MacHan v. Unum Life Insurance Co. of America

Citations: 2005 UT 37; 116 P.3d 342; 528 Utah Adv. Rep. 20; 2005 Utah LEXIS 75; 2005 WL 1414354Docket: 20030789

Court: Utah Supreme Court; June 17, 2005; Utah; State Supreme Court

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The Supreme Court of Utah addressed two certified questions from the U.S. District Court regarding insurance law. The first question pertains to whether an insured can recover consequential damages for a breach of the express terms of an insurance contract in a first-party claim. The second question concerns the existence of a private right of action under Utah Code section 31A-26-301, which mandates timely payment of claims.

The case involves Gary Machan, who purchased a disability income insurance policy from UNUM Life Insurance Company in 1988. Following complications from cardiac surgery, Machan filed claims for benefits in 1999 and 2000, which UNUM initially denied beyond a brief period. Machan subsequently sued for breach of contract and sought consequential damages for his deteriorating mental health, inability to find employment, lack of psychological treatment for himself and his son, and depletion of his financial resources.

Prior to trial, UNUM agreed to pay Machan the requested benefits retroactively but moved for summary judgment on Machan's claims for consequential damages. The federal district court then certified the two questions to the Utah Supreme Court for clarification on the scope of recoverable consequential damages and the private right of action under the mentioned statute. The court's analysis will focus on these certified questions.

In Beck, the court established the criteria for consequential damages resulting from an insurance company's bad faith refusal to investigate or settle a first-party insurance claim, emphasizing the reliance on the implied covenant of good faith and fair dealing inherent in contracts rather than adopting a tort-based approach. While recognizing that some jurisdictions utilize a tort framework to incentivize insurers to meet their contractual obligations, the court argued that a contractual cause of action suffices without the complexities of tort analysis. UNUM contends that under Beck, an insured’s damages for a breach of the contract’s express terms should be limited to policy benefits, prejudgment interest, and foreseeable attorney's fees, asserting that allowing consequential damages without proof of bad faith would undermine deterrence. However, the court disagrees, asserting that Beck was rooted in contract principles and acknowledged the distinct nature of insurance contracts. The court concludes that consequential damages are available for breaches of both express and implied terms of an insurance contract, though the scope of damages for express term breaches may be more limited depending on the contract language and causation. Historically, insurance contracts have been viewed as commercial agreements for monetary compensation upon specific events, aligning with precedents that classify them as contracts focused on payment.

Courts applying the traditional approach to insurance contracts have restricted an insured's damages to the policy amount plus interest, as established in cases like New Orleans Ins. Co. v. Piaggio and Clark v. Life, Cas. Ins. Co. This reasoning is based on the premise that the insured's expectation is solely financial, and fulfillment of the contract involves receiving the agreed amount and interest, which would restore the insured to their pre-breach position. However, this view assumes that insureds have alternative funding sources, a notion that is often inaccurate since many policyholders purchase insurance specifically because they may lack such options to cover potential losses. Increasingly, jurisdictions recognize that viewing insurance solely as a commercial contract for money is flawed; rather, policies are intended for protection against unforeseen calamities. In Beck, the court acknowledged the unique nature of insurance contracts, emphasizing that they are sought not just for financial recovery but also for peace of mind and security. Ultimately, the insured expects timely payment of claims without incurring litigation expenses to enforce their rights, reflecting a broader understanding of the purpose of insurance.

The excerpt outlines the responsibilities of insurers under the implied covenant of good faith and fair dealing, establishing that insurers must diligently investigate claims, fairly evaluate them, and act promptly and reasonably in their decisions regarding claim settlement or rejection. It emphasizes that while policy limits define the insurer's contractual obligations, they do not limit the insurer's liability for breaches of the implied covenant. Insured parties may seek consequential damages—losses that are foreseeable at the time the contract was made—beyond mere general damages. Such consequential damages can include significant losses related to property or business, and potentially emotional distress resulting from the insurer's breach. The document further explores whether insured parties can recover consequential damages for breaches of express contract terms, concluding that damages for both express breaches and breaches of the implied covenant are governed by the same principles of foreseeability, determined by the contract's nature and the parties' reasonable expectations.

