FOR EDUCATIONAL USE ONLYCopr. © West 1999 No Claim to Orig. U.S. Govt. Works
72 TXLR 1203
(Cite as: 72 Tex. L. Rev. 1203)
Texas Law Review May, 1994 Symposium on the Law of Bad Faith in Contract and Insurance *1203 INTRODUCTION TO THE SYMPOSIUM Ellen Smith Pryor [FNa1] Charles Silver [FNaa1] Copyright © 1993 by the Texas Law Review Association; Ellen Smith Pryor and Charles Silver In his contribution to this Symposium on the law of bad faith in contract and insurance, Kenneth Abraham suggests that bad faith law has matured, partly as a result of the settling of California law. [FN1] A mature body of law is more than just predictable, of course. It embodies a stable, coherent, and defensible logic, and it grows incrementally as judges who understand and accept the logic carefully apply it to new cases. For that reason, we wonder whether the evidence supports Abraham's assertion. In December of last year, a California jury ordered a group of insurance companies to pay Amoco Chemical Corporation roughly $386,400,000 in punitive damages [FN2]-the largest such award ever on a bad faith claim. [FN3] The record award does not necessarily show that Abraham is wrong. Amoco's insurers may have gambled on getting away with a monstrous act of bad faith and lost. The appellate courts may also trim or overturn the award, in which event the record may disappear. But on learning of the award, one cannot help wondering whether it is a sign of unpredictability or immaturity in California's bad faith regime. Professor Abraham might reasonably concede that the evidence can be hard to read.
It is also hard to know whether the law in Texas has matured, although Douglas Brothers, another symposiast, thinks it has. [FN4] In any event *1204 the direction of the law's evolution has unquestionably changed. After expanding bad faith liability during the 1980s and early 1990s, the Supreme Court of Texas has switched gears. In the past two years, the court has: refused to compel the stacking of underinsured motorist policy limits; [FN5] directed summary judgment against an insured who failed to give proper notice of a claim; [FN6] limited the benefits to which a family member of an insured employee was entitled under a group health plan; [FN7] restricted duty-to-settle liability [FN8] while making it harder for insureds to sue companies for statutory and regulatory violations; [FN9] denied third-party claimants the right to sue insurers directly for unfair claims settlement practices; [FN10] increased the evidentiary burden on bad faith plaintiffs; [FN11] rendered a take-nothing judgment against a claimant who failed to meet that burden; [FN12] restricted the availability of punitive damages in bad faith cases; [FN13] and refused to subject adjusters and other agents who handle claims to the standard of good faith and fair dealing that applies to insurers. [FN14] In the same period, the court also struck down Mary Carter agreements [FN15] and twice denied the existence of a common law cause of action for negligent infliction of emotional distress, [FN16] thereby eliminating settlement and pleading gambits that plaintiffs' lawyers formerly used against insurers. [FN17] Although companies have lost some recent cases raising questions about insurance coverage, [FN18] on the whole they have done well.
*1205 Is the recent trend in Texas a sign of maturation? Or does it reflect just the ascendance of one faction on the court? The Supreme Court of Texas is a remarkably divided body ideologically. Several of the court's recent decisions provoked exceptionally heated dissents, [FN19] and some became issues in judicial campaigns. [FN20] The court also flip-flopped on the issue of liability for the conduct of insurance agents, first finding the company not liable, then withdrawing the prior opinion and finding liability instead. [FN21] These signs of instability suggest that a change in the composition of the court could easily prompt another redirection of the law. With the aid of hindsight, it may become clear that we are seeing the law's maturation. From the perspective of an eyewitness, it is hard to tell.
One of our purposes in organizing this Symposium was to provide judges and lawyers across the country with an accessible body of contract and insurance scholarship that would help them nudge the maturation process along. When reading recent cases, we were struck by the dearth of citations to the scholarly legal literature. Citations are lacking partly because authors who publish in law reviews have ignored many of the practical problems the cases raise and partly because some of the best scholarship on bad faith law and related issues involves technical economics or appears in places judges and lawyers are unlikely to look. By lining up a strong cast of contributors for a symposium in the Texas Law Review-a respected journal that serves mainstream legal and academic communities-and by asking contributors to prepare short, problem-focused pieces, we hoped to give judges and lawyers immediate access to relevant *1206 information, presented in plain language, that otherwise might not be accessible to them.
