Savage v. Educators Insurance Co.

ZIMMERMAN, Chief Justice:

Pat Christine Savage petitioned this court for a writ of certiorari to review the court of appeals’ decision in Savage v. Educators Insurance Co., 874 P.2d 130 (Ct.App.), cert. granted, 883 P.2d 1359 (Utah 1994). In Savage, the court of appeals held that injured workers cannot assert a claim for lack of good faith and fair dealing against their employers’ workers’ compensation insurance carriers. Id. at 132. We affirm.

Savage was employed by the Jordan School District (“the District”) as a bus driver. The District contracted with Educators Insurance Company (“Educators”) to carry the District’s workers’ compensation insurance policy.¹ On January 25, 1987, an automobile hit the school bus Savage was driving. Savage suffered serious injuries. After a disk operation and additional treatments paid for by Educators failed to ease the back pain Savage suffered as a result of the accident, three physicians recommended that Savage have a device known as a dorsal column stimulator implanted. As permitted by its policy with the District, Educators referred Savage to Dr. Gerald Moress for an independent medical examination and evaluation of the need for the implant. Dr. Moress concluded that implanting a dorsal column stimulator would not provide relief from Savage’s back problems and stated that he was unaware of any further available treatment. On the basis of Dr. Moress’s examination, Educators informed Savage that except for continued psychiatric treatment, her employer’s workers’ compensation insurance would not pay for any additional medical treatment.

Savage disputed Educators’ decision not to pay for the dorsal column stimulator and timely filed a claim with the Industrial Commission of Utah (the “Commission”). No claim had been filed theretofore because Educators had paid Savage’s claims voluntarily. The matter never came on for hearing. After some months, Educators, Savage, and the Employers’ Reinsurance Fund agreed to stipulated findings and an order in settlement of Savage’s claim pending before the Commission. As part of that settlement, Educators agreed to pay for Savage’s disputed medical expenses, including those incurred for a dorsal column stimulator.

Savage then sued Educators in the district court, alleging a breach of the covenant of good faith and fair dealing by Educators in processing her claim and seeking consequential and punitive damages. Educators moved to dismiss, which prompted Savage to file an amended complaint. The amended complaint alleged breach of contract, breach of the covenant of good faith and fair dealing, intentional infliction of severe emotional distress, tortious or bad faith conduct, breach of fiduciary relationship, and interference with a protected property interest. Educators again filed a motion to dismiss, which the trial court granted. The court entered a final order dismissing Savage’s amended complaint with prejudice.

Savage appealed the dismissal to this court, and we poured the appeal to the court of appeals. The court of appeals affirmed on the ground that Savage lacked the privity of contract with Educators necessary to support an action for breach of the covenant of good faith and fair dealing in adjusting her claim.² Savage, 874 P.2d at 132. The court of appeals noted that the issue before it had already been ■ addressed in Pixton v. State Farm Mutual Automobile Insurance Co., 809 P.2d 746 (Utah Ct.App.1991). In Pixton, an injured motorist attempted to recover from the negligent driver’s insurance company, State Farm. In denying the injured motorist a cause of action against State Farm for violating the covenant of good faith and fair dealing in handling the claim, the court of appeals recognized that the “duty of good faith and fair dealing [is] a contractual duty running from the insurer to its insured.” Id. at 749. The court of appeals emphasized that “ ‘[i]n order to maintain an action under a contractual theory of insurer bad faith, the parties must be in privity of contract at the time of the alleged wrong.’” Id. (quoting Amica Mut. Ins. Co. v. Schettler, 768 P.2d 950, 958 (Utah Ct.App.1989)). The plaintiff was not in privity and was denied the right to bring the claim. Id. at 749-51.

In light of its decision in Pixton, the court of appeals in the instant case held:

In the present case, Ms. Savage is a third-party claimant against Educators. Consequently, Ms. Savage and Educators share no privity of contract; rather, that privity runs between Educators and the District. Therefore, given the holding of Pixton, and the cases cited therein, we affirm the trial court’s ruling.

Savage, 874 P.2d at 132. We granted certio-rari.

