Insurer's Rejection of Comparative Bad Faith Defense in Bad Faith Actions: Analysis of Kransco v. American Empire Surplus Lines Insurance Company

Insurer's Rejection of Comparative Bad Faith Defense in Bad Faith Actions: Analysis of Kransco v. American Empire Surplus Lines Insurance Company

Introduction

Parties Involved:

  • Kransco: Plaintiff and Appellant, a California-based manufacturer of the Slip 'N Slide toy.
  • American Empire Surplus Lines Insurance Company (AES): Defendant and Appellant, Kransco's primary liability insurer.
  • Other Insurers: Various excess insurers including International Insurance Company, Agricultural Excess and Surplus Insurance Company, and Transco Syndicate No. 1 Ltd.

Background:

In June 1987, Michael Hubert sustained severe injuries while using Kransco's Slip 'N Slide, leading to a personal injury lawsuit in Wisconsin against Kransco. Kransco defended the action through AES, which had agreed to indemnify up to $1 million. The litigation resulted in a $12.5 million judgment, exceeding policy limits, prompting Kransco to file a bad faith lawsuit against AES in California for failing to settle within policy limits.

Key Issues:

  1. Whether a liability insurer can assert the insured's "comparative bad faith" as an affirmative defense in a bad faith action for breach of the covenant of good faith and fair dealing.
  2. The applicability of comparative negligence in the context of insurance bad faith litigation.

Summary of the Judgment

The Supreme Court of California affirmed the Court of Appeal's decision, holding that a liability insurer cannot assert the insured's comparative bad faith as an affirmative defense in a bad faith action. The court concluded that while insurers owe a tort duty of good faith and fair dealing to their insureds, the insured's conduct does not impute a tortious comparative fault to the insurer's breach of that duty.

The judgment emphasized that the contractual breach by the insured does not align with the tortious breach by the insurer, thereby precluding the use of comparative fault defenses by insurers in such actions.

Analysis

Precedents Cited

The judgment extensively referenced key California cases that shape the understanding of the covenant of good faith and fair dealing in insurance contracts:

  • Comunale v. Traders General Insurance Company (1958): Established the implied covenant of good faith and fair dealing in insurance contracts.
  • Gruenberg v. Aetna Insurance Company (1973): Clarified that an insurer's breach of the covenant can lead to tort remedies.
  • California Casualty General Insurance Company v. Superior Court (1985): Previously allowed insurers to assert comparative bad faith, a stance later overruled by this judgment.
  • Agricultural Insurance Company v. Superior Court (1999): Reinforced that an insurer cannot use the insured's contractual breaches as a tort defense.

Legal Reasoning

The court differentiated between the insurer's tortious duty and the insured's contractual obligations. It underscored that while the insurer's duty arises from tort principles to protect the insured from financial loss exceeding policy limits, the insured's actions remain within the realm of contract law.

Allowing an insurer to use the insured's comparative bad faith as a defense would conflate contractual breaches with tortious actions, leading to logical inconsistencies. The court highlighted that insurers have existing contractual defenses and remedies to address an insured's misconduct without resorting to comparative fault doctrines.

Impact

This judgment sets a clear precedent in California, affirming that insurers cannot mitigate their tort liability for bad faith by attributing fault to the insured. It emphasizes the protective intent of the covenant of good faith and fair dealing, ensuring that insurers cannot evade full responsibility for breaches of this duty by pointing to the insured's conduct.

Future cases in California will follow this ruling, potentially influencing insurance litigation strategies and reinforcing the burden on insurers to honor their commitments without shifting blame.

Complex Concepts Simplified

Covenant of Good Faith and Fair Dealing

This is an implied promise in every contract where both parties agree to act honestly and not impede the contractual benefits of the other party. In insurance, it ensures that insurers will act in their insureds' best interests within the policy terms.

Comparative Bad Faith

A proposed legal defense where an insurer would argue that the insured's own wrongdoing contributed to the loss, thereby reducing the insurer's liability. This concept was previously recognized in a limited capacity but has been overruled in this judgment.

Comparative Negligence

A legal doctrine allowing a plaintiff's compensation to be reduced by the percentage of their own fault in contributing to the harm suffered. The court clarified its inapplicability in the context of insurer bad faith actions.

Conclusion

The Supreme Court of California's decision in Kransco v. American Empire Surplus Lines Insurance Company reinforces the sanctity of the covenant of good faith and fair dealing in insurance contracts. By rejecting the insurer's attempt to employ the insured's comparative bad faith as a defense, the court safeguards insured parties from potential insurer overreach and ensures that insurers remain fully accountable for breaches of their duty.

This ruling clarifies the boundaries between tort and contract law within insurance litigation, maintaining that insurers cannot dilute their tort obligations by referencing the insured's contractual conduct. As a result, insurers must diligently uphold their contractual promises without leveraging comparative fault defenses to mitigate liability, thereby enhancing the protection framework for insured entities.

Case Details

Year: 2000
Court: Supreme Court of California

Judge(s)

Marvin R. BaxterStanley MoskRonald M. GeorgeJoyce L. Kennard

Attorney(S)

Thacher, Albrecht Ratcliff, James F. Thacher, Arthur R. Albrecht, Frank E. Solomon; Quarles Brady, W. Stuart Parsons, Kevin P. Crooks, Katherine H. Grebe; Irell Manella and Thomas W. Johnson, Jr. for Plaintiff and Appellant. Anderson Kill Olick, Jordan S. Stanzler, Deborah M. Mongan and John A. MacDonald for United Policyholders as Amicus Curiae on behalf of Plaintiff and Appellant. James T. Linford as Amicus Curiae on behalf of Plaintiff and Appellant. Latham Watkins, David L. Mulliken, Kristine L. Wilkes, Dorn G. Bishop and Julia E. Parry for Montrose Chemical Corporation of California as Amicus Curiae on behalf of Plaintiff and Appellant. Carroll, Burdick McDonough, Bertrand LeBlanc II, Donald T. Ramsey, David M. Rice, Rosemary Springer; Kravit Gass Weber, J. Ric Gass, Janice A. Rhodes, Caren B. Goldberg; Newman Company and Thomas R. Newman for Defendant and Appellant. Hancock Rothert Bunshoft, Richard L. Seabolt, Eve F. Lynch and Robert M. Fineman for London Market Insurers as Amicus Curiae on behalf of Defendant and Appellant. Horvitz Levy, Lisa Perrochet and Stephanie Rae Williams for Truck Insurance Exchange and Allstate Insurance Company as Amici Curiae on behalf of Defendant and Appellant. Engstrom, Lipscomb Lack, Bolson, Nishimura Saunders, Hahn Bolson Mendelson, Jeffrey T. Bolson and Karen-Denise Lee for Plaintiffs and Respondents International Insurance Company and Transco Syndicate #1, Ltd. Gibbons, Lees Conley, Gibbons Conley and Dolores M. Donohoe for Plaintiff and Respondent Agricultural Excess and Surplus Insurance Company.

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