Brethorst v. Allstate: A Turn in the Tide of Wisconsin Bad Faith Law?
Wisconsin first expressly adopted the tort of insurance bad faith over eighty years ago. Since then, the tort has expanded to a point where many commentators believe it has lost its way.[i]
The tide may be turning, however. In the recent decision of Brethorst v. Allstate, the Wisconsin Supreme Court refused another such invitation to expand the tort of bad faith. The court held that bad faith in the first-party context is limited to situations where an insurer wrongfully denies payment of some contracted-for benefit.
In reaching this decision, the court parted ways with other jurisdictions that have allowed “procedural bad faith,” or bad faith predicated solely on a breach of the duty to investigate a claim, even in the absence of a duty to pay under the insurance policy.[ii] The Brethorst court reached its conclusion with some “misgivings because [the court does] not countenance bad faith behavior by insurers against their insureds.”[iii] However, the court reasoned, allowing bad faith to lie where the insured cannot show wrongful denial of some contracted-for benefit would in effect create coverage, which “is not an appropriate remedy,” and would invite the filing of "unmeritorious claims, focused on the insurer's alleged misconduct."[iv] The court concluded that "[a]n insurer's bad behavior unrelated to a breach of contract might be subject to some sanction, but it does not warrant a first-party bad faith claim."[v]
The Brethorst decision is a departure from a long line of cases in Wisconsin expanding the tort of bad faith, and may signal a shift in the tide of Wisconsin bad faith law.[vi] At the same time, the decision leaves unanswered numerous questions for Wisconsin trial courts to grapple with regarding the current state of first-party bad faith law in Wisconsin. This article examines the impact of the Brethorst decision and the generally favorable arguments it provides insurance companies when defending first-party bad faith claims in Wisconsin.
I. Facts of Brethorst
The Brethorst court was confronted with a situation where an insured, Brethorst, sued her uninsured motorist carrier, Allstate, for bad faith before proving she was entitled to any payments under the insurance policy. The uninsured motorist claim arose out of a motor vehicle accident in which Brethorst allegedly sustained injuries. Brethorst made a claim to her insurer Allstate for the injuries. Allstate contested whether the claimed injuries were caused by the subject motor vehicle accident. Brethorst then filed suit against Allstate alleging that it handled her uninsured motorist claim in bad faith. The underlying uninsured motorist claim was never resolved through arbitration or a separate legal proceeding. Nor did Brethorst file a breach of contract claim seeking contract damages in the bad faith lawsuit. Instead, she attempted a somewhat novel approach of going straight to the bad faith claim and foregoing the breach of contract claim.
Allstate moved to bifurcate and stay discovery on the bad faith claim until after Brethorst proved she was entitled to payments under the policy. Brethorst responded that she did not need to prove entitlement to payments under the policy to succeed on her bad faith claim; instead, all she needed to show was that the actions of Allstate in handling her claim lacked a reasonable basis and that Allstate knew or recklessly ignored this fact.
The trial court agreed with Brethorst and denied the motion to bifurcate and stay. Allstate then filed an interlocutory appeal of the trial court decision arguing that Brethorst first had to prove entitlement to payments under the policy before she could proceed with her bad faith claim. The Wisconsin court of appeals accepted the interlocutory appeal and then certified the case to the Wisconsin Supreme Court. The Wisconsin Supreme Court accepted the certification, and ultimately sided with Allstate on the critical legal issue, holding that entitlement to payments under the policy is not only an element of a first-party bad faith claim, but a fundamental prerequisite to the claim.[vii] At the same time, the court sided with Brethorst on the facts, holding that she had submitted information adequate to satisfy the circuit court that she was entitled to payments under the policy, and that those payments had been wrongfully denied. [viii] The Supreme Court therefore affirmed the circuit court's decision denying Allstate's motion to bifurcate and stay.