The Symposium contains three groups of papers. The first group addresses the question: Should the law impose tort liability for violations of express or implied contractual obligations? This group includes the papers by Mark Gergen and William Powers on the interplay between contract and tort law and the appended commentaries by Gregory Crespi and Dennis Patterson; Kenneth Abraham's reflection on the evolution of bad faith liability for breach of insurance agreements and Robert Jerry's kindred reflection on the historical roots of the contractual duty of good faith; the colloquy between Alan Sykes and Kyle Logue on the efficiency of the duty to settle liability; and the innovative efforts of Tom Baker and Deborah Stone to use the stories that companies tell when selling insurance and handling claims in justification of, respectively, laws that impose bad faith liability on insurers and public control of insurance.
The second group of articles assumes a background of bad faith liability and asks the question: How should bad faith law operate in certain contexts? This group includes James Fischer's argument against the advice of counsel defense and Michael Quinn's rejoinder; Ellen Smith Pryor's article examining the theory and practicality of a comparative fault defense to bad faith liability, and the related commentaries of Douglas Brothers and William Powers; and Charles Silver's argument for company-initiated malpractice actions against defense counsel. [FN22]
The third group of papers considers the demand for liability insurance and the factors, including bad faith liability, that affect the amount of coverage that is bought and sold. This group features Kent Syverud's essay, in which he contends that purchases of insurance spiral upward due to a combination of micro-incentives, common knowledge problems, and the fact that an infinite amount of liability coverage is needed to protect a finite level of resources. It also includes Randall Bovbjerg's critical commentary on Syverud's thesis and the somewhat more favorable review by Steven Pottier and Robert Witt.
We had hoped to include articles containing empirical work relating to the bad faith tort fabric. Alas, empirical work, which remains sparse with respect to tort liability generally, [FN23] is barely in the infancy stage as to the bad faith regime. [FN24] We contacted many of the entities and *1207 individuals most likely to be undertaking or considering empirical work on some aspect of bad faith. [FN25] When that effort bore no fruit, we invited a representative of a major insurance company to contribute a paper, based heavily on input from claims offices in numerous jurisdictions, about the effects of various versions of bad faith doctrines. Although the invitation was accepted, events within the company prevented completion of the work.
Empirical researchers in the tort liability arena face many imposing obstacles. These same obstacles exist, some with a vengeance, in the bad faith realm. For example, assessments of whether bad faith claims have increased or decreased in the first-party context would need some measure of the base of bad faith "injuries" in the first instance. But this base would be even harder to calculate than the base rate of other types of actionable injuries, such as automotive or medical negligence incidents. And studies based on state-court filings would require data that distinguishes between bad faith claims and other types of contract or tort claims. These distinctions are beginning to appear in some of the state-court data, but many gaps remain. [FN26]
Yet these difficulties do not erase the chance for exceedingly valuable empirical research about bad faith. Closed claims files of insurers, for example, could be a rich source for studies about the effects of bad faith doctrines on claims-handling practices. Or many types of studies could explore the connection between evidence and outcomes in bad faith litigation. Some of the contributors to the Symposium are engaged in empirical work related to insurance and bad faith, others are considering such research, and many have identified issues on which empirical research would be crucial. Perhaps this Symposium will help stir more interest in such work.
The participants in the Symposium disagree about many things, and they bring many different styles, perspectives, and methodologies to bear on the subjects they address. What they share is seriousness of purpose, perceptivity, intelligence, and a gift for transparency, economy, and even *1208 elegance of expression. The Symposiasts also share a sense of professional responsibility. The only thing they received for their trouble is the honor of appearing in the Texas Law Review. We neither paid them honoraria nor offered them mid-winter vacations in Austin. It therefore should come as no surprise that the Symposium is full of gems. The level of argument and analysis is consistently and often impressively high. The Symposium also contains something for everyone. Whether your interest is analytical jurisprudence, law and economics, Texas law, insurance law, contract theory, torts, jury instructions, the use of stories in law, or professional responsibility, there is something here for you. The same is true whether you are a plaintiffs' lawyer, a defense lawyer, coverage counsel, or house counsel for an insurer.