We first state the appropriate standard of review. We granted Savage’s petition for a writ of certiorari to determine whether there exists in Utah a remedy at law ■ for an injured employee against a workers’ compensation insurance carrier for breach of the contractual covenant of good faith and fair dealing in adjusting a workers’ compensation claim.³ “Because we are reviewing only legal questions, we accord the conclusions of the court below no particular deference but review them for correctness.” Anesthesiologists Assoc. v. St. Benedict’s Hosp., 884 P.2d 1236, 1238 (Utah 1994).

We conclude, as did the court of appeals, that an action for breach of the covenant of good faith and fair dealing may be brought only by a party to the insurance contract. This conclusion flows naturally from the decisions of this court in Beck v. Farmers Insurance Exchange, 701 P.2d 795 (Utah 1985), and Ammerman v. Farmers Insurance Exchange, 430 P.2d 576 (Utah 1967).

We note as background that this court has analyzed the relationship between an insurer and its insured in two different contexts— first-party and third-party insurance policies:

We use the term “first-party” to refer to an insurance agreement where the insurer agrees to pay claims submitted to it by the insured for losses suffered by the insured .... In contrast, a “third-party” situation is one where the insurer contracts to defend the insured against claims made by third parties against the insured and to pay any resulting liability, up to the specified dollar limit.

Beck, 701 P.2d at 798 n. 2.

In Ammerman, we recognized a tort cause of action for breach of an insurer’s obligation to bargain properly in the context of a third-party insurance relationship. We concluded that insureds have a right to expect their insurers to represent the insureds’ interests by acting reasonably and in good faith in settling third-party claims against insureds and that under traditional agency principles, the insurer’s contractually created duty to its insured was a fiduciary one, a breach of which sounded in tort. Ammerman, 430 P.2d at 578-79. We reached this conclusion because of the basic nature of the third-party insurance relationship. We have stated:

In a third-party situation, the insurer controls the disposition of claims against its insured, who relinquishes any right to negotiate on his own behalf. An insurer’s failure to act in good faith exposes its insured to a judgment and personal liability in excess of the policy limits. In essence, the contract itself creates a fiduciary relationship because of the trust and reliance placed in the insurer by its insured. The insured is wholly dependent upon the insurer to see that, in dealing with claims by third parties, the insured’s best interests are protected. In addition, when dealing with third parties, the insurer acts as an agent for the insured with respect to the disputed claim. Wholly apart from the contractual obligations undertaken by the parties, the law imposes upon all agents a fiduciary obligation to their principals with respect to matters falling within the scope of their agency.

Beck, 701 P.2d at 799-800 (citations omitted) (analyzing Ammerman).

Although in Ammerman we adopted a tort remedy in the context of the third-party insurance contract because of the fiduciary nature of the relationship created by the contract, we have specifically rejected the tort-based approach in the first-party context where the relationship created by the insurance contract is not a fiduciary one. In Beck, we discussed the nature of the duty of good faith and fair dealing that exists in a first-party insurance contract. We noted that the factors which had led us to adopt a tort-based remedy in the third-party context were absent in first-party insurance contracts:

In the first-party situation ... the reasons for finding a fiduciary relationship and imposing a corresponding [fiduciary] duty are absent. No relationship of trust and reliance is created by the contract; it simply obligates the insurer to pay claims submitted by the insured in accordance with the contract. Furthermore, none of the indicia of agency are present.

Id. at 800 (citation omitted). Instead, we concluded that “as parties to a contract, the insured and the insurer have parallel obligations to perform the contract in good faith, obligations that inhere in every contractual relationship.” Id. at 801. We noted that an insurer must “refrain from actions that will injure the insured’s ability to obtain the benefits of the [insurance] contract” and reasoned that such performances were what the insured had “bargained and paid for, and the insurer has the obligation to perform them” or be liable for damages sustained as a result of the breach. Id.

In so holding, we specifically refused to find that a breach of the implied contractual covenant of good faith and fair dealing gave rise to a tort claim, as some states had held. Rather, we found it actionable only as a contractual breach. Id. at 800.

