On May 23, 2002, the Texas Supreme Court issued its opinion in Mid-Century Insurance Company of Texas v. Boyte. The Court addressed the issue of whether the common law and statutory duties of good faith and fair dealing extend beyond entry of judgment. The court reasoned that judgment modifies the relationship of the insured and the insurer to that of judgment creditor and debtor. Accordingly, the Court concluded that because the "special relationship" which gives rise to the duty of good faith and fair dealing no longer exists, the duty ceases to exist.
The Boyte case arose out of an underinsured motorist claim. Boyte sustained injuries in two automobile accidents, on successive days, in 1992. He settled with both liability insurers and asserted an underinsured motorist claim with his own carrier, Mid-Century, for the claims arising from the first accident. While Boyte demanded the $100,000 limit, Mid-Century valued the claim at $120,000 and tendered the $20,000 in excess of the limit of liability insurance. The case proceeded to trial, and the jury found that Boyte was entitled to the remaining $80,000 in policy benefits.
Mid-Century appealed from the judgment, and filed a supersedeas bond. After judgment, while the appeal was pending, Boyte informed Mid-Century that he was in urgent need of back surgery. Mid-Century offered to pay for the surgery and therapy, in the amount of $23,400, but refused to pay the full $80,000 judgment. Ultimately, Mid-Century lost the appeal, and the Supreme Court denied review. Mid-Century then paid the judgment.
Boyte then filed a new suit alleging common law bad faith and violations of Article 21.21 of the Insurance Code. In both regards, Boyte asserted that Mid-Century knowingly failed to attempt settlement once its liability had become reasonably clear. Boyte asserted that Mid-Century's liability was clear after the jury verdict and judgment, essentially arguing that Mid-Century's appeal of the uninsured motorist case constituted bad faith.
During trial, the parties stipulated that Boyte was seeking damage only for post-judgment conduct. The jury found common law bad faith and statutory violations and awarded additional damages for knowing violations. Ultimately, the "bad faith" judgment was rendered in the amount of $458,748.04. The court of appeals affirmed, holding that the duty of good faith and fair dealing extended beyond judgment. On petition for review, the Supreme Court reversed and rendered judgment that Boyte take nothing on the bad faith claims. The court largely relied on its prior decision in Stewart Title Guaranty Company v. Aiello, 941 S.W. 2d 68 (Tex. 1997).
In Aiello, the court concluded that no duty of good faith and fair dealing existed after the insured and insurer entered into an agreed judgment which reduced the insurance obligation to payment of a sum of money. Although Boyte attempted to distinguish Aiello -- because the agreed judgment followed a settlement, and because the judgment was subject to immediate execution -- the court found these distinctions irrelevant.
The court concluded that upon judgment the parties' relationship to each other becomes that of judgment debtor to judgment creditor, and that the duty of good faith is replaced by traditional mechanisms for enforcement of judgment. In contrast to the relative disparity of bargaining power which gives rise to the duty of good faith and fair dealing, the court concluded that the balance between litigants allowed by the procedural rules, including the right to supersede a judgment by posting bond, placed all judgment creditors and debtors in the same position upon appeal. There was no disparity in power that would require the continued application of the duty of good faith.
The court did not address what, if any, duties exist in the context of litigation. Although insureds will undoubtedly argue that implicit in the court's holding is a determination that the duty of good faith exists during trial of the contract action, this issue was not presented to the court. In the underlying case, Mid-Century was granted a directed verdict as to all claims for conduct during trial, and the parties stipulated that the damages sought were only for post-judgment conduct.
Whether and when pre-trial and trial conduct by an insurer can give rise to extracontractual liability will remain a hotly contested issue until it is clearly addressed by the court.