With every contract comes an unwritten promise: the implied covenant of good faith and fair dealing. In essence, the implied covenant of good faith and fair dealing is the unwritten promise, baked into every contract, that neither party will do anything that will destroy or injure the right of the other party to receive the fruits of the contract. In the context of an insurance dispute, this covenant requires an insurance company to act in good faith when investigating claims and forbids it from manufacturing incorrect reasons for which to deny coverage, from deviating from both its own practices as well as those of the insurance industry, and from acting with gross disregard of the insured’s interest.
Indeed, the implied covenant of good faith and fair dealing is separate and distinct from the contract itself, as breach of the covenant involves more than a mere breach of the express terms of the contract. This presents an interesting dilemma when a single lawsuit contains both causes of action. For many years and across many jurisdictions, the general rule has been this: to survive a motion to dismiss, a cause of action for breach of the implied covenant of good faith and fair dealing, when part of the same civil action as a cause of action for breach of contract, must be based on separate and distinct facts from the breach of contract claim.
This article begins by discussing the nature of the obligation of good faith and fair dealing and its application in the context of an insurance contract. Next, it reviews how claims in which a breach of contract cause of action and a cause of action for breach of the implied covenant of good faith and fair dealing are both asserted based on the same conduct are typically resolved by courts, with the good faith and fair dealing claim frequently being dismissed as duplicative of a cause of action for breach of contract. The article then evaluates a recent decision that appears to depart from this typical framework, with an analysis of how it differs and why it is problematic given the existing case law. Finally, it offers observations on the likely future of that decision and whether it may be indicative of future trends in this area of the law.
The implied covenant of good faith and fair dealing is an obligation that exists in all contracts relating to the course of performance. The covenant embraces a pledge that neither party shall do anything that will injure or destroy the right of the other party to receive the fruits of the contract. While it has been observed that the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship, they do encompass any promises that a reasonable person in the position of the promisee would be justified in understanding were included. The precise nature and extent of the duty imposed by the implied promise depends on the contractual purpose.
As it exists in all contracts, the implied covenant of good faith and fair dealing applies to insurance contracts. However, it has been recognized that there is a special nature to the relationship between an insurer and the insured. The insured obtains an insurance contract to seek financial security and protection against calamity rather than to secure commercial advantage. In the context of insurance contracts specifically, the implied covenant of good faith and fair dealing includes a duty on the part of the insurer to investigate in good faith and pay covered claims. The refusal of the insurer to pay valid claims without justification defeats the expectations of the insured and the purpose of the insurance contract. For this reason, the law imposes a legal duty upon the insurer to deal with its insured in good faith. Importantly, the implied covenant of good faith and fair dealing in an insurance contract applies to both claims by the insured for first-party benefits and the obligation of the insurer to defend and settle third-party claims against the insured.
States across the country have characterized a cause of action for breach of the implied covenant of good faith and fair dealing in an insurance contract in different ways. Many states hold that an insured may bring a claim against its insurer in tort for breach of the implied covenant of good faith and fair dealing. Other jurisdictions label the claim as contractual but allow for a broad range of damages, which may include punitive, exemplary, or consequential damages. Some other jurisdictions likewise characterize the claim as contractual but confine the recovery to benefit-of-the-bargain damages. Finally, some other states have codified good faith and fair dealing claims statutorily.
Frequently, an insured who commences a lawsuit against its insurer for an alleged breach of the insurance contract will also assert a cause of action against the insurer for breach of the implied covenant of good faith and fair dealing. Such lawsuits are typically met with a motion, made by the defendant insurance carrier, to dismiss the cause of action for breach of the implied covenant of good faith and fair dealing as duplicative of the cause of action for breach of contract. The rationale behind this litigation tactic is often that, should the motion to dismiss be successful, the result will be the removal of the possibility of the award of extracontractual damages and potential bad faith discovery.
The remainder of this article deals with how courts address motions brought by insurers to dismiss claims for breach of the implied covenant of good faith and fair dealing when a breach of contract cause of action is also asserted.
As a general rule, where a complaint against an insurance carrier includes separate causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing, the latter will be dismissed as duplicative of the former if it is based on the same conduct. Courts that regularly abide by this standard principle often reason that where a private contract is formed between two parties, each party is contractually bound by an implied duty to act in good faith in the execution of such contract. As such, courts typically do not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing where that claim is based on the same facts as the breach of contract cause of action. Indeed, for each cause of action to stand, each must be predicated on distinct factual conduct.
