CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (ICA NO. 29539; CIV. NO. 01-1-0467)
Fernando L. Cosio, for petitioner
Bradford F.K. Bliss, for respondent
RECKTENWALD, C.J., NAKAYAMA, ACOBA, AND MCKENNA, JJ., WITH CIRCUIT JUDGE CHANG, ASSIGNED DUE TO VACANCY, CONCURRING AND DISSENTING
We hold that (1) under the assigned claims procedure of the State of Hawai'i Insurance Joint Underwriting Program (JUP), see Hawai'i Revised Statutes (HRS) § 431:100408 (Supp. 1998), the insurer assigned to a claim owes the same rights and obligations to the person whose claim is assigned to it as the insurer would owe to an insured to whom the insurer had issued a motor vehicle mandatory public liability and property insurance policy, HRS § 431:100403 (Supp. 1998); (2) the insurer's good faith covenant implied in such motor vehicle policies applies to claimants under the assigned claim procedure irrespective of the absence of a written insurance policy; (3) accordingly, Petitioner/Plaintiff-Appellant Shilo Willis (Petitioner), who was assigned by the JUP Bureau to Respondent/Defendant-Appellee First Insurance Company of Hawai'i, Ltd. (Respondent) under the assigned claim procedure, was owed a duty of good faith by Respondent; and (4) whether Respondent acted in bad faith in this case as alleged by Petitioner is a question of fact to be determined by the trier of fact. Therefore, we vacate the December 11, 2008 Final Judgment of the Circuit Court of the First Circuit (the court) and the March 9, 2012 judgment of the Intermediate Court of Appeals (ICA) filed pursuant to its February 3, 2012 published opinion in Willis v. Swain, 126 Hawai'i 312, 270 P.3d 1042 (App. 2012) (Willis III),  affirming the court, because both reflect holdings to the contrary. We remand this case to the court for proceedings consistent with this opinion.
On February 10, 1999, Petitioner was a passenger in an uninsured vehicle that rear-ended another vehicle. The uninsured vehicle was owned and operated by Craig Swain. At the time of the accident, Petitioner, a public assistance recipient, owned her own vehicle, and had a certificate policy issued by the State of Hawai'i Department of Human Services (DHS) through its JUP. Respondent was designated to adjust the certificate policy.
The certificate policy was in effect from July 2, 1998 through July 2, 1999, but did not include uninsured motorist coverage. Petitioner sought medical treatment for injuries resulting from the collision. Willis v. Swain, 112 Hawai'i 184, 187 n.6, 145 P.3d 727, 730 n.6 (2006) (Willis I),  On July 21, 1999, Petitioner applied for assigned claims coverage under the JUP. On August 11, 1999, the JUP Bureau determined that Petitioner was entitled to receive benefits available under JUP, and assigned Petitioner's claim to Respondent. On December 28, 1999, Respondent denied Petitioner's request for coverage on the ground that, at the time of the accident, Petitioner had a certificate policy and that policy did not include uninsured motorist coverage.
On February 9, 2001, Petitioner sued Respondent for breach of contract, bad faith refusal to pay liability coverage, misrepresentation, unfair claims practices, and unfair or deceptive acts or practices in violation of HRS § 480-2 (1993).On May 6, 2003, the court entered summary judgment in favor of Respondent with respect to all of Petitioner's claims. This court reversed and remanded for Respondent to "tender the appropriate benefits under the assigned claims program." Willis I_, 112 Hawai'i at 191, 145 P.3d at 734. Respondent paid Petitioner the bodily injury liability policy limit of $20, 000.
Subsequently, Petitioner requested attorneys' fees and costs as the prevailing party in Willis I. Willis v. Swain, 113 Hawai'i 246, 151 P.3d 727 (2006) (Willis II). This court held that Petitioner was not entitled to attorneys' fees, but that she should be awarded costs. Id. at 250, 151 P.3d at 731.
On June 8, 2007, Petitioner filed a motion to compel Respondent to answer Petitioner's interrogatories, and to respond to Petitioner's requests for production of documents. On June 28, 2007, Respondent moved for summary judgment with respect to Petitioner's remaining claims for breach of contract, bad faith, misrepresentation, unfair claims practices, and unfair or deceptive acts or practices in violation of HRS § 480-2. Petitioner did not move for summary judgment, but filed an opposition to Respondent's motion.