II. Impact of Brethorst on First-Party Bad Faith Claims
A. General Impact
The Brethorst decision has wide ramifications for first-party bad faith claims in Wisconsin. It requires an insured to prove a first-party claim was covered in order to prevail on the bad faith claim. For example, if an exclusion in an insurance policy precludes coverage as a matter of law for a claimed loss, it is immaterial how the insurer handled the claim or what it knew when it denied a claim—bad faith cannot exist. Further, the decision gives insurers a strong argument that, as long as the amount offered in response to a first-party insurance claim is equal to or greater than the actual contract damages awarded at trial or through other fact-finding proceeding (e.g. appraisal, arbitration, etc.), it is immaterial how the insurer handed the claim, and a bad faith claim cannot exist.[ix] For example, if a contract claim and bad faith claim are brought together and the bifurcated trial on the contract claim returns a verdict equal to or less than the amount offered by the insurer, the insurer can move for summary judgment on the bad faith claim because no payments under the policy were wrongfully denied and bad faith cannot exist. It is immaterial what the insurer knew at the time it denied the claim or what the basis was for the denial.
B. Impact on Discovery
The decision also impacts bad faith discovery—the central issue in the Brethorst case.
Wisconsin law, and specifically, the 2001 Court of Appeals decision in Dahmen v. American Family Mutual Insurance Company, requires trial courts to bifurcate a claim of bad faith from an underlying claim of first-party breach of insurance contract (when both claims are brought simultaneously in the same lawsuit) and to stay discovery on the bad faith claim until after the breach of contract claim has been resolved.[x] The reasoning set forth in Dahmen for this mandatory bifurcation and stay is three-fold: (1) The failure to bifurcate a claim of bad faith from an underlying contract claim will significantly prejudice an insurer because an insured will be entitled to discovery it would otherwise not be entitled to if the breach of contract claim were brought alone; (2) the two distinct claims present different evidentiary requirements that increase the complexity of the issues and the potential for jury confusion; and (3) the separate initial trial on the claim of first-party benefits would increase the prospect of settlement and promote economy by narrowing the issues for the jury and potentially eliminating the need for a later trial on the bad faith claim.
Brethorst presented a unique factual situation in light of the above law: what happens if an insured foregoes the usual procedure of first pleading and proving a breach of contract claim, whether in the lawsuit or through some other procedure (e.g. arbitration, appraisal, or stipulation), and instead attempts to go straight to the bad faith claim?
In addressing this question, the court first held that, even if an insured foregoes bringing a contract claim, the insured must still prove a breach of contract as an element of the bad faith claim. Next, the court held that Dahmen is still good law and requires bifurcation and stay of discovery on the bad faith claim when it is brought simultaneously with the contract claim.[xi]
The court then proceeded to explore the following questions: (1) Do the considerations outlined in Dahmen apply equally where a separate contract claim is not alleged? and (2) Must the trial court bifurcate the breach of contract element from the other elements of the bad faith claim?
The court tried to strike a balance in its decision. It held that the considerations in Dahmen are only partially applicable when a party chooses to plead only a bad faith claim. It held there is a "need to establish a wrongful denial of some contracted-for benefit before permitting discovery for a bad faith claim."[xii] Then, it adopted specific procedural requirements for the circumstance where only a bad faith claim is brought.
