Supreme court addresses interplay of contract breach and bad faith in case of first impression

By Deborah Spanic, legal writer

June 16, 2011 – The Wisconsin supreme court, in Brethorst v. Allstate Property and Casualty Ins. Co. (2011 WI 41, June 14,2011), addressed a case of first impression in the relationship of a breach of contract claim to a claim of bad faith on the part of an insurer.

Wanda Brethorst, an insured of Allstate, was injured in an automobile accident with an uninsured motorist (UM). Bresthorst made a claim to Allstate for medical expenses of $9,789. Allstate paid the $5,000 of medical expenses covered in her policy and offered a settlement of an additional $1,800. Brethorst rejected the settlement and filed a claim against Allstate for bad faith.

Allstate filed a motion with the circuit court asking that Brethorst’s contract claim for UM coverage be bifurcated from her bad-faith claim. Brethorst responded that she filed only one claim – bad faith – and therefore no bifurcation or stay of discovery was appropriate. The circuit court agreed with Brethorst and concluded that a party may maintain a bad-faith claim without first proving a breach of contract claim as a condition precedent. Allstate appealed and the court of appeals certified the matter to the supreme court, and the court accepted certification. See Brethorst, ¶¶ 2-4.

The court was asked to decide primarily whether a breach of contract claim is a condition precedent to proceeding with discovery in a first-party bad-faith claim.

The facts of the case

Wanda Brethorst and her husband William were involved in an automobile accident caused by an uninsured motorist, Margy L. Raymond, who was highly intoxicated when she pulled her vehicle onto the highway in front of the Brethorsts. William was driving, and Wanda sustained injury as a result of the accident. The Brethorsts were insured by Allstate, and their policy included coverage for injuries caused by an uninsured motorist, as well as $5,000 in medical expenses. See Id., ¶ 7.

Brethorst submitted a UM claim to Allstate for her injuries. Allstate employee Michael Kahn informed Brethorst’s attorney, Timothy Knurr, that he had assumed the handling of Brethorst’s claim. Kahn also informed Knurr that Allstate viewed the occurrence as a “minor accident” and that Allstate “wouldn’t expect much of any injury and treatment.” See Id., ¶¶ 8-10.

Brethorst continued to receive physical therapy for her injuries and provided Allstate with notice of the ongoing treatment. In total, Brethorst incurred $9,789 in medical expenses. Kahn initially offered to settle the claim for $1,500 above the $5,000 in medical expenses already paid. Brethorst responded to this offer with a letter from her physician, Dr. Jerome Lerner, who stated that while Brethorst had suffered from chronic pain stemming from arthritis and fibromyalgia prior to the date of the accident, the accident had resulted in “acute cervical and back strain/sprain,” exacerbating her pre-existing conditions. See Id., ¶¶ 11-13.

Upon receipt of the letter, Kahn increased Allstate’s offer to $1,800 and again referenced the small amount of damage to the vehicle and Allstate’s assessment that this was only a minor accident. Brethorst then filed her claim for bad -faith denial of benefits, alleging that Allstate had a policy of routinely offering sums substantially less than medical bills incurred in accidents involving “minor impact soft tissue” (MIST) injuries. She also alleged that Allstate failed to conduct a full and fair investigation of the case, failed to have her claim evaluated by anyone with medical training, and ignored both the medical opinion of Dr. Lerner and Wisconsin law governing liability for medical bills and expenses. See Id., ¶¶ 14-15.

Allstate answered that it did have a MIST policy but denied Brethorst’s characterization of it. It also contended that the bad-faith claim should be bifurcated from other claims and the proceedings on bad faith should be stayed until all other claims were resolved. Allstate then filed a motion to bifurcate Brethorst’s contract claim from her bad-faith claim. Brethorst responded that she had asserted only one claim, for bad faith, and therefore there was nothing to bifurcate. See Id., ¶ 16.

The analysis and decision

The court was asked to decide whether the insured must prove a breach of contract prior to litigating a claim of bad faith against an insurer where there is no accompanying claim for breach of contract.

Wisconsin law is clear that to bring a bad-faith claim, “a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” Bad faith is an intentional tort, and as such, the plaintiff asserting a bad faith claim assumes a higher burden than that required for breach of contract. See Id., ¶¶ 26, 33.

This case presented a new fact pattern to the court and an issue that Wisconsin law had yet to address, and, as such, the court noted that it must look to the principles of the tort of bad faith to determine whether the claim is proper. The court specifically noted that “a bad faith claim arises from the contractual relationship between the parties, but is not a contract action.” See Id., ¶ 35.

In assessing Allstate’s request for bifurcation, the appeals court noted that, “the trial court must consider the potential prejudice to the parties, the complexity of the issues, the potential for jury confusion and the issues of convenience, economy and delay.” See Id., ¶ 39.

The court then turned to treatises on first-party claims. It concluded that there is a need to establish a wrongful denial of some contracted-for-benefit before permitting discovery for a bad-faith claim, noting that “First party bad faith cannot exist without some wrongful denial of benefit under the insurance contract.” See Id., ¶ 39.

“An insurer in Wisconsin is required to conduct an appropriate and careful investigation before assessing a claim,” the court noted. “Sometimes, the insured has the burden to establish coverage.” See Id., ¶¶ 61-62.

The court summarized the analysis by stating that, “What damages may be available to Brethorst in the final analysis – if she prevails – cannot be determined until she has first been allowed to proceed with her claim – and to proceed with discovery.” The court concluded that some breach of contract by an insurer is a fundamental prerequisite for a first-party bad-faith claim against the insurer by the insured. See Id., ¶¶ 64-65.

Interestingly, the court noted that it reaches this conclusion “with some misgivings, because we do not countenance bad behavior by insurers against their insureds.” See Id., ¶ 66.

On the issue of discovery, the court held that “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.” See Id., ¶ 76. The effect on this case was that Brethorst did plead a breach contract through her bad-faith claim and that Allstate provided nothing to the circuit court to undermine Brethorst’s story. See Id., ¶¶ 83-85.

Although the court disagrees with some of the circuit court’s analysis, it concluded that Judge Marik properly exercised his discretion in denying Allstate’s motion for a bifurcated trial and a stay of discovery, and it affirmed the order of the circuit court. See Id., ¶ 86.