Using Claim Preclusion to Bar First-Party Bad Faith Actions
The tort of bad faith has gained recent attention by insurers and insureds alike, as Wisconsin courts continue to expand its application.[i] Most recently in Roehl Transportation Company v. Liberty Mutual Insurance Company, the Wisconsin Supreme Court allowed an insured to bring a third-party bad faith claim against its own insurer for failing to settle with a third party, even though the judgment was within the policy limits.[ii] It may seem to insurers that the concept of bad faith is increasingly difficult to grasp, and that the floodgates have been opened to allow bad faith claims for a variety of claims handling circumstances.
Claim preclusion is one equitable tool that may bar some first-party bad faith claims entirely. The basic scenario is as follows. An insured brings a breach of contract action against its own insurer for its failure to pay an insurance claim. He or she does not raise a bad faith claim in the action, and a judgment is entered in favor of the insured. The insured then files a new, separate lawsuit, raising a first-party bad faith claim for the same insurance claims denial that was at issue in the breach of contract action. Under these circumstances, claim preclusion may bar the insured’s action.
First-Party Bad Faith
Wisconsin was one of the first states to recognize bad faith as a common law tort, and the law has been evolving ever since the Wisconsin Supreme Court first allowed a bad faith claim in 1916.[iii] Courts defined “bad faith” as a breach of a duty imposed on an insurer as a result of its contractual relationship with its insured.[iv] However, a bad faith claim arises not from the contract, but from the relationship formed by it, and it is separate and distinct from a breach of contract claim.[v] There are three traditional categories of bad faith claims: third-party bad faith claims,[vi] first-party bad faith claims, and claims for failure to reimburse a worker’s compensation claim.[vii]
First-party bad faith claims can be brought when an insurer unreasonably withholds payment of a claim from its own insured.[viii] The Wisconsin Supreme Court first recognized a first-party bad faith claim in 1978 in Anderson v. Continental Insurance Company.[ix] In that case, two plaintiffs filed a lawsuit against their insurer, raising claims for breach of contract and bad faith for the insurer’s alleged failure to negotiate and pay a property damage claim. The Anderson court defined bad faith as “the absence of honest, intelligent action or consideration based upon knowledge of the facts and circumstances upon which a decision in respect to liability is predicated.”[x] It then explained that a first-party bad faith claim requires a showing that an insurer had no reasonable basis to deny benefits, and that it had knowledge of, or recklessly disregarded, its lack of a reasonable basis to deny.[xi] The court reasoned that an insurer must properly investigate a claim, and that the investigation results must be subject to reasonable evaluation and review by the insurer, for the claim to be “fairly debatable.”[xii]
First-party bad faith claims can expose insurers not only to compensatory damages, but also to severe emotional distress damages, as well as punitive damages if there is a showing of “evil intent or special ill-will or wanton disregard.”[xiii]
The Doctrine of Claim Preclusion
Claim preclusion is an equitable doctrine that recognizes and enforces the principle that a final judgment is conclusive as to “all matters which were litigated, or which might have been litigated in the former proceedings.”[xiv] In order to ensure the finality of judgments, courts strictly apply claim preclusion to bar later actions when the requirements of the doctrine are met.[xv] The doctrine relieves parties of the cost and aggravation of litigating multiple lawsuits, conserves court resources, and prevents inconsistent decisions.[xvi] In order for claim preclusion to bar a later lawsuit, three requirements must be met: (1) identity between the parties in the two suits, (2) identity between the causes of action in the two suits, and (3) a final judgment on the merits in the first suit.[xvii]
Claim Preclusion Can Bar First-Party Bad Faith Actions
Claim preclusion can be used by an insurer to bar an insured from bringing a separate first-party bad faith lawsuit after he or she has already litigated a breach of contract claim for the same claim denial in a previous suit. The first and third requirements for claim preclusion are easily met under that circumstance. There is identity between the parties when the insurer and insured are the same in both actions, and, if a judgment is entered in the breach of contract action, there is a “final judgment on the merits.”
