Think You Cannot Be Sued For Bad Faith Because You Haven’t Issued A Policy to A Plan Participant? Think Again . . .

Just because there is no insurance policy may not mean there is no cause of action for bad faith according to a recent Hawaii Supreme Court decision analyzing the Joint Underwriting Program (“JUP”) statute.  Willis v. Swain case. — P.3d — 2013 WL 2459880 (Hawaii).  In what appears to be a change in position, 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 concluded “the underlying covenant of good faith and fair dealing applies, even in the absence of an actual contract.”

Based on this expanded view of bad faith, the Court held that an insurer participating in Hawaii’s statutorily created JUP owed a duty of good faith and fair dealing to a program participant even though the insurer did not have an insurance policy with that participant.  Specifically, the Court held that the JUP statute created a “special relationship” between the program participant and the insurer that was akin to a contractual relationship, and therefore the insurer was obligated to act in good faith toward the program participant.

The dissent criticized the majority, saying that 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 went on to note that this is a profound departure from prior precedent and that “[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 Willis case is a landmark decision in Hawaii and a development worth watching for those handling claims in Hawaii.  It is also worth watching whether the Willis case may influence any of the other multiple states that have adopted similar joint underwriting programs and associations.

Let us know if you have seen similar results in your state with regard to statutorily created joint underwriting programs and associations.

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Avoiding Insurance Bad Faith
Cozen O’Connor represents insurance clients in jurisdictions throughout the U.S. against statutory and common law first- and third-party extracontractual claims for actual and consequential damages, penalties, punitive and exemplary damages, attorneys’ fees and costs, and coverage payments. Whether bad faith claims are addenda to a broader coverage matter or are central to the complaint, Cozen O’Connor attorneys know how to efficiently respond to extracontractual causes of action. More
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