Hawaii Court Holds an Insurance Company Can Be Exposed to Bad Faith Even if It Did Not Issue a Policy

by Cozen O'Connor

A recent Hawaii Supreme Court decision expands bad faith claims in that state, at least with regard to Joint Underwriting Program (JUP) claims. On June 7, 2013, the court issued its opinion in the Willis v. Swain case. --- P.3d --- 2013 WL 2459880 (Hawaii). In what appears to be a change in position, the court held that a cause of action for bad faith is rooted in the “special relationship” of an insurance company and that issuance of an insurance policy is not necessary to bring a bad faith cause of action. Based on an automobile accident victim’s statutory right to insurance, the court allowed the injured person to bring a cause of action for bad faith against the insurance company responsible for coverage for the injured person’s damages, even though no actual insurance policy had been issued to the individual.

The Court Addressed Whether an Insurance Company Can Owe an Extracontractual Duty of Good Faith to a Person to Whom It Did Not Issue an Insurance Policy

The Willis case has its roots in an auto accident. The plaintiff was injured in an auto accident and had a right to insurance via a Hawaii statute that established the Joint Underwriting Program. The JUP provides access to insurance coverage for Hawaiian citizens who would not otherwise be able to afford auto insurance or who are otherwise unable to obtain auto coverage. Every auto insurer in Hawaii is required to participate in the JUP program. A person who receives insurance through the program has a statutory right to insurance from an insurer but does not receive an insurance policy from that insurer. The chief question presented to the Hawaii Supreme Court in Willis was whether an insurance company owes an extracontractual duty of good faith to the participants in the JUP who are seeking coverage from an insurer under the program (the statute does not provide for any extracontractual private cause of action). The court held that insurers participating in the program do owe an obligation of good faith and fair dealing even though there is no underlying contract at issue.

The Court Held that an Insurer’s Extracontractual Duty of Good Faith Can Arise if There Is a Special Relationship Even if There Is No Insurance Policy

The Hawaii Supreme Court analyzed its prior bad faith precedent and concluded that a cause of action for bad faith can arise even if there is no insurance policy. The court ruled that an insurance policy is “not the sine qua non of a bad faith tort claim.” The court explained that “[t]he special relationship between the insurer and the insured and the conduct of the insurer toward the insured is what gives rise to the tort of bad faith, not solely the existence of a contract.” The court held that the JUP creates a special relationship between the insurer and the program participants and is akin to an insurance policy. The Hawaii Supreme Court, therefore, concluded that “the underlying covenant of good faith and fair dealing applies, even in the absence of an actual contract.”

The Dissent Criticized the Majority’s Opinion As Expanding Bad Faith Causes of Action Beyond the Traditional Confines of Contractual Relationships

The dissenting opinion criticized the majority for expanding Hawaii’s bad faith cause of action from one based in contract to one based on a special relationship, saying the “decision expands the bad faith cause of action beyond the traditional confines of contractual relationships and can now arise out of statutorily created relationships.” The dissent characterized the decision as a profound departure from prior precedent, saying “[w]e are aware of no jurisdiction that has recognized the proposition that a covenant of good faith and fair dealing can be implied in a statutorily created relationship without an underlying contract.” The dissent suggested that it was the legislature, not the courts, that should decide whether statutory relationships should give rise to an extracontractual obligation of good faith and fair dealing.

The Willis Decision May Signal a Future Expansion of Hawaii’s Bad Faith Laws into Other Areas Where There Are Special Relationships

Time will tell whether the dissent’s warning about expanding bad faith beyond the Hawaii’s traditional confines of contractual relationships will come to bear. What can be said is that this is a development worth watching for those handling claims in Hawaii. It is also worth watching whether the Willis case will influence any of the other states that have adopted similar joint underwriting programs and associations.



Written by:

Cozen O'Connor

Cozen O'Connor on:

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