Jones v. Aetna Casualty & Surety Co.
94 Daily Journal DAR 10549, 26 Cal. App. 4th 1717, 33 Cal. Rptr. 2d 291 (1994)
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Rule of Law:
A person who is not a party to an insurance contract cannot sue the insurer for tortious breach of the covenant of good faith and fair dealing, even if they pay the premiums and are an 'implied-in-law coinsured' for subrogation purposes, because the duty of good faith arises strictly from the contractual relationship.
Facts:
- Frank N. Jones, Donna M. Jones and Snowcreek, Inc. (Jones) leased commercial property from Danville L&M Limited (lessor) for a restaurant.
- The lease obligated the lessor to maintain rental income insurance at Jones's expense.
- The lease stipulated that if the property was damaged, Jones's rent would be equitably reduced to the extent the lessor received proceeds from the rental income insurance.
- The lessor obtained an insurance policy from Aetna Casualty and Surety Company (Aetna) that included a 'rental value endorsement.'
- In 1989 and 1990, the restaurant premises suffered significant water damage from various sources.
- As a result of the damage, patronage at the restaurant declined, and Jones became unable to meet rent obligations.
- Jones notified Aetna of the loss in 1989.
- On August 10, 1990, Jones vacated the premises.
Procedural Posture:
- Jones sued Aetna Casualty and Surety Company in a California trial court, alleging tortious breach of an insurance contract.
- The trial court sustained Aetna's general demurrer to Jones's original complaint with leave to amend.
- Jones filed a first amended complaint, reasserting claims based on theories of being an implied-in-law coinsured and a third-party beneficiary.
- The trial court sustained Aetna's general demurrer to the first amended complaint without leave to amend.
- A judgment was entered in favor of Aetna.
- Jones (appellant) appealed the judgment to the California Court of Appeal.
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Issue:
Does a tenant, who is required by a lease to pay for the landlord's rental income insurance policy, have standing to sue the insurer for tortious breach of the covenant of good faith and fair dealing as either an implied-in-law coinsured or a third-party beneficiary?
Opinions:
Majority - Merrill, J.
No. A tenant who pays premiums for a landlord's insurance policy lacks standing to sue the insurer for bad faith because they are not a party to the insurance contract. The duty of good faith and fair dealing arises solely from the contractual relationship, and the tenant is neither a contracting party nor an express beneficiary. Jones's argument to be treated as an 'implied-in-law coinsured' fails because that status is an equitable concept used defensively in subrogation cases and does not create the contractual privity required to bring an affirmative tort claim for bad faith. Furthermore, Jones does not qualify as a third-party beneficiary because the insurance contract was not made 'expressly for the benefit' of Jones; any benefit, such as rent abatement, was merely incidental to the policy's primary purpose of protecting the lessor.
Analysis:
This decision strictly reinforces the privity of contract requirement for bringing a bad faith insurance claim in California. It clearly distinguishes the equitable 'implied-in-law coinsured' doctrine, used to shield a tenant from an insurer's subrogation action, from the contractual standing necessary to affirmatively sue an insurer in tort. The ruling narrows the scope of potential plaintiffs in bad faith actions, protecting insurers from liability to third parties who, despite having an economic interest or paying premiums, are not expressly named or intended beneficiaries of the policy. This solidifies the principle that the duty of good faith is owed only to the parties of the insurance contract.