The court held that an insured may not proceed with discovery on a solo first-party bad faith claim until she or he has: (1) pleaded a breach of contract by the insurer as part of the separate bad faith claim, and (2) satisfied the court that she or he has established such a breach or will be able to prove such a breach in the future.[xiii] In turn, the insurer must then be given an opportunity to rebut allegations of bad faith before discovery is allowed to proceed, not only by a responsive pleading, but also by motion.[xiv] Specifically, before discovery proceeds, the insurer "must be permitted to show that it did not breach the contract or that there was a reasonable basis for its conduct in denying, paying, or processing a claim."[xv]
Admittedly, as pointed out by the concurring opinion in Brethorst, there are still open questions after Brethorst as to how a court should determine whether an insured established a breach of contract or "satisfied the Court that the insured has established such a breach or will be able to prove such a breach in the future."[xvi] Yet, the decision makes clear the insurer must be permitted to rebut the insured's allegations and show that it did not breach the contract before the insured may go forward with discovery.[xvii] Further, the court held that "permitting the [circuit] court to 'find' a wrongful denial of benefits without affording the insurer a trial by jury, if one were requested, would create constitutional problems."[xviii] Thus, if an insurer can show that true factual questions exist as to whether an insured will ever be able to prove a breach of contract by the insurer, it is arguable that a jury trial is required on the breach of contract issue before discovery may proceed on the bad faith claim, which is exactly what Allstate asked for in its motion to bifurcate and stay.[xix]
Although the impact of Brethorst on solo bad faith claims remains unclear,[xx] the wider ramifications of the decision on first-party bad faith claims in Wisconsin are undeniable: Brethorst signals a shift away from the further expansion of the tort of bad faith and towards a more balanced approach. The decision also gives insurers numerous new arguments when confronted with first-party bad faith claims, which will surely be the subject of future appellate decisions.
[i] See, e.g., Victor E. Schwartz & Christopher E. Appel, Common-Sense Construction of Unfair Claims Settlement Statutes: Restoring the Good Faith in Bad Faith, 58 Am. U. L. Rev. 1477, 1478 (2009), cited by Brethorst v. Allstate, 2011 WI 41, ¶ 69 n.6, 334 Wis. 2d 23, 798 N.W.2d 467.
[ii] See, e.g., St. Paul Fire and Marine Ins. Co. v. Onvia, Inc., 196 P.3d 664 (Wash. 2008); United Tech. Corp. v. Am. Home Assurance Co., 118 F. Supp. 2d 181, 188-89 (D. Conn. 2000). But see the following cases supporting the argument that no procedural bad faith exists: State Farm Fire & Cas. Co. v. Slade,747 So.2d 293, 317 (Ala. 1999) (holding that liability for the tort of bad faith is limited to those instances in which the insured's losses were covered under the policy); Pemberton v. Farmers Ins. Exch., 858 P.2d 380, 384 (Nev. 1993) (holding that an insured must demonstrate fault by the tortfeasor and the extent of damages before a claim for bad faith will lie); Brehm v. 21st Century Ins. Co., 166 Cal. App. 4th 1225, 83 Cal. Rptr. 3d 410 (Cal. App. 2d Dist. 2008) (holding that, as a general rule, there can be no breach of the implied covenant of good faith and fair dealing under an insurance policy if no benefits are due under the policy); Hogan v. State Farm Auto. Ins. Co., 649 So.2d 45, 94 (La. App. 1st Cir. 1994).
[iii] Brethorst, 334 Wis. 2d 23, ¶ 66.
[iv] Id., ¶¶ 66-69.
[v] Id., ¶ 70.
[vi] For recent examples, see Danner v. Auto-Owners Ins., 2001 WI 90, ¶ 49, 245 Wis. 2d 49, 629 N.W.2d 159, where the court equated an insurer's duty to its insured in the first-party context to a fiduciary duty—a position from which the Brethorst court retreated. Brethorst, 334 Wis. 2d 23, ¶ 48; see also Roehl Transp., Inc. v. Liberty Mut. Ins. Co., 2010 WI 49, ¶ 7, 325 Wis. 2d 56, 784 N.W.2d 542 (holding that bad faith is not limited to the three types of bad faith claims previously recognized).
