SEPTEMBER 2017 BAD FAITH CASES: INSURED STATED CLAIMS FOR STATUTORY BAD FAITH IN CONTEXT OF MULTIPLE POLICIES, AND CONTRACT BASED BAD FAITH WHERE BAD FAITH CONDUCT MIGHT DIFFER FROM CONDUCT BREACHING CONTRACT (Middle District)
Plaintiffs sued defendant life insurer as beneficiaries of a term life insurance policy issued to the insured. The insurer denied payment of full death benefits due to a suicide exclusion in the policy.
The insured entered into the original policy in September 1986. This policy contained a death benefit of $25,000. Insurer then increased this benefit to $100,000 in December of 1995 upon the insured’s request. In August of 2007, the insurer issued a replacement policy to the insured, also with a death benefit of $100,000. The insured committed suicide in May 2009, and the insurer only paid out $288.54, which represented the premiums paid by the insured on the replacement policy, plus 4.5% interest. The suicide exclusion clause read:
“If the insured dies by suicide while sane or insane or by intentional self-destruction while insane, we will not pay any death proceed payable on amounts of insurance which have been in effect for less than 2 years. If the suicide or intentional self-destruction is within the first 2 contract years, we will pay as death proceeds the premiums you paid.”
The plaintiffs sued for breach of contract, unjust enrichment, promissory estoppel, breach of the implied covenant of good faith and fair dealing, and bad faith.
As to the bad faith claim, the plaintiffs’ argued that because the insured maintained $100,000 in coverage since 1995, the insurer’s denial is “manifestly unreasonable, and constitutes a frivolous and unfounded refusal to pay because it is directly contradicted by the language in the policy.” Plaintiffs’ further argued that insurer either knew or should have known that its refusal was unreasonable, frivolous, and unfounded. Insurer argued that it based its denial of full death benefits on the second sentence in the suicide exclusion, and thus the beneficiaries were only entitled to the premiums paid on the August 2007 replacement policy.
The Court found that at this early stage in the litigation, and for Federal Rule of Civil Procedure 12(b)(6) purposes, “Plaintiffs plausibly allege facts, which the Court must accept as true, [that] support the statutory bad faith claim . . .” against the insurer.
The insurer argued that the Court should dismiss the plaintiff’s breach of the implied covenant of good faith and fair dealing claim, because that claim is subsumed in a breach of contract claim. The Court held, however, that “[n]othing in the case law . . . bars a plaintiff from bringing a cause of action for breach of contract and a cause of action for breach of the duty of good faith and fair dealing when those two actions are based on separate conduct.”
The Court explained that at this early pleading stage, it is not clear that the same conduct forms the basis for both the breach of contract and breach of the covenant of good faith and fair dealing claims. Thus, the Court denied insurer’s motion to dismiss as to that claim.