In the present case, we conclude that Savage cannot recover under either Ammerman or Beck Taken together, Beck and Ammerman demonstrate that the duty of good faith and fair dealing is a contractual covenant, one that arises solely as an incident to contractual obligations owed by an insurer to its insured. Even though the remedy set out in Ammerman sounds in tort because the relationship of the contracting parties is a fiduciary one while that in Beck is purely contractual, both first- and third-party claims arise only because of the contractual relationship of the parties. See Broadwater v. Old Republic Sur., 854 P.2d 527, 535 (Utah 1993) (“Under both Beck and Ammerman, the duty of an insurer to deal fairly is derived from the insurance contract.”). Because Savage has no contractual relationship with Educators, she has no cause of action against it for breach of the covenant of good faith and fair dealing. This conclusion is consistent with the commentators and the great majority of courts in other jurisdictions that have confronted the issue. See Broadwater, 854 P.2d at 535-36 (collecting cases); Pixton, 809 P.2d at 750 (collecting cases); 14 George J. Couch, Couch on Insurance 2d § 51:136 (rev. 2d ed. 1982) (“The duty to exercise due care or good faith is owed to the insured and not to a third party.”).⁴

In an effort to distinguish her case from those cited above, Savage asserts, without any legal analysis, that she is entitled to bring a claim against Educators for “bad faith” adjusting of a claim under the provisions of section 31A-22-1004 of the Utah Code. Section 31A-22-1004 provides:

All workers’ compensation insurance policies shall contain a provision that employees may enforce, in their own names, the liability of the insurer.

Utah Code Ann. § 31A-22-1004. Apparently, it is Savage’s contention that this provision places her in a contractual relationship with Educators.

We conclude that Savage reads too much into this provision. Section 31A-22-1004 does not create a new cause of action for employees against workers’ compensation insurers but instead creates a process whereby an injured employee can deal directly with an insurer to enforce the preexisting liability of the insurer under its policy with the employer to pay workers’ compensation benefits. Section 31A-22-1004 does not purport to create any new or expanded liability for the insurer. Indeed, to read so much into the vague reference to “the liability of the insurer” would do violence to the carefully crafted structure of the Workers’ Compensation Act. Read as we do today, section 31A-22-1004 furthers the primary goal of the workers’ compensation system — to provide the injured employee a quick and easy way to recover statutory remedies for injuries which occur on the job — by allowing the injured employee to deal with the party that will pay for the injuries, the insurer, instead of going through the facade of suing the employer for benefits due.

In addition, if Savage’s sweeping construction of section 31A-22-1004 were adopted and by reason of that section Educators were deemed to owe Savage a contractual duty of good faith and fair dealing, Educators would have an unresolvable conflict between its contractually based duty to the District and its so-called “contractual” duty to Savage. An insurer cannot be expected to zealously protect the interests of two parties with diametrically opposed interests. Cf. Beck, 701 P.2d at 799; Ammerman, 430 P.2d at 578-79.

More important, recognizing a cause of action in favor of employees against an insurer for the manner in which it adjusted a claim is inconsistent with the workers’ compensation scheme and could do substantial harm to the workers’ compensation system as a whole. As the Florida Court of Appeals stated:

“[Bjeyond the legalistic objection to appellant’s position, we must point out that if delay in medical service attributable to a carrier could give rise to independent third party court actions, the system of workmen’s compensation could be subjected to a process of partial disintegration. In the practical operation of the plan, minor delays in getting medical service, such as for a few days or even a few hours, caused by a carrier, could become the bases of independent suits, and these could be many and manifold indeed. The uniform and exclusive application of the law would become honeycombed with independent and conflicting rulings of the courts. The objective of the Legislature and the whole pattern of workmen’s compensation could thereby be partially nullified.”

Sullivan v. Liberty Mut. Ins. Co., 367 So.2d 658, 660-61 (Dist.Ct.App.) (quoting Noe v. Travelers Ins. Co., 172 Cal.App.2d 731, 342 P.2d 976, 979, 980 (Dist.Ct.App.1959)), cert. denied, 378 So.2d 350 (Fla.1979).

