Advisories & Insights

In the recent case of Jonathan Neil & Associates, Inc. v. Jones, (2004) 33 Cal.4^th 917, the California Supreme Court held that a tort remedy for breach of the implied covenant of good faith and fair dealing is unavailable to a policyholder in premium calculation disputes when the policyholder has other remedies available.

Fred and Mildred Jones owned Jones Trucking. Jones Trucking obtained liability insurance for its trucks under the California Automobile Assigned Risk Plan. After the policy was issued to Jones, the Assigned Risk Plan changed the formula for calculating premiums for trucking companies, which, like Jones, used subhaulers. When Jones was audited, the servicing insurer, Cal-Eagle, assessed Jones substantially higher premiums. A dispute arose between Jones and Cal-Eagle over the extent to which Jones would be permitted to recreate its records to prove its eligibility for various premium reductions. After Jones refused to pay the additional premiums assessed, Cal-Eagle assigned its claim to Jonathan Neil & Associates, a collection agency, which thereafter sued Jones. Jones cross-complained against Cal-Eagle for bad faith and fraud. At trial, the jury awarded Jones $11,445,714.23 in punitive damages, a sum later reduced by the trial court to $4,350,887. Cal-Eagle appealed.

The California Supreme Court reversed, holding that the trial court should have applied the primary jurisdiction doctrine and referred the premium calculation dispute to the California Insurance Commissioner for determination. Noting, however, that the balance of the case might have to be retried following action by the Insurance Commissioner, the court also discussed the bad faith claim.

In concluding that a tort remedy for bad faith did not exist in connection with a premium dispute, the court relied on its decision sixteen years earlier in Foley v. Interactive Data Corp., 47 Cal.3d 654, 765 P.2d 373 (1988), in which the court had held that bad faith remedies were unavailable in employment cases. The Foley court had compared the available remedies and economic incentives that affected the employer-employee relationship and the insurer-policyholder relationship and had concluded that a bad faith remedy was not appropriate in the employment relationship. Here, the Jones court noted that traditional tort remedies might be available, as well as administrative and contractual remedies. Accordingly, the court concluded that "tort remedies for breach of the implied covenant of good faith and fair dealing in these circumstances are unnecessary to protect the insured's interests."

Jones poses a significant restriction on the expansion of tort remedies for contractual disputes. Under Jones, the implied covenant remedy is available only in those circumstances where there is no other adequate remedy for the consequences of the insurance company's breach of contract. Though the bad faith tort remedy continues to be available in connection with claims disputes, its availability may be limited in other suits between policyholders and insurers. Jones is likely to generate future litigation focusing on the adequacy of the other common law and statutory remedies available to the policyholder in certain types of insurer-policyholder disputes.