Duplication in Alexanian. This was the case in Alexanian v. Government Employees Insurance Co., where the plaintiff sued GEICO and Travelers for a declaration that they had a duty to defend and indemnify him against counterclaims that were asserted against him in an underlying lawsuit. Specifically, Alexanian included two causes of action: one for breach of contract and another for breach of the implied covenant of good faith and fair dealing. The defendant insurance carriers moved to dismiss the implied covenant of good faith and fair dealing cause of action as redundant and duplicative of the breach of contract cause of action. In assessing whether to dismiss this cause of action, the court began by noting that it was predicated on the same facts as the breach of contract cause of action. In holding that Alexanian’s cause of action for breach of the implied covenant of good faith and fair dealing should be dismissed as duplicative of his cause of action for breach of contract because both claims were premised on the defendants’ disclaimers of coverage, the court explained as follows:
“New York law . . . does not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled.” Thus, when, as here, “a complaint alleges both a breach of contract and a breach of the implied covenant of good faith and fair dealing based on the same facts, the latter claim should be dismissed as redundant.”
In his opposition papers to the defendant insurance carriers’ motion to dismiss, Alexanian essentially repeated the allegations of the complaint. Namely, Alexanian argued that his cause of action for breach of the implied covenant of good faith and fair dealing was supported by the additional allegations that, in denying his claim, Travelers deceived him through a series of falsehoods. Alexanian further alleged that such conduct went beyond the level of a mere breach of the insurance contract and reached the level of a breach of the implied covenant of good faith and fair dealing. The court dismissed this argument in opposition offered by Alexanian, reasoning that these arguments amounted to “nothing more than referring to disagreements about policy terms as deception and falsehoods.” Essentially, the court held, Alexanian packaged the same conduct on the part of the insurer in two different ways in an effort to maintain two different causes of action.
As the Alexanian case illustrates, where a complaint contains causes of action for both breach of contract and breach of the implied covenant of good faith and fair dealing, both of which are predicated on the same factual allegations, the cause of action for breach of the implied covenant of good faith and fair dealing will be dismissed as duplicative of that for breach of contract. Indeed, the outcome of Alexanian appears to be the majority approach across jurisdictions.
Duplication in Veyhl. Another illustrative example comes from the recent New Jersey case Veyhl v. State Farm Fire & Casualty Co. There, the plaintiff held a homeowners insurance policy with the defendant, State Farm. The plaintiff’s premises allegedly sustained severe water damage, and the insured made a claim for first-party coverage under the policy. According to the plaintiff’s allegations, State Farm represented to its insured that it would pay $345,969.69 to reconstruct the premises, but the amount actually paid to its insured was short by over $90,000. Because of this alleged failure to fully cover the claim, the insured commenced an action against State Farm. The complaint alleged causes of action for, among other things, breach of contract and breach of the implied covenant of good faith and fair dealing. State Farm moved to dismiss the cause of action for breach of the implied covenant of good faith and fair dealing. State Farm’s theory behind its motion to dismiss was that this cause of action was duplicative of the plaintiff’s cause of action for breach of contract as the two causes of action were based on substantially the same conduct.
In considering whether these two causes of action were duplicative of one another, thus warranting dismissal of the good faith and fair dealing claim, the court began by noting New Jersey’s general rule, which encapsulates that outlined above:
It is well settled that “[w]here a party has breached a specific term of a contract, that party cannot be found separately liable for breaching the implied covenant of good faith and fair dealing ‘when the two asserted breaches basically rest on the same conduct.’” . . . Where breach of the implied covenant of good faith and fair dealing claims lack a distinct factual predicate, courts may dismiss them at the motion to dismiss stage.
Thus, when considering whether to dismiss a cause of action for breach of the implied covenant of good faith and fair dealing as duplicative of the breach of contract cause of action, an analysis must be made as to whether each is predicated on conduct different from the other. Here, the court noted that in the cause of action for breach of contract, the plaintiff alleged that the carrier failed to take appropriate and timely actions consistent with its express contractual obligations and acknowledgment of coverage for the loss. The court compared this allegation with the one that the plaintiff used to support his cause of action for breach of the implied covenant of good faith and fair dealing—that State Farm failed to provide full coverage to the plaintiff and acted in “bad faith” in its refusal to do so. The court ultimately held that these allegations were fundamentally the same, and reiterated that the plaintiff “cannot merely recite the same conduct [he] alleges for [State Farm’s] breach of contract and transform such conduct into a breach of the implied duty of good faith and fair dealing by appending a conclusory label that those actions were also done in bad faith.” Thus, in Veyhl, consistent with what seems to be the general rule across jurisdictions, the plaintiff’s cause of action for breach of the implied covenant of good faith and fair dealing was dismissed because it was predicated on the same conduct as the plaintiff’s cause of action for breach of contract.
