(Article from Insurance Law Alert, September 2020)
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A California federal district court predicted that the California Supreme Court would decline to impose tort liability for a breach of the covenant of good faith and fair dealing in the reinsurance context. California Capital Ins. Co. v. Maiden Reinsurance North America, Inc., 2020 WL 4018796 (C.D. Cal. July 16, 2020).
California Capital sued its reinsurer, Maiden, alleging breach of contract and the covenant of good faith and fair dealing. California Capital alleged that Maiden refused to pay valid claims and demanded return of previous payments for covered claims, among other things. Maiden moved to dismiss the breach of good faith cause of action on the basis that reinsureds may not recover tort damages for such claims under California law. The court agreed and dismissed the cause of action to the extent it sought to recover tort (rather than contractual) damages.
Although the California Supreme Court has strictly limited tort recovery for the breach of the duty of good faith and fair dealing for contract-based disputes, it has allowed such recovery in the context of insurance disputes. California Capital asserted that “because reinsurance is a form of insurance, tort remedies should be available in the reinsurance context.” Rejecting this contention, the court emphasized the distinction between the policyholder-insurer relationship and the reinsured-reinsurer relationship. In particular, the court reasoned that a breach of a reinsurance contract does not violate the same social policies as a breach of an insurance contract because insurance contracts are typically “marked by elements of adhesion and unequal bargaining power,” whereas reinsurance contracts are not. Further, the court explained that reinsurers do not have the same fiduciary duties that insurers do.
The also court dismissed California Capital’s claims for attorneys’ fees and statutory penalties, finding them unsupported by law and the allegations in the complaint. However, the court declined to strike the breach of the covenant of good faith and fair dealing cause of action to the extent it seeks contractual damages. The court reasoned that the bad faith conduct alleged in the complaint went beyond mere contractual breaches sufficient to withstand a motion to dismiss.