As to Petitioner's bad faith claim, Respondent argued, in relevant part, that under Hawai'i law there is no bad faith if an insurance company denies benefits based on a reasonable interpretation of the policy or based on an open question of law. Respondent contended that the fact that the court had previously granted summary judgment to it on the merits of Petitioner's claim for benefits (a decision ultimately reversed in Willis I) demonstrated that there was reasonable disagreement over the interpretation of the law as applied to the facts of this case. Thus, Respondent urged, there was an open question of law and Petitioner had no basis to pursue its bad faith claim.
Petitioner answered that whether Respondent had acted unreasonably was a question of fact, and as such, was not the proper subject of a motion for summary judgment. Petitioner also argued that if an insurer honestly believes that its policy does not provide coverage, it must bear the risk of making the wrong judgment. Petitioner noted that this court in Willis I had criticized Respondent's argument, calling it "absurd, " and thus, whether Respondent acted reasonably when it denied benefits on an irrational argument was a question of fact that precluded summary judgment.
Additionally, Petitioner argued that because Respondent had not answered some of Petitioner's interrogatories, produced requested documents, or allowed Petitioner to depose its claims adjusters, Petitioner's expert, a former adjuster for the JUP program for another insurance company, was unable to fully evaluate whether Respondent had denied coverage in bad faith. However, the expert averred in an affidavit submitted along with Petitioner's opposition, that according to his reading of Willis 1_ and the practice of the insurance industry, Respondent had unreasonably denied coverage to Petitioner.
On August 20, 2007, Respondent filed supplemental memorandum in support of its motion for summary judgment, and Petitioner filed a supplemental memorandum in opposition to the motion for summary judgment. Attached to Petitioner's Reply to Respondent's Supplemental Legal Memorandum was another affidavit from Petitioner's expert. In the affidavit, Petitioner's expert averred:
1. I reviewed the documents which were produced to [Petitioner] in response to [Petitioner's] request for production of documents relating to [Respondent's] denial of benefits .
2. Based on the review of the above documents, it is my professional opinion that [Respondent] unreasonably denied the JUP assigned claim benefits to [Petitioner].
3. [Respondent] unreasonably denied the JUP assigned claim benefits because it did not, among other things, have any legal basis to deny said benefits.
4. The above-referenced records produced by [Respondent] also do not show that a sufficient investigation was undertaken by [Respondent] in connection to its denial of the JUP assigned claim benefits.
5. [Respondent] unreasonably and wrongfully denied the assigned claim when it unilaterally confused the purpose and application of a certificate policy and an assigned claim, which are separate and apart from one another.
6. Within the insurance industry and community, it is common knowledge and understood that a certificate policy does not negate a JUP assigned claim.
7. [Respondent] owed [Petitioner] a duty of good faith and fair dealing, as the insurance company who was assigned to adjust the JUP assigned claim by the State of Hawai'i under the [JUP] .
8. To the extent that the JUP assigned claims, essentially, operates as an insurance relief measure and is a substitute to the mandated automobile bodily injury coverage requirements of the State of Hawai'i, [Respondent's] duty of good faith and fair dealing arises from [Respondent's] assigned role as a servicing carrier and an insurer under the [JUP], and as such does not depend, necessarily, on whether [Petitioner] was a party to any written contract.
9. [Respondent breached its duty of good faith and fair dealing when when [sic] it unreasonably and wrongfully denied [Petitioner] the JUP assigned claim benefits.
10. The above opinions are preliminary and subject to change whenever further documents are produced by [Respondent] and/or other facts are developed through further discovery in the underlying lawsuit against
[Respondent] . (Emphases added.)
On October 3, 2007, the court granted Respondent's motion, concluding, in relevant part, that there was no contract of insurance between Petitioner and Respondent, and thus, there could be no cognizable claim of bad faith in the absence of a contract. The court further concluded that the published opinion of this court in Willis I settled an open question of law and therefore pursuant to Enoka v. AIG Hawai'i Ins. Co., 109 Hawai'i 537, 128 P.3d 850 (2006), there was no bad faith on Respondent's part. The court also granted Respondent's motion for summary judgment with respect to the remainder of Petitioner's claims. Upon granting Respondent's motion for summary judgment, the court held that Petitioner's motion to compel was moot and denied it.