The second requirement of claim preclusion, “identity between the causes of action in the two suits,” is seemingly more problematic. At first glance, it appears that it cannot be met because a first-party bad faith cause of action is not identical to a breach of contract cause of action. Bad faith claims and breach of contract claims have separate elements, and may involve different evidence. However, “identity between the causes of action” does not mean that the claims or theories of recovery in the two actions have to be the same.[xviii] A later action can be barred even when the legal theories or evidence in the second action would differ from the first.[xix] A later action can also be barred if a plaintiff seeks remedies or forms of relief that he or she did not seek in the first action.[xx] That is because courts utilize a transactional approach to determine if there is “identity between the causes of action.”[xxi]
A judgment extinguishes “all rights to a remedy for all or part of a transaction from which the first action arose.”[xxii] A transaction is a “natural grouping or common nucleus of operative facts.”[xxiii] In using a transactional approach to determining whether there is an identity between the causes of action, courts consider whether the facts underlying each action are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether the parties’ expectations or business understandings justify treating the facts as one unit.[xxiv]
In Northern States Power Company v. Bugher, the Wisconsin Supreme Court further clarified that “identity of causes of action” does not mean that the claims raised or the theories of recovery need to be identical. In that case, a plaintiff filed an action raising a statutory theory of recovery, and, after receiving a disfavorable judgment, filed a second action raising a constitutional claim arising out of the same incident.[xxv] The court held that the second suit was barred because the two actions arose from the same facts when evaluated under a transactional view.[xxvi] It was immaterial that the theories of recover differed—because they arose from the same facts, they had to be brought together in the same action.[xxvii]
The “identity between the causes of action” requirement can be satisfied when an insured brings a first-party bad faith action separate from a previously adjudicated breach of contract action arising from the same insurance claim denial. Both actions arise from the same incident or accident for which an insurance claim was made, the same insurance policy, the same insurance claim, and the same denial of coverage. For a breach of contract claim, an insured argues that the insurance claim should have been paid under the policy. For a bad faith claim, the insured again argues that the insurer should have paid the claim, for the same incident and damages, but adds the contention that the denial was unreasonable. Thus, the two causes of action arise from a “common nucleus of operative facts,” and so the second requirement for claim preclusion is met.
There is a recent unpublished Wisconsin Court of Appeals case, Viscusi v. Progressive Universal Insurance Company, in which the court upheld summary judgment barring a first-party bad faith action in the scenario just discussed.[xxviii] In that case, an insured made a property damage claim under his auto policy after he hit a pothole with his car and continued to drive until oil leaked out, causing engine damage.
The insurer denied the claim on the basis that the insured failed to take reasonable steps after a loss to protect the covered vehicle from further loss.[xxix] The insured filed a lawsuit bringing a breach of contract action, but he did not also allege a bad faith claim. The insured’s attorney tried to interject bad faith arguments at trial, and the insurer’s attorney argued that the claim was never adequately pled. The insured’s attorney responded that he was not yet pursuing a bad faith claim. A final judgment was rendered in favor of the insured on the contract claim, and the insured then filed a new lawsuit raising a bad faith claim against the same insurer for the same incident.
The circuit court granted summary judgment in favor of the insurer on the basis that claim preclusion barred the action. The court of appeals affirmed. Importantly, the court concluded that the “identity between the causes of action” requirement was satisfied because the claims “flowed from the same nexus of facts: Progressive’s failure to pay policy benefits for the engine damage.”[xxx] The court rejected the argument that the insured’s first-party bad faith claim was not ripe until after trial, noting that the facts regarding the insurer’s investigation and nonpayment of the insurance claim already existed at the time the insured filed the first action.[xxxi]
While there is no published Wisconsin decision in which a court has held that first-party bad faith claims are unequivocally barred by claim preclusion in these circumstances, other federal and state jurisdictions have found that first-party bad faith and breach of contract claims arise from the same transaction, and must be brought in one action or be barred.[xxxii]
Claim preclusion creates an interesting contrast in the law between an insured who brings a breach of contract action and not a first-party bad faith claim, and an insured who brings a bad faith action without raising breach of contract. For the former, as discussed, the bad faith claim and any requested relief for punitive or severe emotional distress damages are barred once there is a final judgment. For the latter, compensatory damages that would normally be recovered through a breach of contract action can be awarded even if breach of contract is not pled, as the damages are still viewed as the proximate result of the bad faith.[xxxiii]
Claim preclusion prevents an insured from raising first-party bad faith as a new theory of recovery in order to drag its own insurer into court a second time to litigate an insurance claim denial that was previously adjudicated by way of a breach of contract claim. Insurers can be assured that if an insured fails to raise a first-party bad faith claim along with a breach of contract claim in one action arising out of an adverse claim decision, the insured is forever precluded from doing so in a subsequent action based on the same claim. Claim preclusion gives insurers the ability to avoid the cost and time of litigation and the potential for punitive damages, and it is also an effective tool for saving the courts’ time and resources.
[i] Roehl Transp., Inc. v. Liberty Mut. Ins. Co., 2010 WI 49, 25 Wis. 2d 56, 784 N.W.2d 542.
[ii] Id., ¶ 198.
[iii] See Wisconsin Zinc Co. v. Fidelity & Deposit Co., 162 Wis. 39, 155 N.W. 1081 (1916).
[iv] Anderson v. Cont’l Ins. Co., 85 Wis. 2d 675, 271 N.W.2d 368 (1978).
[v] Id. at 686.
[vi] Third-party bad faith claims are claims “based on a liability insurer's failure to accept a third-party claimant's offer to settle his claim against the insured.” Roehl Transp., Inc., 25 Wis. 2d 56, ¶ 73 (quoting Stephen S. Ashley, Bad Faith Actions: Liability and Damages § 3:01 (2d ed. 1997)).
