Consequential Damages for Breach of Express Policy Terms Allowed
July 2005
On certification from the United States District
Court for the District Court of Utah, the Utah Supreme Court considered two
issues: the availability and scope of consequential damages in a first-party
claim for breach of the express terms of an insurance contract; and whether
an insured has a private right of action under Utah Code § 31A–26–301, which
requires timely payment of claims.
by Kevin
Merriman
Goldberg
Segalla LLP
Machan v. UNUM Life Insurance Company of America (Utah June 17, 2005) arose from a claim by Machan for benefits under a disability
policy issued by UNUM. Machan had been employed as a corporate executive in
the construction industry, and filed a claim for benefits in March 1999 following
complications from surgery. He filed an additional claim in April 2000, asserting
mental impairment resulting from the surgery.
Machan filed suit on UNUM's failure to pay the claim, which included claims
for consequential damages for the worsening of his psychological condition,
resulting in his inability to procure any gainful employment; the deprivation
of, due to his inability to pay for, psychological treatment for himself and
his mentally ill son; and the depletion of his assets and savings in order to
meet basic living expenses. UNUM eventually agreed to pay the monthly benefits
requested under the policy, and then sought dismissal of the claims for consequential
damages.
The Utah Supreme Court was asked to consider whether an insured may recover
consequential damages, other than attorney fees, for breach of the express terms
of an insurance contract, and, if so, the consequential damages available for
the breach and how they differ from the consequential damages for breach of
the implied covenant of good faith and fair dealing that the Court had previously
held are recoverable under Beck v. Farmers Insurance
Exchange, 701 P.2d 795, 801 (Utah 1985).
UNUM argued that, in the absence of bad faith, the only damages available
to an insured are the benefits to which the insured is entitled under the policy,
prejudgment interest, and reasonably foreseeable attorney fees. The Court disagreed,
holding that consequential damages are available for breach of either the express
or the implied terms of an insurance contract, but that the consequential damages
available for breach of an insurance contract's express terms may be more limited
in scope, based on the language of the contract and the extent to which any
damages were caused by the breach.
The court reasoned that insurance policies, though traditionally viewed as
such, are not merely commercial contracts for money, since the proceeds obtained
through insurance are not always fungible—an insured does not always have access
to an alternative source of funds from which to pay that which should have been
paid under the policy. Rather, insurance is purchased not only to provide funds
in case of loss, but also to provide peace of mind for the insured or his beneficiaries.
Thus, the Court had held in Beck that, in addition
to the damages flowing naturally from the breach, an insured is entitled to
damages reasonably within the contemplation of, or reasonably foreseeable by,
the parties at the time the contract was made. Such damages might include losses
in excess of the policy limits, such as for a home or business, and damages
for mental anguish in unusual cases.
Beck considered only the damages available
for breach of the implied terms of good faith and fair dealing, i.e., damages
available for bad faith. It did not consider damages available for breach of
the express terms of the policy. Since consequential damages are available under
general contract law, however, in the court's view, such damages are available
whether the company has breached the express or implied terms of the policy.
In both cases, the insured is entitled to those damages reasonably within the
contemplation of, or reasonably foreseeable by, the parties at the time the
contract was made.
The court acknowledged that the measure of damages in both types of cases
will not always be the same—the available damages for breach of express terms
will differ from those available for breach of the implied terms to the extent
they are limited by the language of the contract and the nature of the breach
in relation to the insured's reasonable expectations.
On the second certified question, the court held that an insured does not
have a private right of action to enforce Utah Code section 31A–26–301 against
an insurer, as the statute existed in 2000.
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