California Insurance - Insured Cannot “Split” Breach of Contract and Bad Faith Cause of Action Against Insurer
Lincoln Property Company, N.C., Inc. v. The Travelers Indemnity Company, No. A417887 (Cal. Ct. App., March 20, 2006)
An insured cannot bring serial lawsuits against an insurer based on an insurer’s alleged breach of an express contractual obligation, and later, for “bad faith” arising out of the insurer’s conduct in
investigating and performing that obligation. According to California’s First Appellate District (San Mateo County), both involve violations of the same “primary right,” requiring the insured to pursue
its rights in a single lawsuit.
Lincoln Property sued its insurer, The Travelers Indemnity Company, based on Travelers’ initial refusal to defend a personal injury suit against Lincoln Property under a general liability policy that named Lincoln Property
as an additional insured. Another insurer was defending Lincoln Property, and Travelers later agreed to participate in the defense under a reservation of rights. Lincoln Property thereafter brought a separate lawsuit against Travelers, alleging that it acted in “bad faith” in the way that it investigated and responded to Lincoln Property’s tender.
Travelers ultimately paid $1 million to settle the underlying action, obtaining a general release in favor of all of the parties. Travelers prevailed on Lincoln Property’s claim that it breached its defense obligations
on the ground that Lincoln Property suffered no damage because another insurer was fully funding the defense of the underlying claim. The trial court also sustained Travelers’ demurrer to Lincoln Property’s bad
faith lawsuit without leave to amend on res judicata grounds – that the final judgment in the lawsuit over Travelers’ alleged breach of its defense obligations prevented Lincoln Property from making Travelers’
alleged bad faith claims-handling conduct the subject of a separate lawsuit.
The First Appellate District agreed. As the court explained, California is a “primary rights” jurisdiction and only a single cause of action arises from the violation of the same primary right –
here, Travelers' duty to defend and its alleged “bad faith” conduct in connection with discharging its obligations.
Lincoln Property’s “bad faith” claim derived from and was supplemental to Travelers’ express contractual duty to defend its insured. Claims that an insurer conducted an inadequate or tardy
investigation, delayed payment or other conduct that breaches the implied covenant are actionable because they frustrate the insured’s primary right to receive the benefits of the policy. But, without the primary
right, the ancillary bad faith claim does not exist.
It made no difference to the court’s analysis that the damages recoverable on a breach of contract theory are narrower than those recoverable on a “bad faith” theory – both arise out of violations of the
same primary right. The court also rejected Lincoln Property’s argument that Travelers’ bad faith conduct was discovered too late to amend its first lawsuit, observing that courts have broad discretion to
permit supplemental pleadings, especially where the proposed amendments relate to the same general facts and do not allege new or independent causes of action.