Pursuant to Utah Code Ann. § 31A-26-303 (3), “ . . . the following is an unfair claim settlement practice if committed or performed with such frequency as to indicate a general business practice by an insurer or persons representing an insurer: . . . (c) compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than amounts ultimately recovered in actions brought by those insureds when the amounts claim were reasonably near to the amounts recovered; . . . (e) failing to promptly provide to the insured a reasonable explanation of the basis for denial of a claim or for the offer of a compromise settlement; . . . or (h) not attempting in good faith to effectuate a prompt, fair, and equitable settlement of claims in which liability is reasonably clear.” This section does not create any private cause of action. § 31A-26-303 (5).
Utah courts have rejected to extend the cause of action for bad faith to first-party cases and have instead held that the good faith duty to bargain or settle under an insurance contract is only one aspect of the duty of good faith and fair dealing implied in all contracts and that a violation of that duty gives rise to a claim for breach of contract. Beck v. Farmers Ins. Exch., 701 P.2d 795 (Utah 1985). The Beck court reasoned that in a first-party relationship between an insured and its insured, the duties and obligations of the parties are contractual rather than fiduciary. Id. at 800. Thus, without more, a breach of the implied or express duties can give rise only to a cause of action in contract, not one in tort. Id.
In the third-party context, the Supreme Court of Utah has indicated that because a third-party insurance contract obligates the insurer to defend the insured, the insurer incurs a fiduciary duty to its insured to protect the insured’s interest as zealously as it would its own, and as such, a tort cause of action is recognized to remedy a violation of said duty. Ammerman v. Farmers Ins. Exch., 19 Utah 2d 261 (1967). Moreover, an insurer owes its insured a duty to accept an offer of settlement within the policy limits when there is a substantial likelihood of a judgment being rendered against the insurer in excess of those limits. Campbell v. State Farm Mut. Auto. Ins. Co., 840 P.2d 130, 193 Utah Adv. Rep. 19 (Ct. App. 1992) (citing to Larraburu Bros., Inc. v. Royal Indem. Co., 604 F.2d 1208 (9th Cir. 1979)). The test of the insurer’s conduct is one of reasonableness. Id. (citing to Larraburu, 604 F.2d at 1212; Memphis Bank & Trust Co. v. Tennessee Farmers Mut. Ins. Co., 619 S.W.2d 395 (Tenn. Ct. App. 1981); Crisci v. Security Ins. Co., 66 Cal. 2d 425 (1967)).
Chartwell Law represents the interests of insurers and employers, as such, we continue to continue to monitor the legal landscape. If you have any questions about issues associated with right of action for bad faith claims, our attorneys are available to help. Please contact your Chartwell Law attorney.