DUTY OF GOOD FAITH IS NONDELEGABLE: INSURERS AND SELF-INSURERS CANNOT AVOID BAD FAITH LIABILITY BY DELEGATING RESPONSIBILITY
By Mike Abourezk and Marialee Neighbours
The duty to act in good faith is nondelegable and an insurer or self-insured cannot escape liability for bad faith by delegating its responsibility to attorneys, third-party administrators, or other agents. Majorowicz v. Allied Mutual Ins. Co., 569 N.W.2d 472 (Ct. App. Wis. 1977); Scott Wetzel v. Johnson, 821 P.2d 804 (Colo. en banc 1991).
South Dakota Supreme Court
The South Dakota Supreme Court has recognized that an insurance company can not delegate its good faith duty to investigate an insurance loss to a third party. In Eldridge v. Northwest G.F. Mutual Ins. Co., an insured sued its insurer for the amount required to replace a damaged roof on a property loss claim. 221 N.W.2d 16 (S.D. 1974). On appeal, the Court concluded that the insurer had failed to make a good faith investigation of the insured's claim:
We conclude that defendant failed in its duty to conduct a good faith investigation of plaintiff's claim and that as a result of defendant's refusal to pay the full amount of plaintiff's loss was without reasonable costs.
Id. at 21, citing Brown v. Continental Casualty Co., 209 Kan. 632, 498 P.2d 26 (Kan. 1972)(emphasis added).
In that case, the insurer argued that it should not be held liable for attorney fees because it had engaged a reputable independent adjusting firm to investigate and adjust the loss. However, the Court emphasized that the ultimate failure to make an adequate investigation rests with the insurer:
We do not believe that defendant can insulate itself from liability by delegating its responsibility to investigate claim losses to third parties. While we do not question defendant's good faith in assigning the claim to the independent adjusting firm for investigation reports, ultimately the liability for the adjusting firm's failure to make an adequate investigation of plaintiff's claim of additional damage must rest upon defendant.
Id. (emphasis added).
Although Eldridge was not a bad faith action, the Court's rationale is consistent with South Dakota Supreme Court bad faith holdings.
Nondelegable Duty Of Good Faith Applies to Self-Insurers
In Scott Wetzel Services Inc. v. Johnson, 821 P.2d 804 (Colo. en banc 1991) the Colorado Supreme Court held that a self-insured employer could not relieve itself of its obligation of good faith and fair dealing by contracting out its responsibilities. In that case, the court held that a self-insured employer like a workers' compensation insurance carrier, owed a duty of good faith and fair dealing to its employees. Id. at 811. Recognizing that the duty of good faith is nondelegable, the court said:
We recognize that Safeway, is a self-insured employer, cannot relieve itself of its obligation of good faith and fair dealing by contracting out its responsibilities.
Id., citing Denny's Restaurant Inc. v. Husson, 746 P.2d 63, 65 (Colo. App.1987).
See also Wathor v. Mutual Ins. Admin. Inc., 87 P.3d 559, 562 (Ok. 2004)(Oklahoma Supreme Court affirmed earlier decision that insurer's duty of good faith is nondelegable; insurer cannot escape bad faith liability by delegating tasks to third parties).
Cannot Delegate Good Faith Duty To Attorney
The duty to act in good faith is nondelegable, and an insurer or self-insurer cannot escape liability for bad faith by delegating its responsibilities to third party attorneys. Majorowicz v. Allied Mutual Ins. Co., 212 Wis.2d 513, 569 N.W.2d 472 (Wis. App. 1997). In Majorowicz, an insured brought a bad faith action against his automobile insurance company. On appeal, the insurer argued that the trial court had erred in holding the insurer responsible for the negligence of its counsel in conducting the actual litigation in the case.
The trial court had instructed the jury that: (1.) the relationship between an attorney and his or her client is one of agency, and is governed by the same rules applicable to other agencies; (2.) an insurer's duty to act in good faith in its dealings with its insured is non-delegable; and (3.)an insurer cannot escape liability for bad faith by delegating its responsibilities to attorneys or other agents. 212 Wis. 2d at 523, 56 N.W.2d at 475.
In Majorowicz, the appellate court stressed that an insurer cannot delegate responsibility for performance of its good faith obligation:
Allied cannot practice law. Legal matters affecting the insurance contract are handled by counsel and are delegable. Although Allied must delegate performance of the obligation, it may not delegate the responsibility for the performance of the obligation. . .. Here, we do not address whether the acts of an attorney hired by an insurance company to represent its insured may be imputed to the insurance company in every bad faith case. Instead, the issue for us to decide is whether an insurance company can delegate its duty to act in good faith to the attorney it hires to represent its insured. On the facts before us, we conclude that Allied's duty to act in good faith was non-delegable.
212 Wis. 2d at 528, 56 N.W.2d at 477(emphasis added).
Continuing, the court explained:
Allied failed to properly investigate and evaluate Majorowicz's claim. The ultimate response to act in good faith remains with Allied, even when Allied relied on its attorney's litigation decisions.
Another case relating to the nondelegable duty of good faith is Safeco Ins. Co. v. Ellinghouse, 223 Mont. 239, 725 P.2d 217 (Mont. 1986). In that case, Safeco brought a declaratory judgment action against its insured to determine the existence of coverage. The policy holder counterclaimed for bad faith, fraud, misrepresentation and breach of insurance contract. A judgment awarding punitive and actual damages was entered in favor of the insured. Safeco appealed.
On appeal, Safeco objected to language in a jury instruction, which said: "if you find attorney Holden was the agent of Safeco, then you must find that Safeco is responsible for all of the acts done by attorney Holden within the scope of his employment and it is responsible for them. The mere fact that Holden is an attorney at law does not excuse Safeco from responsibility." 223 Mont. at 252, 725 P.2d at 225.
Safeco contended that it should not be punished for attorney Holden's alleged improprieties or breach of duty. The Montana Supreme Court disagreed:
Safeco's argument it should not be charged with its attorney's actions, but rather that Ellinghouse has a remedy in a separate action against attorney Lon Holden, comes close to being part of the twilight zone. Safeco sold the policy, accepted coverage for months, hired Holden and then repudiated coverage.
Continuing, the Court concluded:
Safeco attempts to characterize Holden as an independent contractor, thereby absolving itself from liability for any mistakes he may have made. The attempt fails. Safeco cannot insulate itself from its own bad faith simply by renouncing an agency relationship.
Id. See also Smoot v. State Farm Mutual Auto. Ins. Co., 299 F.2d 525, 530 (5th Cir. 1962)( "Those whom the Insurer selects to execute its promises, whether attorneys, physicians, no less than company-employed adjustors, are its agents for whom it has the customary legal liability); Stumpf v. Continental Casualty Co., 102 Or. App. 3022, 794 P.2d 1228 (Or. App. 1999)( "[W]e apply what appears to be the rule in the majority of jurisdictions: An insurer may be vicariously liable for the actions of its agents, including counsel that it hires to defend its insured.")
Clearly, an insurer can not be absolved from its duty of good faith simply because it delegates its responsibilities to third parties, including its attorney.