6 provides that no policy of workers' compensation insurance will be issued unless it contains an agreement of the insurer to promptly pay to the person entitled to compensation all installments of the compensation that may be awarded or agreed upon.

 

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