Maryland And Bad Faith:


Time To Complete The Circle by Robert G. Samet


Robert G. Samet is a senior partner with Ashcraft & Gerel, LLP, which concentrates its practice in personal injury litigation, medical malpractice litigation, product liability litigation, mass torts and workers’ compensation, with offices in Maryland, D.C., Virginia and Boston, Massachusetts. Mr. Samet graduated from the University of Baltimore in 1976 and is a member of MTLA.


The law of insurance bad faith can be divided into two basic categories; (1) third party bad faith claims based upon a li- ability insurance (third party insurance) carrier’s failure to offer the policy limit to settle a claim, thereby exposing its insured to a verdict in excess of the policy limit and (2) first party bad faith claims, in which an insured is permitted to main- tain a tort action for bad faith based on the conduct of a first party insurer in ad- ministering a claim.1


The origin of insurance bad faith law


has its roots not in tort or insurance law, but in the 1905 holding of the New York Court of Appeals in Industrial & General Trust v. Tod,2


where the court, in discuss-


ing the contract obligations of trustees of a reorganization committee to bond hold- ers under a reorganization agreement, read into the agreement an implied obli- gation of good faith on the part of the parties to the agreement. Several, subse- quent decisions by the New York courts further developed the then novel idea of a covenant of good faith and fair dealing in all contracts and applied it to insur- ance contracts.3 During this same period, courts across the country were experiencing litigation generated by the conduct of liability in- surance carriers in which their refusal to pay the insurance policy limit in liability claims was exposing their insureds to ver- dicts in excess of the insurance coverage. On strict contract terms these carriers owed no more to their insureds than a duty to defend and a duty to pay amounts up to the insurance policy limit. The dif- ficulty posed by these cases was that the liability insurance carrier retained control over the litigation and the insured was not permitted to settle the case on his own,


1


Stephen S. Ashley, Bad Faith Actions, § 1:01 at 1-2 (1994).


2 180 N.Y. 215, 73 N.E. 7 (1905) 3


Brassil v. Maryland Casualty Co., 210 N.Y. 235, 104 N.E. 622 (1914); Wigand v. Bachmann-Bechtel Brewing Co., 222 N.Y. 272, 118 N.E. 618 (1918); Simon v. Etgen, 213 N.Y. 589, 107 N.E. 1066 (1915).


6


thereby leaving the insured helpless to the whim of the insurer. To compound mat- ters, the insurance carrier’s interests conflicted with that of its insured, because the carrier, in the absence of tort liability, had nothing to lose in trying to “save” money off of the policy limit, while the insured was exposed to the risk of finan- cial ruin by an excess verdict. Courts were troubled by this relationship and the con- duct being demonstrated in litigation, and, while initially denying these claims based upon strict contract principles, be- gan to question whether some tort remedy might not exist. As a result, a body of case law developed nationally in which the courts concluded that as a result of the inherent conflict of interest, a fiduciary relationship existed in which the insurer owed its insured a duty to treat its own insured’s interests with as much care and caution as its own interests and to settle within policy limits when good faith re- quired the same.


The foundation for first party bad faith claims was first placed in a third party bad faith case when the implied covenant of good faith and fair dealing in contracts (found to exist a half century earlier by the New York line of cases noted above) was held to apply to a third party bad faith case. Comunale v. Traders & General In- surance Co.4


Whereas third party bad faith


cases had ordinarily been held to be founded in tort, the court in Comunale was faced with a claim brought outside the two year California statute of limita- tions for torts but within the four year limitations period for contracts in writ- ing. The court, in order to preserve the claim, held that such a claim could be founded on the implied covenant of good faith and fair dealing found in all con- tracts, including insurance contracts, in which the parties to the agreement cov- enant that neither will do anything to


injure the right of the other to receive the benefit of the agreement. 5


Having thus found in all insurance contracts an implied covenant of good faith and fair dealing, it was only a mat- ter of time before the California Supreme Court, in Gruenberg v. Aetna Insurance Co.,6


extended that ruling to a claim


against a first party insurance carrier un- der a fire insurance policy. The Gruenberg decision spawned rulings across the na- tion. Today, a large majority of jurisdictions recognize a tort cause of ac- tion for breach of the implied covenant of good faith and fair dealing in first party insurance policies.7 The Maryland Court of Appeals has recognized a cause of action for third party


5


Maryland, similarly, has numerous rulings to the effect that an implied covenant of good faith and fair dealing exists in all contracts. See, e.g., Suburban Hospital v. Dwiggins, 324 Md. 294, 596 A.2d 1069 (1991); Julian v. Christopher, 320 Md. 1, 575 A.2d 735 (1990); Head v. Head, 59 Md. App. 570, 477 A.2d 282 (1984).


6 7


9 Cal.3d 566, 510 P.2d 1032, 108 Cal. Rptr. 480 (1973)


4 50 Cal.2d 654, 328 P.2d 198 (1958) Trial Reporter


Ashley, supra note 1, at § 1:02 at 4. Several states have created statutory causes of action by either direct enactment of a bad faith cause of action or by creating causes of action for violations of unfair claim settlement practices statutes. Id. at § 2:15 at 58-59. Maryland’s Unfair Claim Settlement Prac- tices statute, Md. Ins. Code Ann. §§ 27-301 - 27-306 (1995-1997)(Supp. 1999) explic- itly states that it neither provides nor pro- hibits a private cause of action for wrongful conduct. Id. at §27-301(b)(2).


Spring 2000


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