An Independent Duty of Good Faith and Fair Dealing in Insurance Contracts--Gruenberg v. AETNA Insurance Co.

California courts have generally encouraged insurers to deal fairly with their customers. If the insurer failed to accept a reasonable settlement offer from an injured third party, and the third party gained a judgment in excess of the policy limits against the insured, the insurer has been held liable for the excess. This has been accomplished by treating the bad faith failure to settle as a breach of an implied covenant of good faith and fair dealing in the insurance policy. An interesting facet of this breach is that it has been held to sound in either tort or contract. However this dual identity has caused courts to confuse the basic facts that must be pleaded to allege the cause of action. This June, the California Supreme Court had the chance to clarify this area of the law in Gruenberg v. Aetna Insurance Co. The case presented a unique fact situation to the Supreme Court, because it involved an alleged bad faith failure to settle directly with the insured, rather than with an injured third party. The Supreme Court also faced the defense that the insured failed to fulfill a condition precedent to the insurers\u27 duty to pay. The Comment will analysis the logic of the Supreme Court\u27s disposal of this defense and question whether the decision has not further confused elements of tort and contract in litigation over breaches of the implied covenant of good faith and fair dealing