It may seem unsurprising that the Symposium touches so many bases. At more than 400 pages, the Symposium fills the largest issue the editors of the Texas Law Review have ever produced. We greatly appreciate the editors' willingness to shoulder the massive production burden and the grace and patience they displayed when working with the authors and with us. We owe special debts of gratitude to Mark Taylor and Bill Christian, the Editors in Chief who shepherded the Symposium through the publication process. They combined flexibility and resolve in just the proportions needed to keep the authors happy and the Symposium on track.
We also wish to acknowledge the contribution of Mark Yudof, Dean of the University of Texas School of Law, who generously offered to defray the cost of publishing the Symposium. By happenstance, this issue appears as he leaves the deanship and begins a new career as Executive Vice President and Provost of the University of Texas. Dean Yudof often describes this institution as Dean Page Keeton's law school, and that it is. But, after ten years of superb leadership, the law school also bears Mark Yudof's stamp. We were lucky to have him at the helm for so long, we will miss him, and we wish him continued success.
[FNa1]. Associate Professor of Law, Southern Methodist University School of Law.
[FNaa1]. Cecil D. Redford Professor, The University of Texas School of Law.
[FN1]. Kenneth S. Abraham, The Natural History of the Insurer's Liability for Bad Faith, 72 TEX. L. REV. 1295, 1300-01 (1994).
[FN2]. Amoco Chem. Co. v. Lloyd's of London, No. BC 030755 (Cal. Super. Ct. of L.A. County Dec. 7, 1993) (judgment in accordance with jury verdict). For industry reactions to the decision, see Bad Faith Award Shocks Insurers, BUS. INS., Dec. 13, 1993, at 1.
[FN3]. Margaret C. Fisk, In Insurance Bad Faith, Make It Clear Who Made the Decisions and Why, NAT'L L.J., Feb, 14, 1994, at S13 (1994).
[FN4]. D. Douglas Brothers, The Defense of Comparative Bad Faith: A Practitioner's Viewpoint, 72 TEX. L. REV. 1565, 1565 (1994).
[FN5]. Upshaw v. Trinity Cos., 842 S.W.2d 631, 633 (Tex. 1992).
[FN6]. Liberty Mut. Ins. Co. v. Cruz, 37 Tex. Sup. Ct. J. 276, 277-78, No. D-3990, 1993 WL 502525, at *2 (Dec. 8, 1993).
[FN7]. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994).
[FN8]. American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 847-49 (Tex. 1994); Texas Farmers Ins. Co. v. Soriano, 37 Tex. Sup. Ct. J. 989, No. D-3363, 1994 WL 264967 (June 15, 1994).
[FN9]. Garcia, 876 S.W.2d at 847.
[FN10]. Allstate Ins. Co. v. Watson, 876 S.W.2d 145, 147 (Tex. 1994). After the original decision was released on November 24, 1993, the insurance industry heaved a sigh of relief. See Michael Schachner, Texas Court Limits Bad Faith Suits, BUS. INS., Dec. 6, 1993, at 1.
[FN11]. Lyons v. Millers Casualty Ins. Co., 866 S.W.2d 597, 600 (Tex. 1993).
[FN12]. National Union Fire Ins. Co. v. Dominguez, 873 S.W.2d 373, 377 (Tex. 1994).
[FN13]. Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 23 (Tex. 1994); see also Ellis County Bank v. Keener, 37 Tex. Sup. Ct. J. 1117, No. D-3413, 1994 WL 278170 (Tex. June 2, 1994) (applying Moriel retroactively).
[FN14]. Natividad v. Alexsis, Inc., 875 S.W.2d 695, 697 (Tex. 1994).
[FN15]. See Elbaor v. Smith, 845 S.W.2d 240, 250 (Tex. 1992) (disallowing agreements that give a settling defendant a stake in the plaintiff's recovery while allowing the defendant to remain a party at the trial of the case).
[FN16]. Boyles v. Kerr, 855 S.W.2d 593, 594 (Tex. 1993); Twyman v. Twyman, 855 S.W.2d 619, 620 (Tex. 1993).
