According to a recent District of Columbia federal district court case, policyholders may sue their insurers for a breach of the implied contractual covenant of good faith and fair dealing, despite the fact that D.C. does not recognize the tort of bad faith refusal to pay insurance benefits. Depending on the circumstances, they also may be eligible to recover attorneys’ fees.
In Nugent v. Unum Life Insurance Company, 2010 WL 4780847 (D.D.C. Nov. 24, 2010), a physician sued her insurance company when, after extensive delay and mishandling of her claim, it refused to pay benefits under her disability insurance policy. The insurer moved to dismiss certain claims in the plaintiff’s suit, including her claim for breach of the implied covenant of good faith and fair dealing and her claim for attorneys’ fees. The insurer argued that because D.C. does not recognize the tort of bad faith refusal to pay insurance benefits, the plaintiff’s claim for breach of the covenant of good faith and fair dealing was an attempt to seek extra-contractual damages in a contract action, which is not permitted under D.C. law. It also argued that the plaintiff’s claim for attorneys’ fees was contrary to D.C. law, which follows the rule that each litigant must bear his or her own attorney’s fees and litigation costs (i.e., the “American Rule.”)
Rejecting these arguments, the court first held that a claim for breach of the implied contractual covenant of good faith and fair dealing is entirely separate from a bad faith claim based in tort. Under D.C. law, all contracting parties are charged with an implied duty of good faith and fair dealing, and that duty is breached when one of the parties “evades the spirit of the contract, willfully renders imperfect performance, or interferes with performance by the other party.” The court found that the plaintiff’s allegations – that the insurer acted or failed to act in a way that injured or destroyed her rights under the insurance contract – properly stated a claim for breach of the implied covenant of good faith and fair dealing.
Further, the court held that the plaintiff was not precluded from seeking attorneys’ fees, despite the general rule that litigants must bear their own costs of litigation. An exception to that rule, the court stated, is when the defendant’s conduct is oppressive or vexatious. Because the plaintiff alleged conduct by her insurance company which amounted to a vexatious refusal to pay benefits, the court found that the plaintiff had adequately pled a claim for attorneys’ fees.
Policyholders should note that the court’s holding makes policyholders’ rights under D.C. law potentially broader than they are under Maryland law. Maryland, by statute, permits policyholders with a first-party claim under a property or casualty policy to sue for a breach of the insurer’s duty of good faith, and, if that duty is breached, to recover litigation costs and reasonable attorneys’ fees. See Maryland Code, Insurance Article § 27-1001; Courts and Jurisdiction Article § 3-1701. A recent Maryland case clarified that this statute does not permit bad faith suits, litigation costs or attorneys’ fees when suing under a surety insurance policy. See Johns Hopkins Federal Credit Union v. Cumis Ins. Society, Inc. 2010 WL 1258000 (D. Md. March 26, 2010). The Nugent opinion, in contrast, does not limit the right to sue for bad faith to certain types of policies.