The Veyhl decision can be boiled down to one key point: where an insured merely realleges the same conduct with different labels and legal conclusions attached, such is insufficient to maintain two distinct causes of action.
Distinct causes of action in N.Y. Botanical Garden. The complement to this general rule is that where the two causes of action are based on different conduct, each cause of action will survive a motion to dismiss based on the claims being duplicative. This was the case in N.Y. Botanical Garden v. Allied World Insurance Co. (U.S.) Inc. There, the plaintiff made a claim with Allied World for interruptions to its business that it suffered in the wake of the COVID-19 shutdown orders. While acknowledging that the plaintiff’s claim met the relevant policy definition of “contingent business interruption,” Allied World denied the plaintiff’s claim, and a lawsuit ensued. The plaintiff asserted two causes of action against Allied World: breach of contract and breach of the implied covenant of good faith and fair dealing. The basis for the plaintiff’s breach of contract cause of action was that Allied World’s denial of the plaintiff’s claim was a breach of the express terms of the policy. Notably, the allegations that supported the plaintiff’s cause of action for breach of the implied covenant of good faith and fair dealing were that Allied World did not conduct a full and fair investigation of its claim and had no meritorious basis for denying the claim but instead simply denied the claim pursuant to an internal business policy of not paying claims for business interruption losses that came as a result of the shutdowns associated with COVID-19.
The plaintiff’s lawsuit was met with a motion to dismiss by Allied World. Specifically, Allied World sought to dismiss the plaintiff’s cause of action for breach of the implied covenant of good faith and fair dealing as duplicative of its cause of action for breach of contract. To support its position, Allied World argued that the plaintiff’s cause of action for breach of the implied covenant of good faith and fair dealing was predicated on the same facts as its cause of action for breach of contract.
In denying Allied World’s motion to dismiss the plaintiff’s cause of action for breach of the implied covenant of good faith and fair dealing as duplicative of its cause of action for breach of contract, the court first recognized that the two causes of action contained some degree of overlap in terms of their factual allegations. However, the court denied Allied World’s motion because the plaintiff’s cause of action for breach of the implied covenant of good faith and fair dealing was premised on facts additional to those that supported the plaintiff’s cause of action for breach of contract.
This decision serves as the counterpart to the line of cases discussed above. Those cases stand for the proposition that where a cause of action for breach of the implied covenant of good faith and fair dealing is based on the same factual allegations as an accompanying cause of action for breach of contract, the former will be dismissed as duplicative of the latter. However, as seen in N.Y. Botanical Garden, this does not mean that the two causes of action can never appear side by side in a single lawsuit. Indeed, as N.Y. Botanical Garden held, where those causes of action are based on different, or even additional, factual allegations, they will both survive a motion to dismiss.
While the law is mostly settled on how courts will evaluate factually duplicative claims for breach of contract and breach of the implied covenant of good faith and fair dealing, one recent decision appears to have departed from this established methodology.
Phase I. Phase I Group, Inc. v. Burlington Insurance Co. illustrates a different way in which a cause of action for breach of the implied covenant of good faith and fair dealing may survive a motion to dismiss, where application of the above-referenced case law would suggest it should not have. In Phase I, the New York Supreme Court, New York County, allowed the cause of action for breach of the implied covenant of good faith and fair dealing to survive a motion to dismiss because, although based on virtually the same conduct as the cause of action for breach of contract, it sought additional damages aside from those pleaded in the breach of contract cause of action.
Phase I sued Burlington for declining to defend and/or indemnify it in an underlying action arising out of a construction accident. In its complaint, Phase I listed four separate causes of action against Burlington: (1) a declaration that Burlington had a duty to defend Phase I in the underlying action, (2) a declaration that Burlington would be required to indemnify Phase I if it were found liable in the underlying action, (3) breach of contract, and (4) breach of the implied covenant of good faith and fair dealing.
