Bad Faith - Federal District Court Holds That Utah Law Bars Punitive Damages in a First-Party Bad Faith Action
The U.S. District Court for the District of Utah recently held that punitive damages may not be awarded under Utah law in a first-party bad faith action against an insurer. In Crabb v. State Farm Fire & Casualty Co.,
No. 2:04-CV-00454 PGC (April 21, 2006), the court reasoned that Utah courts have held that a bad faith claim arises from contract rather than tort law and that Utah limits punitive damage awards to tort cases.
In Crabb, the insureds’ home was destroyed by a fire. Their homeowners insurer paid them a significant settlement, but the insureds claimed that they were entitled to more money for their lost personal property
and for the cost of demolishing the remainder of the house. Nearly four years after the fire, the insureds sued for breach of contract and bad faith.
The insurer sought summary judgment on the insureds’ claim for punitive damages, arguing that the Utah Supreme Court’s 1985 decision in Beck v. Farmers Insurance Exchange, 701 P.2d 795 (Utah 1985) barred an
award of punitive damages in a first-party bad faith case. The Beck court held that the relationship between an insurer and an insured is a contractual one and that a bad faith claim is a form of breach of contract
action. The Beck court concluded that punitive damages could not be awarded because Utah law did not permit punitive damages for breach of contract. The insureds argued that a 1987 decision from the Utah Court
of Appeals, Gagon v. State Farm Mutual Automobile Insurance Co., 746 P.2d 1194 (Utah Ct. App. 1987), changed the law to permit an award of punitive damages in first-party bad faith cases. The insureds also argued that
Utah Code Ann. § 78-18-1(1)(a) permitted an award of punitive damages for “willful and malicious” conduct.
The district court held that Beck remained good law and had been reaffirmed by the Utah Supreme Court three times since 2002. In doing so, the Crabb court recognized that the Utah Supreme Court has consistently
held that a bad faith suit is based upon contractual rather than tort principles. The court further held that § 78-18-1(1)(a) specifically permits punitive damages to be awarded only against a “tortfeasor,”
and that the statute could not apply in a first-party bad faith action, which is a contractual claim.