Does the Implied Covenant of Good Faith and Fair Dealing Impose a Broad Duty on Insurers to Act “Reasonably” or “Properly” in Handling Claims?

The United States District Court for the District of Minnesota in Selective Insurance Company of South Carolina v. Sela,¹ recently addressed whether the implied covenant of good faith includes a broader obligation to act “reasonably” and “properly” in making a decision about whether to pay benefits. Sela had submitted a claim for hail damage to his home. Selective investigated the claim and filed suit alleging that Sela made fraudulent misrepresentations and was not entitled to coverage. Sela counterclaimed for breach of contract, breach of the implied covenant of good faith and fair dealing, and bad faith, pursuant to Minn. Stat. §604.18.

Under Minnesota law, the implied covenant imposes two obligations on insurance contracts. First, the implied covenant is breached when a party to a contract unjustifiably hinders the other party’s performance under the contract. Second, the implied covenant is breached when a party to a contract acts dishonestly, maliciously or otherwise in subjective bad faith in exercising unqualified discretion that is given to the party in the contract.

In granting Selective’s motion in limine to dismiss Sela’s claim for breach of the implied covenant of good faith, the trial court found the two obligations imposed by the implied covenant to be irrelevant in a case involving the denial of insurance benefits. The court concluded that common law does not impose a broad obligation of reasonableness on insurers. Rather, the only question in a denial-of-benefits case is whether the insurance contract requires the insurer to pay the claim. Such a determination is based on the language of the insurance contract.²

The trial court noted that Minnesota decided to address the issue of unreasonable claims handling through §604.148, and not by importing broad reasonableness obligations into insurance contracts via the implied covenant of good faith and fair dealings. It is within the bad faith claim that Sela will have to prove that Selective did not have a “reasonable basis” for denying his claim and that the person or persons at Selective who denied the claim “knew of the lack of a reasonable basis.” We will have to wait and see if Sela is permitted to recover damages and attorney fees pursuant to Minn. Stat. §604.18, as this part of the case is set for trial in December.
___________________________
¹ Selective Ins. Co. of South Carolina v. Sela, 2019 WL 3858701 (D. Minn. Aug. 16, 2019).
² Id. at * 2.