[vii] The key issue in Brethorst was not whether policyholders can sue insurers for bad faith without filing a breach of contract claim, as some commentators have suggested. Instead, the issues were: (1) whether a breach of contract is an element of a first-party bad faith claim; and (2) if a breach of contract is an element of a first-party bad faith claim, when must it be proven. As the Supreme Court pointed out in Brethorst, it had already held almost ten years earlier, in Jones v. Secura, 2002 WI 11, 249 Wis. 2d 623, 638 N.W.2d 575, that a solo bad faith claim can exist without an accompanying breach of contract claim. Brethorst, 334 Wis. 2d 23, ¶¶ 63, 64 ("[W]hile Jones held that a bad faith claim need not be accompanied by a breach of contract claim, it did not hold that a first-party bad faith claim need not be accompanied by a breach of contract."). The Brethorst court recognized that "Allstate's motion implicate[d] a question that [the court had] avoided in [the past,] namely, whether an insured's first-party claim of bad faith may exist in the absence of coverage or in the absence of some other breach of contract by the insurer." Id., ¶ 42 (citing Danner v. Auto-Owners Ins. Co., 245 Wis. 2d 49, ¶ 54 & n.6). Only after the court answered this critical question in favor of Allstate could it move on to when an insured must prove the breach of contract element of a bad faith claim. It is the holding that a policyholder must show a breach of contract as part of a bad faith claim that has the widest ramifications on first-party bad faith claims. See, e,g, Alan D. Windt, 2 Insurance Claims and Disputes, § 9:26 (5th Ed., updated March 2012) (citing to Brethorst as one of the few decision holding that no claim for a bad faith duty to investigate can exist unless there was a wrongful denial of some contracted-for benefit); Dimugno, Wisconsin Supreme Court Makes Breach Of Contract A “Fundamental Prerequisite” To A First Party Bad Faith Claim, 33 No. 10 Ins. Litig. Rep. 317 (July 8, 2011).
[viii] Brethorst, 334 Wis. 2d 23, ¶ 65. The court ultimately upheld the circuit court's decision to deny the motion to bifurcate and stay based on "uncontradicted evidence" that Allstate breached its contract. Notably, the Brethorst case was an interlocutory appeal. The case was in its infancy at the trial court when the appeal went up to the Wisconsin Supreme Court. The only "evidence" in the record was notice pleading allegations and denials. In any event, for purposes of this article, the dispositional outcome of the case is not important.
[ix] This assumes the offer is made within a reasonable period of time. Otherwise, an insured can argue that the delay constitutes a de facto denial of the claim. As a result, an insurer should always try to respond to a demand within 30 days (the time allowed by Wis. Stat. § 628.46 and arguably per sereasonable) with an offer, denial, or specific request for additional information to evaluate the claim.
[x] Dahmen v. Am. Family Mut. Ins. Co., 2001 WI App 198, ¶ 20, 247 Wis. 2d 547, 635 N.W.2d 1.
[xi] Brethorst, 334 Wis. 2d 23, ¶ 75.
[xii] Id., ¶¶ 56, 65.
[xiii] Id., ¶ 5.
[xiv] "Stated differently, an insured must plead, in part, that she was entitled to payment under the insurance contract and allege facts to show that her claim under the contract was not fairly debatable. To go forward in discovery, these allegations must withstand the insurer's rebuttal." Brethorst, 334 Wis. 2d 23, ¶ 76. "The insurer, in turn, must be permitted to challenge the elements of the claim, not only by a responsive pleading, but also by motion." Id., ¶ 77.
[xv] Id., ¶ 77.
[xvi] Id., ¶ 76; id., ¶¶ 106-107 (Bradley, J., concurring).
[xvii] Id., ¶¶ 76-77.
[xviii] Id., ¶ 74.
[xix] Portions of the Brethorst decision further support that this is the proper way to resolve the fundamental prerequisite contract claim issue when conflicting evidence is submitted as to its viability. For example, in the majority opinion's concluding paragraph, the court states: "At any future trial, Brethorst will be required to prove her injuries and the resulting breach of contract …." Id., ¶ 86 (emphasis added). Also, when discussing Judge Marik's motion hearing on the motion to bifurcate and stay, the court said, "[t]he Court heard argument but did not conduct an evidentiary hearing," suggesting an evidentiary hearing is appropriate when deciding whether the prerequisite breach of contract has been established. Id., ¶ 6.
[xx] It is unclear both how trial courts should implement the procedures outlined in Brethorst for solo bad faith claims and whether insureds will ever pursue such claims given the procedural complexities created by Brethorst.