A Breach of Contract is Now an Element of Insurance Bad Faith Claims in Wisconsin
The Wisconsin Supreme Court held on June 14, 2011, in Brethorst v. Allstate, Case No. 2008AP2595, 2011 WI 41, that an insured can plead a bad faith claim against its insurer without pleading a separate breach of contract, as long as the breach of contract is alleged within the bad faith claim. Further, the Court specifically held an insurer’s “egregious” conduct alone towards its insured is insufficient to create coverage not otherwise existing under the policy.
Brethorst, the insured, suffered injuries from an auto accident and filed an insurance claim. After Allstate offered only a partial settlement of Brethorst’s claims and offered no factual grounds for its decision, Brethorst filed a bad faith claim. She did not, however, file an accompanying breach of contract claim seeking coverage. The lower court held an insured may maintain a bad faith claim without first proving a breach of contract claim as a condition precedent. The Supreme Court accepted the case for review.
The Court contrasted breach of contract claims from bad faith claims and held: (1) an insured may file a bad faith claim without also filing a breach of contract claim; (2) a breach of contract is a fundamental prerequisite to a bad faith claim against an insurer; and (3) an insured may not proceed with bad faith discovery without first satisfying the court that she has established such a breach or will be able to prove such a breach in the future.
Breach of Contract Claims versus Bad Faith Claims
The Court made clear that a breach of an insurance contract claim is merely the failure to pay the claim in accordance with the policy, while a bad faith claim constitutes, “a separate and intentional wrong, which results from a breach of duty imposed as a consequence of the relationship established by contract.” The Court held contract damages are not the result of bad faith acts, but of a breach of contract, and therefore should only be awarded in an improper denial of coverage. Second, allowing contract damages where no coverage is found would bind parties to conditions they did not contemplate or purchase, and therefore would be inconsistent with basic principles of contract law. Lastly, the Court recognized and warned that allowing bad faith claims completely separate from a prerequisite breach of contract, “would invite the filing of unmeritorious claims, focused on the insurer’s alleged misconduct.” Insurance claims, including bad faith, must be firmly anchored in contract law.
Pleadings versus Prerequisites
Importantly, the Court found that although a bad faith claim, “is a separate tort and may be brought without also bringing a breach of contract claim . . . bad faith cannot exist without some wrongful denial of benefit under the insurance contract.” An underlying breach of contract must be alleged, and the insured must plead that they were entitled to payment under the contract. The holding clarified that simply because a breach of contract need not be pleaded does not mean it need not exist, and concluded, “some breach of contract by an insurer is an fundamental prerequisite for a first-party bad faith claim against the insurer by the insured.”
Discovery on a bad faith claim
The Court limited the impact of its holdings by requiring an insured to plead breach of contract with her bad faith claim, and satisfy the court the breach can or will be proven in order to take discovery on bad faith claims. In essence, “an insured must plead, in part, that she was entitled to payment under the insurance contract and allege facts to show that her claim under the contract was not fairly debatable.” Only then may a plaintiff conduct discovery on bad faith topics such as claims handling procedures and internal coverage decision-making.
Implications of the Wisconsin Supreme Court’s Decision
The Court shifted away from its previous two-prong test for bad faith claims and adopted the three-prong test from Arnold Anderson’s treatise, Wisconsin Insurance Law. A bad faith claim in Wisconsin now must prove 1) the terms of the policy obligated the insurance company to pay the claim; 2) the insurer lacked a reasonable basis in law or fact for denying the claim; and 3) the insurer either knew there was no reasonable basis for denying the claim or acted with reckless disregard for whether such a basis existed. An insurer can defend against this claim either by showing there was no coverage under the policy and therefore no breach of contract, or by showing a reasonable basis existed for denying the payment or processing of the claim.
Although insureds may now bring a bad faith claim without a separate cause of action for coverage, coverage still must be alleged. In addition, a concurring opinion in the case points out the majority may have raised the pleading standards by now requiring an insured to, “allege facts to show that her claim under the contract was not fairly debatable,” and “plead facts which, if proven, would demonstrate . . . that the insurer breached its contract.” The concurring judge concluded that notice pleading was no longer sufficient in insurance bad faith cases.