By Timothy A. Carney and Leah P. White
Oklahoma traditionally recognized that while every contract contains an implied covenant of good faith and fair dealing, the breach of that covenant would give rise only to a claim for breach of contract. The Oklahoma Supreme Court first recognized a tort remedy for a party’s breach of the performance of a contractual duty in Christian v. American Home Assurance Co., 577 P. 2d 899, 1977 OK 141. In Christian, the Court found that a “special relationship” existed between an insurer and an insured, given the quasi-public nature of insurance, the fact that the terms of insurance contracts are dictated by insurers, the unequal bargaining strength in such relationships, and the potential for an insurer to unscrupulously exert its power at a time when the insured is most vulnerable. The Christian Court held that in light of this special relationship, the breach of the implied duty of good faith may give rise to tort liability for bad faith.
Since Christian, the Oklahoma courts have shown restraint when asked to expand the tort of bad faith beyond the context of the insurer-insured relationship. For example, Oklahoma courts have declined to extend the duty to at-will employment relationships (Hinson v. Cameron, 742 P.2d 549, 1987 OK 49); claims against banks relating to commercial loans (Rogers v. Tecumseh Bank, 756 P.2d 1223, 1988 OK 36); claims against banks relating to guaranty agreements (First Nat’l Bank & Trust Co. of Vinita v. Kissee, 859 P.2d 502 1993 OK 96); and claims under take-or-pay gas contracts (RJB Gas Pipeline Co. v. Colorado Interstate Gas Co.,1989 OK CIV APP 100, 813 P.2d 1), to name a few. In these cases, the courts found that the contracts created in these commercial relationships do not have the same characteristics as an insurance contract, but instead are generally arms-length, negotiated contracts between sophisticated parties. The Oklahoma Supreme Court has cautioned that recognizing tort liability for a breach of the contract in these types of relationships would only serve to “chill” commercial transactions.
However, in certain other limited contexts beyond the traditional insurer-insured relationship, Oklahoma courts have recognized a tort claim for breach of the duty of good faith, such as in the context of a claim brought by a depositor for a willful and intentional wrongful dishonor of checks by his bank (Beshara v. S. Nat’l Bank, 928 P.2d 280, 291, 1996 OK 90); a claim brought by an obligee on a surety contract for a bad faith failure to pay (Worldlogics Corp. v. Chatham Reinsurance Corp., 108 P.3d 5, 2005 OK CIV APP 16); and a claim by a beneficiary of a self-insured plan against a third-party administrator, at least where the administrator may share in the losses occasioned by paying claims (Wathor v. Mutual Assurance Administrators, Inc., 87 P.3d 559, 2004 OK 2). These contexts were deemed to be more akin to the type of relationship identified in Christian as worthy of this extra protection.
Very recently, the Oklahoma Supreme Court issued two opinions relating to bad faith claims addressing whether the contract in question was an insurance contract, and whether a bad faith tort claim could be asserted if the contract in question was not an insurance contract. In Embry v. Innovative Aftermarket Systems L.P., 2010 OK 82, a vehicle purchaser entered into an agreement with a company as an addendum to a vehicle financing contract under which the company agreed that in the event of a total vehicle loss, if the purchaser’s insurance was insufficient to pay the remaining vehicle debt, the company would pay that deficiency. After the purchaser’s vehicle was totaled in an accident, and insurance was applied, there was a deficiency owed to the vehicle financing company, and so the purchaser sought payment of the deficiency under the contract. However, the company delayed paying the contract benefits and subsequently computed the deficiency and paid much less than the purchaser anticipated. The purchaser then brought various claims, including one for bad faith. Embry, 2010 OK 82 ¶1.
After various proceedings, which included findings concerning whether the contract was an insurance contract, the Supreme Court found that regardless of whether the contract was in fact an insurance contract, a bad faith claim could be asserted. The Court first noted that, “Tort recovery for bad faith is one of the two remedies provided for breach of the implied covenant to deal fairly and in good faith in the performance of a contract.” Id. ¶ 4. The Court then stated that it had “expressed reluctance to extend tort recovery for bad faith beyond the insurance field…,” but that “an insurance contract is not required to support tort liability for bad faith….” Id. ¶ 6. Rather, the Court found, “such liability depends upon the existence of a ‘special relationship’ under a contract (like the ‘special relationship’ of an insurer and insured).” Id.
The Court then held that the “’special relationship’ that gives rise to tort liability for bad faith is marked by (1) a disparity in bargaining power where the weaker party has no choice of terms, also called an adhesion contract; and (2) the elimination of risk.” Id. ¶ 7. Tort liability is allowed in such instances, the Court found, because “breach of the implied duty to deal fairly and in good faith, precipitates the precise economic hardship the contract was intended to avoid.” Id.
The Court went on to review the specific facts, and found that the purchaser could pursue a tort remedy for bad faith because such a special relationship existed. The Court found that the company alone chose the contract language, including the method used to calculate the amount of deficiency. Id. ¶8. Additionally, the company’s marketing brochure illustrated the importance of the contract benefit and its internet website emphasized that the protection would help customers during a “stressful time” when money is needed for a replacement vehicle. And, the company’s failure to pay the full deficiency in accordance with the representations made to the purchaser brought about the precise economic hardship the purchaser sought to avoid in entering into the contract. Id. ¶8-9.
The primary takeaway from Embry is that Oklahoma courts will continue to recognize tort liability in relationships that resemble the “special relationship” of insurer-insured, highlighted by an adhesion contract and a disparity in bargaining power, with the contract’s specific intention of eliminating a particular risk. A tort duty may arise even where one party specifically attempts to avoid creating such a relationship. In Embry, the company went out of its way to make clear that it was not offering insurance, and never intended to create that type of relationship. Id. ¶10. Nonetheless, the relationship created by the contract had all of the same characteristics of the insurer-insured relationship, and was specifically designed to eliminate the financial risk associated with a vehicle loss.
In McMullan v. Enterprise Financial Group, Inc., 2011 OK 7, the Court found that a vehicle service contract entered into in connection with the purchase of a used car was a contract of insurance under Oklahoma, the breach of which would give rise to a tort claim for bad faith. In McMullan, the Court found that the vehicle service contract met the Oklahoma Insurance Code’s definition of “insurance” because it was a “contract whereby one undertakes to indemnify another or to pay a specified amount upon determinable contingencies.” Also, the Act defined an insurer to mean “every person engaged in the business of insurance or indemnity.” The Court also relied upon the Oklahoma Service Warrant Insurance Act in finding the contract to be one of insurance, in that this Act defined service warranties as indemnity contracts (while excluding maintenance contracts). The Court found that although neither Act identified service warranty issuers as insurers, the similarities between vehicle service contracts and insurance policies, including the fact that such warranties essentially “function and perform” just like insurance policies, rendered them subject to the same covenant of good faith that insurers must meet. While the Court noted its earlier decision in Embry, in a footnote, it did not apply Embry or engage in any extensive discussion of the decision.
The takeaway from McMullan is that even if a contract is not expressly identified as insurance or brought under the regulation of the insurance department, it may still be considered as insurance as a matter of Oklahoma law. Also, although it is not possible to identify all relationships that may constitute insurance under this type of analysis (or, if not insurance, that may otherwise give rise to tort liability under Oklahoma law based upon Embry), it may be wise for companies to have counsel review their customer agreements, warranty agreements, advertising or marketing materials, and any indemnity-type relationships, to determine whether there may be ways to limit potential liability, such as by including damage limitations or waivers and/or provisions demonstrating that the other party does have bargaining power, or by considering other terms that could minimize the concerns expressed by the Court in these two opinions.