Burlington responded to the suit by filing a pre-answer motion to dismiss Phase I’s fourth cause of action for breach of the implied covenant of good faith and fair dealing on the ground that it was duplicative of its cause of action for breach of contract. Burlington based this argument on the fact that the bad faith cause of action was premised on substantially the same facts as the breach of contract cause of action. Notably, Phase I’s breach of contract cause of action sought only compensatory damages, while its implied covenant of good faith and fair dealing cause of action also sought consequential damages and legal fees that it incurred as a result of having to defend itself in the underlying action due to Burlington’s failure to do so. This key element of the proceedings was what caught the court’s attention. The court held as follows:
The Court finds that although these allegations arise out of similar facts as the third cause of action for breach of contract, plaintiff seeks different damages for the good faith claim. That requires the Court to deny the motion. Both causes of action assert that defendant breached the contract (the insurance policy) by refusing to provide defense and indemnity. But the good faith and fair dealing cause of action asserts consequential damages while the breach of contract claim does not. This fourth claim also seeks legal fees while the third claim does not.
This decision marks a sharp departure from the widely accepted standard discussed in the preceding section of this article. Perhaps most notably, the court expressly recognized that both causes of action arose out of the same factual circumstances. Having made this finding, the court nevertheless permitted the cause of action for breach of the implied covenant of good faith and fair dealing to proceed past the pleading stage based solely on the fact that Phase I sought damages for this cause of action aside from those sought in the cause of action for breach of contract.
Contrast Armata. However, the troubling decision reached by the court in Phase I does not appear to be the norm across jurisdictions. For example, another recent decision held exactly the opposite when presented with strikingly similar facts. In Armata v. Certain Underwriters at Lloyd’s London—Syndicate 1861, the U.S. District Court for the District of Colorado dismissed the plaintiffs’ cause of action for breach of the implied covenant of good faith and fair dealing when the only difference between it and their cause of action for breach of contract was the type of damages pleaded.
There, defendant ANV Global Services, Inc., had issued a policy to Cool Frootz LLC, which declared Chapter 11 bankruptcy. The plaintiffs had pending claims against Cool Frootz. Once a trustee was appointed in the bankruptcy proceeding, the plaintiffs notified the bankruptcy court of their claims, for which ANV proceeded to deny coverage.
Following ANV’s denial of coverage, the plaintiffs brought this lawsuit and alleged, among other things, causes of action for breach of the implied covenant of good faith and fair dealing and breach of contract. The plaintiffs’ breach of contract cause of action alleged that ANV was contractually obligated to defend Cool Frootz and indemnify it (as well as the plaintiffs) for their losses, per the claim. As part of the factual allegations to support the plaintiffs’ cause of action for breach of contract, the plaintiffs also alleged that ANV breached the policy by failing to comply with its contractual obligations, expressly provided for under the policy, to investigate the claim. To support their cause of action for breach of the implied covenant of good faith and fair dealing, the plaintiffs alleged that ANV unreasonably failed and/or refused to properly evaluate and/or investigate the claim; failed to adopt and/or implement reasonable standards for the prompt investigation, processing, and/or evaluation of claims; failed to affirm or deny coverage of claims within a reasonable amount of time; and, ultimately, wrongfully refused its own duty to defend and/or indemnify valid claims.
ANV moved to dismiss the plaintiffs’ cause of action for breach of the implied covenant of good faith and fair dealing as duplicative of their cause of action for breach of contract. In support of its motion to dismiss, ANV argued that each cause of action was based on the same factual conduct and that both therefore could not stand.
In opposition to ANV’s motion to dismiss, the plaintiffs argued that the factual allegations used to support their cause of action for breach of the implied covenant of good faith and fair dealing were distinct from their cause of action for breach of contract because the former sought different damages than the latter. Namely, the plaintiffs argued, the cause of action for breach of the implied covenant of good faith and fair dealing sought punitive damages, while the breach of contract cause of action sought compensatory damages.
In dismissing the plaintiffs’ cause of action for breach of the implied covenant of good faith and fair dealing as duplicative of their cause of action for breach of contract, the court reasoned that this fact alone was insufficient to render the two causes of action no longer duplicative of one another:
Plaintiffs fail to allege facts in the Second Amended Complaint to support their bad faith claims, let alone any facts supporting that Defendants acted “egregiously” with respect to their obligations under the Policy. In addition, Plaintiffs’ assertion that they seek other (i.e., punitive) damages under their bad faith claims does not explain how those claims are “based on allegations different than those underlying the accompanying breach of contract claim.”
Clearly, the Armata decision is in sharp dissonance with that reached in Phase I. In Phase I, the New York Supreme Court held that where a cause of action for breach of the implied covenant of good faith and fair dealing seeks damages additional to or different from those sought in the breach of contract cause of action, each cause of action may stand on its own. In Armata, the District of Colorado held just the opposite. Indeed, the Armata decision seems more akin to the string of decisions discussed in the preceding section, which each suggests that to withstand a motion to dismiss, the cause of action for breach of the implied covenant of good faith and fair dealing must be based on different conduct (not merely different damages) than the cause of action for breach of contract.