An insured cannot always recover the same damages for breaches of express contract terms versus breaches of the implied covenant of good faith and fair dealing. In Billings v. Union Bankers Insurance Co., the court emphasized limiting damages for breaches of express terms when the insurer acted in good faith, acknowledging the need for insurers to resolve legitimate disputes before being liable for claims. The distinction between the types of breaches is significant; while the implied covenant cannot be waived, parties can limit expectations through contractual language. If an insurance policy specifically requires timely claim resolution, damages for breaches of this obligation may align with those for breaches of the implied covenant. 

Both parties to insurance contracts should anticipate that insurers may need reasonable time to process claims. An insurer is not liable for breaching the implied covenant if the claim is fairly debatable. If an insurer resolves a claim incorrectly but within a reasonable investigation period, damages incurred are generally not attributable to the breach. However, if an insurer unreasonably delays or acts in bad faith during investigation, it is more likely that damages arose from the breach, extending its duration. Once an incorrect decision is made, further damages from the insurer's withholding of payment may be claimed if they are foreseeable. 

The second certified question inquires whether Utah Code Ann. 31A-26-301, regarding timely payment of claims, provides a private cause of action for insureds against insurers for statute violations as of 2000.

The four-factor test from Cort v. Ash is utilized to determine if an individual has a private right of action to enforce a state statute. The relevant factors include: (1) whether the plaintiff belongs to a class intended to benefit from the statute, (2) the legislature's intent regarding private remedies, (3) consistency of a private remedy with the statute's goals, and (4) the traditional relegation of the cause of action to state law. Utah courts are not strictly bound to apply these factors as federal courts do and are generally hesitant to recognize implied rights in the absence of explicit statutory language.

Regarding Utah Code section 31A-26-301, as it existed in 2000, the statute mandates timely payment of valid insurance claims but does not explicitly allow individual insureds to bring claims against insurers for enforcement. Although the purpose of Chapter 26 of the Utah Insurance Code includes protecting claimants from unfair claims practices, it also aims to enhance the competence of claims adjusters and encourage fair settlements. The focus of Chapter 26, including its title and provisions, appears to regulate adjusters rather than to provide individuals with a private right of action. The existing remedies for violations, such as license termination for adjusters, further suggest that the legislature did not intend to create a private right of action without clear statutory language.

Section 31A-26-101(3) is closely related to section 31A-26-303, which explicitly states that it does not establish a private cause of action. The omission of a similar denial in section 31A-26-301 does not imply legislative intent to create a private right of action, as the denial in section 31A-26-303 likely precludes such an inference. Machan's reference to the 2001 amendment to section 31A-26-303 is deemed irrelevant since the focus is on the 2000 version of the statute. Machan, as the policyholder, retains contract remedies against UNUM for breaches of contract or the implied covenant of good faith and fair dealing. The existence of a contract remedy indicates that the legislature did not intend for separate claims under section 31A-26-301. Consequently, it is concluded that the 2000 version of Utah Code section 31A-26-301 did not permit a private cause of action against an insurer. Additionally, plaintiffs may pursue consequential damages for breaches of express contract terms, with such damages varying based on contract language and the nature of the breach. No private right of action existed in 2000 for enforcing Utah Code section 31A-26-301 against an insurer. The opinion is concurred by Justices DURRANT, PARRISH, NEHRING, and Associate Chief Justice WILKINS.

Machan's bad faith claim pertains solely to a specific second claim for benefits as stated in the district court's certification order. Insurance companies, due to their expertise in policy drafting, cannot overly restrict an insured's right to consequential damages based on the policy language, particularly when the insured has a reasonable expectation of coverage. Courts often uphold a policyholder's reasonable expectations even against clear exclusions in the policy, as emphasized in legal commentary. Machan argues for the reversal of a precedent set in Prince v. Bear River Mutual Insurance Co., where a claim was deemed fairly debatable based on a doctor's assessment. He is concerned that the district court may apply this precedent despite differences in his situation, such as the lack of a personal examination by UNUM's doctor and the absence of a denial based on that report. However, this argument was not part of the certified question and will not be addressed.