Recently, the United States District Court for the Central District of California concluded in a matter of first impression that a reinsured cannot recover in tort for a reinsurer’s alleged breach of the implied covenant of good faith and fair dealing.  California Joint Powers Insurance Authority v. Munich Reinsurance America, CV 08-956 DSF (RZx) (C.D. Cal. Apr. 21, 2008).

We previously reported on the Motion to Dismiss filed in this case by Munich Reinsurance America, Inc. (“Munich Re America”) seeking to dismiss the count of the complaint filed by plaintiff California Joint Power Insurance Authority (“CJPIA”) seeking tort and punitive damages for an alleged breach of the covenant of good faith and fair dealing under the reinsurance agreement entered into between the parties. Munich Re America contended in its motion to dismiss that a reinsured may not recover in tort for the breach of the implied covenant of good faith and fair dealing.

In the absence of California Supreme Court precedent, the court applied the rule it believed the California Supreme Court would adopt under the circumstances.  Based on the California Supreme Court’s consistent limitation of tort recovery for breach of the covenant of good faith and fair dealing, the court concluded that the state’s highest court would not impose tort liability in the reinsurance context.  The court noted that, while California’s courts have found that an insurer’s breach of the covenant of good faith and fair dealing violates social policy that merits the imposition of tort remedies, the same social policy does not adhere to the relationship between a reinsurer and its reinsured, because such contracts are not characterized by elements of adhesion, unequal bargaining power, public interest and fiduciary responsibility.  The court also observed  that where sophisticated entities engage in contract negotiations, the policy supporting tort damages cannot be justified on the basis of an unequal bargaining position between them.  Because most of the public policy concerns that support tort liability in the direct insurance context do not apply in the reinsurance context, the court concluded that “the California Supreme Court would not find the imposition of tort damages to be appropriate.”  Therefore, the Court granted Munich Re’s motion to dismiss CJPIA’s cause of action for tortious breach of the implied covenant of good faith and fair dealing.

Click here to review a copy of the Court’s decision.