On Petitioner's appeal to the ICA,  the ICA held that an underlying insurance contract was required in order to assert a claim of bad faith against an insurer, and because Petitioner's claims did not arise from an insurance contract, the court did not err in granting summary judgment on Petitioner's bad faith claim. Willis III, 126 Hawai'i at 315-17, 270 P.3d at 1045-47. In light of that holding, the ICA declined to address whether the court erred in concluding that Respondent did not act in bad faith. Id. The ICA also concluded that in light of its holding that no bad faith claim could lie against Respondent, the court properly denied Petitioner's motion to compel. Willis III, 126 Hawai'i at 317, 270 P.3d at 1047. III. Petitioner presents the following questions in her Application:
[1.] Whether the ICA correctly decided that [Respondent] did not owe a duty of good faith in the absence of a contractual relationship when HRS § 431:10C-403 specifically and clearly states that an assignee insurance company has the same obligations as though it had sold the policy.
[2.] Whether [Respondent] owed [Petitioner] a duty of good faith pursuant to its insurer and insured relationship regardless whether [Petitioner] purchased a conventional motor vehicle insurance policy from [Respondent].
[3.] Whether it is rational to exempt Hawai'i insurance companies from acting in good faith when adjusting [JUP] assigned claims when they have an independent duty implied in law to act in good faith as fiduciaries with their insureds.
In 1973, Hawai'i overhauled its insurance law and created a no-fault insurance scheme to govern motor vehicle accident reparations. Chapter 294 was enacted in order to "create a system of reparations for accidental harm and arising from motor vehicle accidents, to compensate these damages without regard to fault, and to limit tort liability for these accidents." HRS § 294-1(a) (1974). According to the legislature, the "system of no-fault insurance can only be truly effective ... if all drivers participate at least to the extent required by law" HRS § 294-1(b) (1974). For those persons "truly economically unable to afford insurance, the legislature . . . provided for them under the public assistance provisions of [Chapter 2 94]." Id.
In 1974, the public assistance provisions of the plan, located in HRS §§ 294-20 through -23, were repealed and replaced with the JUP, HRS §§ 294-20 to -24 (1974). The JUP plan required all insurers authorized to write insurance in Hawai'i to maintain membership in the plan. HRS § 294-20. The insurance commissioner was required to establish classifications of eligible persons for whom the JUP would provide no-fault policies and any additional coverage. HRS § 294-22.
In 1987, Hawaii's motor vehicle insurance law was again overhauled with the repeal of Chapter 2 94 and enactment of Article IOC of Chapter 431. The purpose of Article IOC was to
(1) Create a system of reparations for accidental harm and loss arising from motor vehicle accidents;
(2) Compensate these damages without regard to fault; and
(3) Limit tort liability for these accidents.
HRS § 431:10C-102 (Supp. 1997). To encourage participation by-all drivers, uninsured drivers were dealt with more severely in criminal and civil areas, and those who were unable to afford insurance were provided for under the JUP. Id.
The JUP was incorporated into Article IOC under HRS §§ 431:10C-401 through -412. The JUP has two options for coverage. The first allows individuals to obtain certificate policies, HRS § 431:10C-407 (Supp. 1999), which are "intended to provide motor vehicle insurance and optional additional insurance in a convenient and expeditious manner for . . . persons who otherwise are in good faith entitled to, but unable to obtain, motor vehicle insurance through ordinary methods." Hawai'i Administrative Rules (HAR) § 16-23-67(a) (1999). The second, the "assigned claims" program, allows individuals to obtain coverage even if they do not have a certificate policy. HRS § 431:10C-408. The assigned claims program "consists of the assignment . . . of claims of victims for whom no policy is applicable, such as the hit-and-run victim who is not covered by a motor vehicle insurance policy." HAR § 16-23-67 (b).
For certificate policies, the DHS must provide a certificate of eligibility for JUP coverage to eligible licensed drivers and unlicensed permanently disabled individuals unable to operate their motor vehicle, who are receiving public assistance and who desire basic motor vehicle insurance coverage under the JUP. HAR § 16-23-73 (a) (1999). The applicant then submits the certificate to the servicing carrier of the applicant's choice for a motor vehicle insurance policy. Id. Certificates received by the servicing carrier within thirty days from the date of certification eligibility by DHS "shall be accepted and treated as if it were payment in full" for a policy. Id. The servicing carrier must then "certify this certificate which will function as a motor vehicle insurance policy and issue the applicant a motor vehicle insurance identification card." Id.
