A Reasonable But Erroneous Coverage Determination is Not Bad Faith

The Massachusetts Supreme Judicial Court reinvigorated, yet at the same time may have narrowed, a key rule governing insurer bad faith claims in this state in its decision this month in City Fuel Corp. vs. National Fire Insurance Company of Hartford, SJC-09623 (May 10, 2006), available here http://www.masslawyersweekly.com/signup/opinion.cfm?page=ma/opin/sup/1007806.htm.

In the Commonwealth, bad faith claims are premised on General Laws Chapter 93A, which bans unfair and deceptive trade practices; in the context of insurance, it grants both claimants and insureds the right to sue insurers for any of a variety of actions by the insurer. One key carve out, an area where an insurer is understood to be left with some discretion to act without fear of being liable for bad faith under the statute, has traditionally been the insurer's freedom to make coverage determinations, even erroneous ones. So long as the determination was at least reasonable, the insurer cannot be liable for bad faith simply for making an incorrect coverage determination. The Supreme Judicial Court, in City Fuel Corp., reiterated that this rule still applies, and that insurers still have both discretion in this area and the freedom to err. The court stated:

We do, however, affirm the judge's decision granting summary judgment on the G. L. c. 93A claim to National Fire. That claim fails because the interpretation of the policy's language is an issue of first impression, and we find that National Fire's position was reasonable. See Polaroid Corp. v. Travelers Indem. Co., 414 Mass. 747, 763 (1993) (even if coverage found to exist, insurer not liable under G. L. c. 93A if its position was reasonable, particularly where little or no legal precedent exists on the issue).

City Fuel Corp. does raise an interesting question on this point, however. By its focus on the absence of legal precedent that would guide the insurer's determination, is the court in the process of narrowing that carve out? Is it no longer enough to simply be reasonable to preclude bad faith liability from attaching to an insurer's erroneous coverage decision? Is the court moving towards imposing additional requirements, such as the absence of legal guidance? Are we moving towards the word reasonable in this context being defined, and having specific elements - such as the absence of legal precedent?

Case law has moved far in the direction of imposing bad faith liability on insurers in this jurisdiction for acts that traditionally have been a normal part of the business of insurance, or at least opening up those acts to microscopic investigation before deciding whether or not the insurer should be free to engage in them without the risk of bad faith exposure. Is this another example?