Bad Faith - Hawaii Supreme Court Holds That Insurer May Be Liable for Bad Faith Claim Handling Even if Relevant Policy Excludes Coverage
Last week, in Enoka v. AIG Hawai’i Insurance Co., Inc., No. 25291, 2006 WL 408410 (Feb. 23, 2006), the Supreme Court of Hawai’i held that an insurer could be liable for bad faith mishandling of a claim even if
the policy at issue excluded coverage. The court distinguished an action for bad faith mishandling of a claim from an action for bad faith failure to investigate and held that “an insurer must act in good faith in dealing
with its insured and in handling the insured’s claim, even when the policy clearly and unambiguously excludes coverage.”
In Enoka, the insured was involved in an automobile accident. More than three years after the accident, she filed a claim for no-fault benefits under a policy with AIG. AIG denied the claim, stating that the
two-year statute of limitations on no-fault benefits had run. Enoka then brought an action against AIG for breach of contract, breach of the implied covenant of good faith and fair dealing, and intentional infliction of emotional
distress for failing to provide her with the no-fault limits of the policy, less any no-fault payments paid by other insurers. AIG moved for summary judgment on the basis that: (1) Enoka’s claim for no-fault benefits
was barred by the applicable statute of limitations; (2) Enoka failed to timely notify AIG of her no-fault claim for benefits; and (3) certain exclusions in the AIG policy barred Enoka’s claim for no-fault benefits.
The trial court granted AIG’s motion for summary judgment, finding that coverage for the claim was excluded under the policy and therefore the insurer could not have acted in bad faith. Enoka appealed the judgment, arguing
that the policy provided coverage and that AIG acted in bad faith when it denied her claim.
The Hawai’i Supreme Court determined on appeal that Enoka’s claim was not barred by the statute of limitations, but upheld the trial court’s determination that the claim for no-fault benefits was precluded by
a policy exclusion. It then considered the bad faith claim. Enoka argued that the insured’s duty to act in good faith is separate from its contractual duties under the policy and AIG countered that if there is
no contractual duty to pay benefits, then there is no implied covenant of good faith and fair dealing. The court rejected AIG’s argument. Although the court acknowledged that, under Hawai’i law, an insured
could not recover for bad faith failure to investigate a claim where the policy excluded coverage, it distinguished an action for failure to investigate from an action for mishandling a claim. The court held that an insurer
has a duty to act in good faith when handling a claim, regardless of whether coverage exists or not. Therefore, it found that the trial court erred in determining that Enoka’s claim for bad faith failed because her claim
for breach of contract failed.
Ultimately, however, the court held that AIG did not act in bad faith by initially denying coverage on limitations grounds. The issue, according to the Supreme Court, had been “an open question of law” and there
was no bad faith in AIG’s position. It further held that AIG had not violated HRS §431:10C-304(3)(b), which requires an insurer electing to deny coverage to notify the claimant within 30 days of “the reasons”
for the denial. The court stated that it is unsettled under Hawai’i law whether “the reasons” means “ all reasons.” It consequently refused to find AIG in bad faith for not having initially
stated all the reasons for its denial of Enoka’s claim for no-fault benefits.