The Phase I decision is out of conformity with the established string of case law that is laid out above. As noted, in a typical case, where a cause of action for breach of the implied covenant of good faith and fair dealing is part of the same action as a cause of action for breach of contract, the former is dismissed as duplicative of the latter if it is based on the same conduct on the part of the insurer. In Phase I, however, the New York Supreme Court, County of New York, allowed both causes of action to stand because the cause of action for breach of the implied covenant of good faith and fair dealing sought damages additional to those sought by the cause of action for breach of contract. But as demonstrated by the Armata decision, additional damages alone are not enough in at least some jurisdictions to avoid dismissal. What’s more, a national search conducted by Hurwitz Fine revealed no case that upheld a cause of action for breach of the implied covenant of good faith and fair dealing as not duplicative of a cause of action for breach of contract where the only difference between the two was additional and/or different damages sought. This therefore begs the question: Is the Phase I decision the pioneer of a new exception to this well-established doctrine, or is it simply an outlier case that will likely be overturned on appeal?
Our prediction favors the latter. Indeed, there exists precedent from the appellate courts of New York that warrants dismissal: East Ramapo Central School District v. New York Schools Insurance Reciprocal.
In East Ramapo, the New York Appellate Division, Second Department, overturned a ruling by the New York Supreme Court, County of Nassau, that granted the defendant insurance company’s motion to dismiss the plaintiff’s cause of action for breach of the implied covenant of good faith and fair dealing as duplicative of its cause of action for breach of contract. This case arose out of an insurance coverage dispute following the defendant’s denial of the plaintiff’s claim made under a school board legal liability policy. The defendant’s denial of the claim was met by a lawsuit in which the plaintiff alleged causes of action for, among other things, breach of contract and breach of the implied covenant of good faith and fair dealing. This lawsuit by the plaintiff was met, in turn, by the defendant’s motion to dismiss the plaintiff’s cause of action for breach of the implied covenant of good faith and fair dealing as duplicative of its cause of action for breach of contract.
In support of its cause of action for breach of the implied covenant of good faith and fair dealing, the plaintiff alleged that the defendant failed to investigate, in good faith, the claims that were made against it in a related lawsuit in which it was sued, and denied coverage to it based on a piece of information that the plaintiff did not include in its claim. These allegations concluded with the allegation that the defendant’s conduct in denying its insurance claim “deviated from industry practices by denying coverage to the plaintiff where ‘[n]o reasonable insurer would have denied [such] coverage,’ and ‘[disclaimed] coverage with gross disregard for the facts and applicable law.’” Compare these allegations with those that supported the plaintiff’s cause of action for breach of contract, which were based entirely on the express terms of the policy.
In concluding that the lower court erred in dismissing the plaintiff’s cause of action for breach of the implied covenant of good faith and fair dealing as duplicative of its cause of action for breach of contract, the court stated:
[W]here, as here, the cause of action to recover damages for breach of the policy and the cause of action to recover damages for breach of the implied covenant of good faith and fair dealing allege different conduct on the part of the defendant and seek different categories and/or types of damages, the cause of action seeking damages for breach of the implied covenant of good faith and fair dealing should not be dismissed as “duplicative” of the cause of action alleging breach of contract.
Thus, the East Ramapo decision is clear that, in order to survive a motion to dismiss, a plaintiff’s cause of action for breach of the implied covenant of good faith and fair dealing must not only seek different damages but must also be based on conduct separate and apart from that upon which the plaintiff’s cause of action for breach of contract is based. Compare this with the holding of Phase I, which allowed both causes of action to stand where the breach of the implied covenant of good faith and fair dealing claim sought damages additional to those sought by the breach of contract claim—but where the two causes of action were based on the same conduct.
Based on the East Ramapo precedent, our prediction regarding the future of the Phase I decision is that it will be appealed to the New York Appellate Division, First Department, and will be overturned upon arrival. We see no reason to relax the standard articulated above and begin to allow each cause of action to stand on its own where one of them merely seeks additional—but not even entirely different—damages relative to the other.
We will have to see how this plays out, but our expectation is that the distinction drawn by the court in Phase I, regarding what is sought in terms of damages as a ground for sustaining a breach of the covenant of good faith and fair dealing claim that is otherwise entirely duplicative of a breach of contract claim, does not signal the beginning of a trend and should not raise concerns about future potentially seismic changes in the jurisprudence on this issue.
