By Bruce D. Voss

In an important decision for all insurance companies doing business in Hawaii, the Hawaii Supreme Court has ruled that insureds need not prove they have suffered economic or physical loss in order to recover emotional distress damages caused by an insurance company’s alleged bad faith.

The case, Miller v. Hartford Life Insurance Company, came to the Hawaii Supreme Court on a certified question from the U.S. District Court. The plaintiff claims that the two defendant insurance companies committed bad faith when they terminated her benefits under a long-term care insurance policy.

The insurance companies argued that Hawaii should follow California law, requiring economic or financial loss before an insured may recover emotional distress damages for bad faith. The insurance companies’ law firm contended that since first-party insurance contracts are primarily designed to protect the insured from financial loss, the insured should not be able to recover emotional distress damages in the absence of financial loss. The plaintiff’s attorney argued that Hawaii should adopt Colorado law, because following the California rule would encourage insurers to unreasonably refuse to pay, or delay payment of, a valid claim of the insured and then avoid liability for bad faith emotional distress damages by making payment at the last minute.

The Hawaii Supreme Court sided with the plaintiff, soundly rejecting the arguments made by the insurance company lawyers. The Court noted there was no language in prior Hawaii case law indicating Hawaii intended to place a threshold requirement of economic or physical loss caused by bad faith in order to recover emotional distress damages incurred as a result of the insurer’s bad faith.

The Court said its decision should not alarm insurance companies: “The jury system itself serves as a safeguard against fictitious claims of, and unlimited liability for, emotional distress damages allegedly resulting from an insurer’s bad faith. Our experience is that jurors are not easily deceived, and take their responsibilities seriously in evaluating the evidence and following the law as instructed by the trial court.”

In the short term, the Miller decision will make it more difficult for Hawaii insurance companies to obtain summary judgment on plaintiffs’ bad faith claims. In the long term, it remains to be seen whether the ruling will encourage plaintiffs’ attorneys to file more bad faith lawsuits.