In contrast, under the assigned claims program "a person sustaining accidental harm, or such a person's legal representative, " (except as provided in another subsection) may obtain motor vehicle insurance benefits through the plan whenever:
(1) No insurance benefits under motor vehicle insurance policies are applicable to the accidental harm;
(2) No such insurance benefits applicable to the accidental harm can be identified; or
(3) The only identifiable insurance benefits under motor vehicle insurance policies applicable to the accidental harm will not be paid in full because of financial inability of one or more self-insurers or insurers to fulfill their obligations .
HRS § 431:100408 (a) .
Insurers operating in Hawai'i are required to participate in the JUP (with some exceptions) . HAR § 16-23-68 (a) (1999). Under the program, insurers "pool their losses and bona fide expenses ... to prevent the imposition of any inordinate burden on any particular insurer." HAR § 16-23-68(a). "All costs incurred in the operation of the [JUP], such as administrative, staff, and claims (other than assigned claims) paid, shall be allocated fairly and equitably among the JUP members." HAR § 16-23-70 (1999). Losses and expenses "under the assigned claims program are pro-rated among and shared by all motor vehicle insurers and self-insurers." HAR § 16-23-67(b). Every year, the commissioner "prorate[s] among and assess[es] all insurers and self-insurers all costs and claims paid under the assigned claims program." HAR § 16-23-85 (1999).
The JUP also specifies the duties of insurers participating in the program. Under HRS § 431:10C-403, the JUP Bureau "shall promptly assign each claim and application, and notify the claimant or applicant" of the identity of the assignee insurer. (Emphasis added.) Importantly,
[t]he assignee, thereafter, has rights and obligations as if it had issued motor vehicle mandatory public liability and property damage policies complying with this article applicable to the accidental harm or other damage, or, in the case of financial inability of a motor vehicle insurer or self-insurer to perform its obligations, to perform its obligations as if the assignee had written the applicable motor vehicle insurance policy, undertaken the self-insurance, or lawfully obligated itself to pay motor vehicle insurance benefits.
Id. (emphasis added).
The law of insurance fits largely within two domains. 1 New Appleman on Insurance Law Library Edition § 1.04 (Jeffrey E. Thomas, ed., 2011) (hereinafter Appleman). The first involves the regulation of insurers, and is generally accomplished through statutes enacted by state legislatures and administrative regulations issued by state agencies. Id. The second involves regulation of the insured-insurer relationship, and for the most part consists of judicially-articulated rules. Id. This latter realm of insurance law largely overlaps with contract law because the insurance arrangement is usually articulated in a contract. Id. However, even if insurance law is generally understood as a specialized application of contract law, other bodies of law are also pertinent to its application. Id. Doctrines developed in contract law to facilitate the formation of agreements between parties negotiating at arms length have been adapted and expanded by incorporating principles from other areas of law in order to regulate the special relationship between policyholders and insurers. See id. Thus, "tort law as expressed through the law of bad faith is highly relevant to the regulation of the insurer-insured relationship." Id.
Broadly speaking, in first-party insurance, "the contract between the insurer and the insured indemnifies the insured for a loss suffered directly by the insured." Appleman § 1.08. Proceeds are paid to the insured to redress the insured's loss. Id. Liability insurance, on the other hand, is described as third-party insurance because the interests protected by the policy are ultimately those of third parties injured by the insured's conduct. Id. For example, if the insured negligently insures a third party, the third party will possess a claim against the insured. Id. If the claim is reduced to a judgment, the insured will suffer a loss. Id. The liability insurer will reimburse the insured for any liability the insured may have to the third party, but in the event of payment, the insured simply transfers the proceeds from the insurer to the third party. Id.
One kind of insurance that appears to straddle the first-party and third-party categories is uninsured motorist insurance. Id. As Appleman explains, after states began to require that operators of automobiles carry liability insurance for the purpose of compensating the victims of automobile accidents, "it became apparent that no mandatory system of liability insurance could compensate all of the situations in which persons were injured in vehicular accidents." This led insurers to market uninsured motorist coverage, "which is essentially a first-party coverage where the insurer's obligation is defined by the scope of a third party's obligation to its own insured." Id. (emphasis added). In other words, under uninsured motorist coverage, ...