Strategies, Challenges, and Answers

Breach Of Insurance Contract And Bad Faith Claims Do Not Have To Be Brought In the Same Lawsuit . . . Sometimes

Often we see breach of insurance contract and bad faith claims included in the same complaint.  However, have you ever wondered if the two causes of action must be brought together?  The case of Pulley v. Preferred Risk Mut. Ins. Co., 111 Nev. 856, 897 P.2d 1101 (1995) tells us that that breach of contract and bad faith suits are distinct and can be brought either together or separately.

1032596_which_way In Pulley, the Plaintiffs filed their UM claims with the insurance carrier.  They were unable to reach a settlement and the Plaintiffs filed suit alleging breach of the UM portion of the insurance contract.  Rather than go to trial, the parties decided that they wanted to arbitrate their dispute.  The arbitrator awarded $10,716.20 to Pulley and $7,216.35 to the second plaintiff.  The Plaintiffs demanded immediate payment of the awards.

When, 50 days later, the awards had not been satisfied, the Plaintiffs filed a second suit alleging bad faith.  The next day, the checks were tendered to the Plaintiff.  A Motion to Dismiss the bad faith claim was filed.  The insurance carrier argued that the Plaintiffs had a duty to bring the breach of contract suit and the bad faith suit together in the same action.  The carrier argued that by litigating the first case without raising the bad faith claims foreclosed the bad faith action under a theory of res judicata.  The trial court agreed with the insurance company and dismissed the bad faith suit.

The Nevada Supreme Court disagreed with the District Court’s decision.  It found that the duty to act in good faith arises not from the terms of the insurance contract.  Instead, the duty of good faith and fair dealing is imposed by law.  See United States Fidelity v. Peterson, 91 Nev. 617, 620, 540 P.2d 1070, 1071 (1975).  The court explained that the first suit was a contract action.  In contrast, the bad faith suit was a tort action.  The bad faith suit did not arise until after Preferred Risk delayed payment of the arbitration award.  Therefore, there was no bad faith suit until after the delay in payment.  The two causes of action could not have been brought together.  The court sent the case back to the District Court to be tried on the issue of whether the delay in payment constituted “bad faith”.

There are specific instances where the contract action and the bad faith action must be brought together.  However, in Pulley, the Nevada Supreme Court clearly distinguishes the two types of suits and indicates that where the bad faith happens after the contract action is over, the bad faith action can be brought separately.  The practice tips learned here are when settling a contract case, keep the lines of communication open with the Plaintiffs’ attorney, expedite handling of the settlement check and if possible, reach a settlement that includes not only the contract claim, but also any related extra-contractual claims.

For a different perspective with a different result, read our May 21, 2009 blog post by clicking HERE.

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