[FN17]. See, e.g., Davis v. Twin City Fire Ins. Co., 865 S.W.2d 231, 234 (Tex. App.-Texarkana 1993, writ requested) (noting the plaintiff's attempt to recover damages for negligent infliction of emotional distress against an insurer).
[FN18]. See, e.g., National County Mut. Fire Ins. Co. v. Johnson, 879 S.W.2d 1 (Tex. 1993) (plurality opinion) (invalidating an intra-family exclusion provision in an automobile liability policy); State Farm Fire & Casualty Co. v. S.S., 858 S.W.2d 374, 378-79 (Tex. 1993) (holding that an insured did not necessarily act intentionally when he transmitted herpes to a claimant via sexual intercourse and that therefore an insurer could be liable under the insured's homeowner's policy); State Farm Fire & Casualty Co. v. Reed, 873 S.W.2d 698, 701 (Tex. 1993) (construing a business pursuit exclusion in a homeowner's policy and finding coverage for an injury to a child who was cared for in a day-care center operating within the insured's home).
It is unclear whether the decision in Spencer v. Eagle Star Insurance Co. of America, 876 S.W.2d 154 (Tex. 1994), favored the company or the insured. The court found a flaw in the jury charge relating to unfair practices in the business of insurance, but the court denied the company a dismissal of the plaintiffs' action and instead held that the company was entitled to only a new trial. Id. at 157.
[FN19]. E.g., American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 855 (Tex. 1994) (Hightower, J., dissenting); Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 135 (Tex. 1994) (Doggett, J., dissenting); Boyles v. Kerr, 855 S.W.2d 593, 605 (Tex. 1993) (Doggett, J., supplemental dissenting opinion on motion for rehearing); Twyman v. Twyman, 855 S.W.2d 619, 640 (Tex. 1993) (Spector, J., dissenting); Lyons v. Millers Casualty Ins. Co., 866 S.W.2d 597, 602 (Tex. 1993) (Doggett, J., dissenting).
[FN20]. Walter Borges, Gonzalez-Haas Fireworks Eclipse Other Races, TEX. LAW., Feb. 28, 1994, at 8 (reporting that candidate Rene Haas took incumbent Justice Raul Gonzalez to task for his votes in Boyles v. Kerr, 855 S.W.2d 593 (Tex. 1993), and Celtic Life Insurance Co. v. Coats, 37 Tex. Sup. Ct. J. 1246 (1993) withdrawn, No. D-2775, 1994 WL 278107 (Tex. June 22, 1994)).
[FN21]. Celtic Life Ins. Co. v. Coats, No. D-2775, 1994 WL 278107 (Tex. June 22, 1994), withdrawing 37 Tex. Sup. Ct. J. 1246 (1993).
[FN22]. Professor Silver's article appears without a commentary because the discussant who agreed to review the article missed the publication deadline.
[FN23]. See generally Michael J. Saks, Do We Really Know Anything About the Behavior of the Tort Litigation System-And Why Not?, 140 U. PA. L. REV. 1147 (1992).
[FN24]. The only study we found is Willy E. Rice, Judicial Bias, The Insurance Industry and Consumer Protection: An Empirical Analysis of State Supreme Courts' Bad-Faith, Breach-of-Contract, Breach-of-Covenant-of-Good-Faith and Excess-Judgment Decisions, 1900-1991, 41 CATH. L. REV. 325, 357-82 (1992) (concluding from an empirical examination of over 500 state supreme court decisions and over 100 state appellate decisions that variables and influences that have little to do with the legal merits of claims against insurance companies influence the outcome in a large percentage of cases).
[FN25]. These included the Rand Institute, the Workers' Compensation Research Institute (because many jurisdictions recognize bad faith liability in the context of workers' compensation claims), numerous state workers' compensation research organizations, the Urban Institute, several individuals in the insurance industry who are knowledgeable about research initiatives, a number of individuals who have conducted research about the tort liability system generally, and consumer and plaintiff organizations, such as the National Insurance Consumer Union and the Association of Trial Lawyers of America.
[FN26]. Telephone Interview with Polly Phipps, Associate Behavioral Scientist, The Rand Corporation (May 25, 1993). For a discussion of state-court filing data, see Saks, supra note 23, at 1206-11.
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