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In Hawaii, an Insurer can be Liable to a Non-Insured Party for Intentional Infliction of Emotional Distress if Its Claims Handling Process is “Outrageous!”

Plaintiffs’ counsel are always seeking new avenues from which to recover damages. In my last article, I discussed two recent New York rulings that permitted an insured to bring a breach of contract action seeking consequential damages against an insurer. Similarly, the Hawaii Supreme Court has upheld the right of a third-party claimant to bring an intentional infliction of emotional distress (IIED) lawsuit when an insurer fails to pay a claim against its insured.
 
If you have read John Grisham’s novel The Rainmaker or have seen the movie starring Matt Damon as attorney Rudy Baylor, you will recall that Rudy sues Great Benefit Life Insurance for bad faith after it refused to pay for medical treatment for its insured. After the insurer had denied on seven occasions the claim for the requested medical treatment, the vice-president of claims sent what became known as the Stupid Letter, which said: “On seven prior occasions, this company has denied your claim in writing. We now deny it for the eighth and final time. You must be stupid, stupid, stupid!” If Grisham’s novel had been set in Hawaii instead of Memphis, Rudy could have added a claim for IIED.
 
In Young v. Allstate Ins. Co., 119 Haw. 403 (Haw. 2008), the plaintiff, an 84-year-old woman, received multiple injuries when her car was rear-ended by the insured, who had fallen asleep at the wheel. The insurer contacted the plaintiff that same day and told her that they would provide her with quality service and she did not need an attorney. The insurer also provided the plaintiff with a “Quality Service Pledge” that assured her that “You’re in Good Hands with Allstate.” The insurer later offered to settle the claim for less than the plaintiff’s medical expenses (apparently ignoring the damages to her vehicle, which was totaled), which caused her distress.
 
After the plaintiff hired an attorney and filed suit, the insurer filed an answer that claimed that she had been negligent, which increased her distress. The insurer later offered substantially less than what was recommended in non-binding arbitration, and a jury awarded her approximately $200,000. She then sued for bad faith and IIED, and the trial court dismissed the bad faith claim because there was no contractual relationship with the insurer and dismissed the IIED claim because the insurer’s action was not outrageous.
 
The Hawaii Supreme Court affirmed the dismissal of the bad faith claim and reversed the dismissal of the IIED claim. IIED required proof that (1) the conduct allegedly causing the harm was intentional or reckless, (2) the conduct was outrageous, and (3) the conduct caused extreme emotional distress to another. The Supreme Court stated that, “The tort of IIED is well-accepted….Still, this tort ‘provides no clear definition of the prohibited [outrageous] conduct.’…The Restatement simply informs us that a defendant's conduct satisfies the element where ‘the recitation of the facts to an average member of the community would arouse his resentment against the actor, and lead him to exclaim, “Outrageous!”’” The Supreme Court held that average members of the community could find that the action of the insurer was “Outrageous!”
 
The insurer expended substantial legal fees, suffered an original judgment of $200,000, and was forced to defend an IIED claim, all in a dispute that could likely have been settled for a small sum. In the initial dealings with the plaintiff, the insurer offered to settle the claim for $700 less than her medical bills. The insurer, through its claims personnel and legal counsel, continued to refuse to settle the case for a realistic amount while it proceeded through arbitration and trial, even as the potential damages increased exponentially. The decision is also worthwhile reading because the Supreme Court details the insurer’s “Claims Core Process Redesign”, a claims process that the Supreme Court states “was intended to increase profits by over $ 200,000,000.00 annually by underpaying claims and denying claimants just and reasonable compensation.”
 
We will likely never learn who made the decisions that ultimately caused the insurer’s costs to be many times the original settlement value of the case, or why those decisions were made. The actions in Young v. Allstate Ins. Co. do bring to mind a 1994 famous case that received substantial notoriety. An elderly customer, Stella Liebeck, was burned when she spilled her McDonald’s hot coffee while sitting in the parking lot. She was awarded a jury verdict of $ 2.9 million, and although the award was reduced substantially by the trial judge and a settlement was reached, the case was regular fodder for Leno and Letterman and other comedians and became the poster child for arguments by insurers and corporations that claimed that the personal injury tort system had run amok.
 
The actual facts, though, were seldom discussed. Stella, who suffered severe third-degree burns, initially sought payment of the portions of her medical bills that were not covered by Medicare and the wages that her daughter lost while caring for her. Her original claim could have been settled for two thousand dollars or less. Instead, McDonald’s played hard ball all the way. All through the legal process, as the potential liability continued to grow, McDonald’s declined to seek to settle the matter for a realistic amount.
 
The narrow lesson of Young v. Allstate Ins. Co. of course, is that third-party claimants can seek damages for IIED against insurers in Hawaii, even if bad faith cannot be claimed. But the larger lesson for attorneys who represent insurers and corporations is that we should always remember that these are real people on the other side, and if the client or the attorneys exceed the bounds of decency, a jury composed not of lawyers and executives, but representing a cross-section of the entire community, may punish the client. As legal counsel, you may not always be successful in controlling or moderating the damaging conduct of your clients, but you should consider how your conduct may inflame the situation further and aggravate a bad situation created by your client.
 
 

Editor's Note: Readers with a subscription to lexis.com and the Matthew Bender Insurance Laws Library can quickly and accurately research the law relating to intentional infliction of emotional distress claims against insurers in Appleman on Insurance, at 30-183 Appleman on Insurance § 183.02, and in Insurance Bad Faith Litigation at 1-1 Insurance Bad Faith Litigation § 1.06.