In perhaps its most significant insurance coverage decision since Young v. Allstate, 119 Haw. 403, 198 P.3d 666 (2008), the Hawaii Supreme Court ruled that an insured need not prove economic or physical loss caused by the insurer's bad faith in order to recover emotional distress damages. See Miller v. Hartford Life Ins. Co., 2011 WL 6811570 (Haw. Dec. 28, 2011).
Hartford issued a long-term care policy to Penelope Spiller. In 2007, after she suffered a seizure and was diagnosed with lung cancer that metastasized to her brain, Hartford determined she was eligible for benefits. A year later, however, her benefits were terminated. Hartford determined Ms. Spiller was no longer "cognitively impaired" or incapable of performing two Activities of Daily Living as required by the policy.
Thereafter, Ms. Spiller repeatedly sought reinstatement of her benefits. Phone conversations between Ms. Spiller and a Hartford employee became increasingly contentious. Hartford denied an internal appeal of the termination of benefits.
On January 23, 2009, however, benefits were restored. Nevertheless, in July 2009, Ms. Spiller sued in state court for bad faith, negligence, and intentional infliction of emotional distress. She sought damages for the emotional distress incurred during the period that her benefits were denied, together with punitive damages.
The case was removed to federal court. The district court issued certified questions to the Hawaii Supreme Court. The Hawaii Court addressed one of the questions, revised to read, "If a first-party insurer commits bad faith, must an insured prove the insured suffered economic or physical loss caused by the bad faith in order to recover emotional distress damages caused by the bad faith?"
The Hawaii Supreme Court first surveyed its jurisprudence on bad faith. Under the leading case, Best Place, Inc. v. Penn Am. Ins. Co., 82 Haw. 120, 920 P.2d 334 (1996), and subsequent cases, the Court intended to provide the insured with a vehicle for compensation for all damages incurred as a result of the insurer's misconduct, including damages for emotional distress, without imposing a threshold requirement of economic or physical loss.
Nonetheless, Hartford urged the Court to rely on California law, under which economic or financial loss was required before an insured could recover emotional distress damages for bad faith. Ms. Spiller, on the other hand, urged the Court to follow Colorado's lead in rejecting California's economic loss requirement for the recovery of emotional distress damages in insurer bad faith actions. In Goodson v. Am. Standard Ins. Co. of Wisconsin, 89 P.3d 409 (Colo. 2004), the Colorado court held that in a tort claim against an insurer for bad faith, the insured could recover damages for emotional distress without proving substantial property or economic loss. Otherwise, the insurers would be encouraged to unreasonably refuse to pay, or delay payment of, a valid claim and then avoid liability for bad faith emotional distress damages by making payment at the last minute.
The Hawaii Supreme Court determined the Colorado view was more compatible with Best Place. In Best Place, the Court made clear its intent to make available to the insured a broader range of compensatory damages, including damages for emotional distress, that were generally not available in actions based solely on breach of contract.