We observe that the workers’ compensation system contemplates the situation where a claim for medical benefits is denied by the workers’ compensation insurer. An employee who disagrees with the denial of benefits can apply for a hearing with the Industrial Commission. Utah Admin.Code R568-1-4(A). Thus, the workers’ compensation system provides an efficient and definite remedy to employees who disagree with the decision of a workers’ compensation insurer. It is important to note that Savage did, in fact, take advantage of this remedy. After Educators decided not to pay for the dorsal column stimulator, Savage filed a timely claim with the Industrial Commission. The matter never came on for hearing, however, because Savage and Educators agreed to stipulated findings and an order in settlement of the dispute. As part of that settlement, Educators agreed to pay for all of Savage’s disputed medical expenses, including those incurred for a dorsal column stimulator.

Furthermore, our decision today does not give workers’ compensation insurers free rein to act in a dilatory manner in resolving the claims of injured employees. Both the legislature and the Commission have provided penalties to be imposed where an insurer or employer delays payment without good cause. Rule 568-1-14(0 of the Utah Administrative Code provides:

Failure to make payment without good cause shall result in referral of insurance companies to the Insurance Department for appropriate disciplinary action and may be cause for revocation of the Certificate of Self-Insurance from self-insured employers.

Utah AdmimCode R568-1-14(C). These actions would have drastic consequences for the insurer and the self-insurer. See Utah Code Ann. § 35-1-46(2) (providing that court may enjoin the further operation of an employer’s business until that employer secures payment of benefits as required by this section). Furthermore, the Utah Code provides:

If any employer, employee or other person violates any provision of this title, or does any act prohibited hereby, or fails or refuses to perform any duty lawfully imposed, or fails, neglects or refuses to obey any lawful order given or made by the commission, or any judgment or decree made by any court in connection with the provisions of this title, such employer, employee or other person shall be guilty of a misdemeanor.

Utah Code Ann. § 35-1-39.

Because Savage is not in privity with Educators, she has no cause of action against Educators for so-called “bad faith” adjusting of her workers’ compensation claim. The court of appeals is affirmed.

HOWE and RUSSON, JJ., concur in Chief Justice ZIMMERMAN’S opinion.

1 . The District is actually self-insured. Under its contract with the District, Educators simply administers the District’s workers' compensation claims.

2 . In a footnote, the court of appeals noted, "Savage raised three other issues on appeal, but briefed only one of the three. We believe all three issues are without merit and do not address them.” Savage v. Educators Ins. Co., 874 P.2d 130, 131 n. 2 (Ct.App.), cert. granted, 883 P.2d 1359 (Utah 1994).

3 . In her petition for a writ of certiorari, Savage listed the following as the sole issue presented for review: "Is there a remedy at law against a workers [sic] compensation insurance carrier for bad faith adjusting of a workers [sic] compensation claim in the state of Utah by an injured worker?" We construe this as raising the issue of an action for breach of the covenant of good faith and fair dealing which inheres in every contract. See Beck v. Farmers Ins. Exch., 701 P.2d 795, 798 (Utah 1985). In her brief to this court, however, Savage raises the following additional issues: (i) Can an injured employee sue her employer’s workers’ compensation insurer for intentional infliction of emotional distress? and (ii) must a district court deem the material allegations in the complaint true for the purposes of a motion to dismiss? We decline to consider these issues because they were not set forth in the petition for a writ of certiorari. Utah R.App. P. 49(a)(4) ("Only the questions set forth in the petition or fairly included therein will be considered by the Supreme Court.”).

4 . In holding that no duty of good faith and fair dealing is imposed upon an insurer running to a third-party claimant such as Savage, we do not foreclose the possibility that such a claimant could state a cause of action for an independent tort. See Broadwater v. Old Republic Sur., 854 P.2d 527, 536 (Utah 1993); Beck, 701 P.2d at 800 n. 3. For example, the law of this state recognizes a duty to refrain from intentionally causing severe emotional distress to others. Samms v. Eccles, 11 Utah 2d 289, 358 P.2d 344 (1961). Thus, intentional and outrageous conduct by an insurer against a third-party claimant could conceivably result in separate tort liability. As we indicated earlier, however, because Savage did not raise this issue in her petition for a writ of certiorari, we will not consider it here.