[vii] See Roehl Transp., Inc., 25 Wis. 2d 56, ¶ 27 (discussing the three types of bad faith claims). However, the Roehl Transportation court recognized the possibility that the traditional bad faith categories could expand as cases with new claims handling scenarios are brought before the courts. See id., ¶ 36 (“No Wisconsin case holds that the three types of bad faith claims previously recognized are the only situations in which a claim of insurance bad faith may be recognized. . . . Rather, the three identified types of insurance bad faith claims arise from fact situations presented to the courts to date.”).
[viii] Anderson, 85 Wis. 2d at 689.
[ix] 85 Wis. 2d 675, 271 N.W.2d 368 (1978).
[x] Id. at 692.
[xi] Id. at 691.
[xii] Id. at 692; see also Trinity Evangelical Lutheran Church v. Tower Ins. Co., 2002 WI App 46, ¶ 27, 251 Wis. 2d 212, 641 N.W.2d 504.
[xiii] Anderson, 85 Wis. 2d at 696-697.
[xiv] Lindas v. Cady, 183 Wis. 2d 547, 558, 515 N.W.2d 458 (1994).
[xv] Kruckenberg v. Harvey, 2005 WI 43, ¶ 20, 279 Wis. 2d 520, 694 N.W.2d 879.
[xvi] Allen v. McCurry, 449 U.S. 90, 94 (1980).
[xvii] Northern States Power Co. v. Bugher, 189 Wis. 2d 541, 551, 525 N.W.2d 723 (1994).
[xviii] See Kruckenberg, 279 Wis. 2d 520, ¶ 25.
[xix] See id., ¶¶ 27-30.
[xx] Pliska v. City of Stevens Point, 823 F.2d 1169, 1173 (7th Cir. 1987).
[xxi] Id.; Depratt v. West Bend Mutual Ins. Co., 113 Wis. 2d 306, 311-312, 334 N.W.2d 883 (1983).
[xxii] Northern States Power Co., 189 Wis. 2d at 555.
[xxiii] Id. (citing Restatement 2d of Judgments § 24).
[xxiv] Id. at 544.
[xxv] Id. at 554.
[xxviii] Viscusi v. Progressive Universal Ins. Co., unpublished slip op., No. 09-AP-942 (Wis. Ct. App. Jan. 12, 2010).
[xxix] The policy provided that an insured “must take reasonable steps after a loss to protect the covered vehicle . . . from further loss. We will pay reasonable expenses incurred in providing that protection. If you fail to do so, any further damages will not be covered under this policy.” Id.
[xxxii] In Porn v. National Grange Mut. Ins. Co., 93 F.3d 31, 33 (1st Cir. 1995), the court found a bad faith claim to be barred by claim preclusion. See also Rawe v. Liberty Mut. Fire Ins. Co., 462 F.3d 521, 529 (6th Cir. 2006) (“[A]llegations of bad faith based upon Liberty Mutual's alleged actions pre-dating the filing of Rawe's first suit do not arise ‘from entirely separate and discrete events and wrongful acts.’”); McCarty v. First of Ga. Ins. Co., 713 F.2d 609, 612 (10th Cir. 1983) (applying Oklahoma law); Duhaime v. American Reserve Life Ins. Co., 511 A.2d 333, 335 (Conn. 1986) (“In effect, the plaintiff is seeking to re-litigate a single claim under a new theory in order to obtain an additional remedy, and this he may not do.”); Chandler v. Commercial Union Ins. Co., 467 So. 2d 244, 250 (Ala. 1985); Hubbell v. Trans World Life Ins. Co., 408 N.E.2d 918, 919 (N.Y. 1980); Stone v. Beneficial Standard Life Ins. Co., 542 P.2d 892, 894 (Or. 1975) (“It is the rule in any case that because part of the claim could have been brought under a separate cause of action, it is no excuse for not applying res judicata when that portion of the claim could have been readily disposed of in the original proceeding.”); Salazar v. State Farm Mut. Auto. Ins. Co., 148 P.3d 278, 281 (Colo. Ct. App 2006) (“[A]lthough the two claims presented different legal theories, one sounding in contract and the other in tort, they sought redress for essentially the same wrong.”); Beals v. Commercial Union Ins. Co., 808 N.E.2d 824 (Mass. App. Ct. 2004).
[xxxiii] See Jones v. Secura Ins. Co., 2002 WI 11, ¶ 35, 249 Wis. 2d 623, 638 N.W.2d 575. In Jones, a breach of contract action that was brought by two insureds was dismissed on summary judgment because the one-year statute of limitations for fire insurance policy claims expired. Id., ¶ 6. The insured’s bad faith claim survived summary judgment, and the insureds sought a declaration that they could seek damages for lost use of property, lost property, and lost business as part of the bad faith claim. Id., ¶ 7. The insurer argued that the damages were contractual in nature, and thus were not recoverable as part of the bad faith claim. Id. The court disagreed, holding that the statute of limitations for the breach of contract claim did not preclude recovery of the damages sought, so long as they were the proximate result of the insurer’s tortious conduct, and were recoverable as compensatory damages. Id., ¶¶ 34-36. The court recognized that breach of contract and bad faith claims are separate, but held that they could lead to the recovery of separate, but not necessarily exclusive, damages. Id., ¶ 34.