Although the duty is implied in every contract, a breach of it often is triggered in life, health, disability and property insurance first-party claims. Because the bargaining power of the insured and the insurer is inherently unbalanced, the contract takes on an adhesive nature. Furthermore, insurers hold themselves out as fiduciaries, which bind them by a duty of good faith and fair dealing.

Too often, though, insurers have been found to inadequately investigate or outright deny claims without adequate supporting evidence, to make unreasonably low settlement offers, to refuse to reveal policy limits, to refuse to negotiate, to make oppressive demands not required under the policy, to destroy evidence that would support the insured’s claim for benefits, to reject the recommendation of the insured’s attorney regarding settlement, to rely on minor misrepresentations in the insurance application as a reason for denying coverage or to coerce acceptance of a compromise of a claim. The list goes on and on.

Insureds clearly are at a disadvantage when their insurers have exclusive control of the defense and settlement of a claim, and their interests diverge with the risk of an excess verdict that is borne entirely by the insured or an excess carrier. That’s when the courts step in.

Ledingham v. Blue Cross Plan for Hospital Care of Hospital Service Corp., 29 Ill.App.3d 339, 330 N.E.2d 540 (5^th Dist. 1976), rev’d on other grounds, 62 Ill.2d 338, 356 N.E.2d 75, 1976), initially recognized an independent tort of bad faith. The Illinois Supreme Court later approvingly cited Ledingham for the proposition that the same conduct may both breach a contract as well as constitute a separate and independent tort. Kelsay v. Motorola, Inc., 74 Ill.2d 172, 384, N.E.2d 353 (1978).

But succeeding courts have gone in varying directions, unsure if the tort should cover third party (liability) actions or failure to pay as opposed to failure to settle cases. Although some courts have acknowledged that an Illinois statute that deals with extracontractual remedies is on the books, 215 I.L.C.S. 5/155 (West 2000) clearly doesn’t cover all bad faith scenarios nor all remedies.

The statute provides for the insured to recover the proceeds due under a policy; but compensatory damages may exceed the policy limits, such as the cost of procuring other insurance or for the necessity of being self-insured. The statute also allows for recovery of reasonable attorney fees and other costs, as well as an additional sum that constitutes a limited penalty. Before the enactment of the statute, an insured’s only recourse was to seek the policy proceeds under a breach of contract action, which generally does not include attorney fees or punitive damages, a real deterrent for bad faith conduct.

Tort-based first-party bad faith actions usually require the insured to prove not only that the denial of benefits was a breach of contract, but also that it was wrongful. Therefore, the failure to pay or failure to settle cases may be different but without a distinction.

The majority in Cramer v. Insurance Exchange Agency, 174 Ill.2d 513, 675 N.E.2d 897 (1996), however, made a distinction between the two and concluded that Section 155 does not preempt a separate and independent tort involving insurer misconduct when it involves failing to settle a claim. But "failure to pay" cases are strictly breach of contract actions in which additional remedies are afforded only under section 155, the majority held.

Illinois Supreme Court Justice Charles E. Freeman in a concurring opinion, though, differs. He finds the preemptive scope of Section 155 on the basis of statutory remedies, not on whether the conduct of the insured is based in tort or contract.

It also should be noted that Section 155 remedies clearly are reserved for policyholders. So where does that leave third-party, bad-faith claims involving liability insurance? Justice Freeman also takes issue with the majority on this point and writes:

"Contrary to the majority’s statements, third-party coverage claims for bad faith are based, like first-party claims, on an implied duty arising from the insurance contract." Id., at 531.

I agree, especially when you consider that public policy notions of judicial economy are advanced through Justice Freeman’s thinking in that fair and reasonable settlements are encouraged when an excess carrier is allowed to bring a cause of action for a negligent or bad faith refusal to settle within the policy limits.

The Cramer court recognized that the complex issues surrounding the tort of bad faith have been divisive throughout the state; and since Cramer, courts still are struggling with its parameters. For instance, in Prisco Serena Sturm Architects, Ltd. v. Liberty Mutual Insurance Co., 126 F.3d 886 (7^th Cir. 1997), the court held Section 155 applies to third-part insurance; but in California Union Insurance Co. v. Liberty Mutual Insurance Co., 930 F.Supp 317 (N.D.Ill.1996), the court found the section was intended to apply only to first-party claims.

Just what is "good faith" and "fair dealing?" Illinois courts have been vague in defining the terms. Illinois had codified the covenant of good faith in the adoption of the Uniform Commercial Code: "Every contract or duty within this act imposes an obligation of good faith in its performance or enforcement." 810 I.L.C.S. 5/1-203 (West 2000).

Even the most distinguished of jurists have indicated the concept is an elusive one. Richard Posner of the 7^th U.S. Circuit Court of Appeals defines the concept in an exclusive rather than inclusive posture, stating that it forbids "the kinds of opportunistic behavior that a mutually dependent, cooperative relationship might enable in the absence of a rule." Market Street Assoc. v. Frey, 941 F.2d 588, 595 (7^th Cir. 1991).

Fundamentally, the duty requires that neither party to a contract will do anything that will injure the other’s right to receive the benefit of their agreement.

Like any other wrongful conduct, a plaintiff should be allowed to present all evidence and recover all damages allowed by law. Illinois courts should strive to develop a cohesive approach involving a breach of the duty of good faith and fair dealing. Anything less will only lead to inconsistency and, worse still, unjust results.