Emotional Distress: Can You Recover From A Breach Of Contract?

Emotional distress damages are a significant aspect of bad faith actions, and their recovery is dependent on the specific circumstances and nature of the contract. While emotional distress damages are generally challenging to recover in breach of contract cases, there are exceptions and varying standards across different states and statutes. The recovery of such damages is typically associated with personal contracts, where mental anguish is a foreseeable outcome of a breach. However, the definition of personal contracts and the applicability of emotional distress damages can vary based on the jurisdiction and the specific facts of each case.

Emotional distress damages in tort, contract and bad faith actions

Emotional distress damages are a significant aspect of bad faith actions in jurisdictions that allow them. However, the recovery of such damages depends on the nature of the case, and whether it is based on tort, contract, or bad faith actions.

Tort Actions

In tort law, emotional distress damages are relatively easy to recover. Traditionally, common law required physical injury or outrageous conduct by the tortfeasor, but in bad faith tort actions, these stringent requirements do not apply. Courts have approved recovery for emotional distress when an insured person loses their property due to the tortious conduct of an insurer. The standard for recovery varies across states. For example, the Nevada Supreme Court requires a "substantial property loss" and severe emotional distress.

Contract Actions

In contract actions, the recovery of emotional distress damages is more challenging. Courts have generally held that emotional distress damages are recoverable only in cases involving "personal" contracts, such as those concerning carriers and passengers, innkeepers and guests, and contracts to provide care. In commercial contracts, emotional distress damages are typically not recoverable, as they are not considered to flow naturally from a breach of such contracts.

Bad Faith Actions

Bad faith actions can be based on either tort or contract principles, or statutory enactments. In states that follow traditional contract principles, recovery of emotional distress damages is often difficult. However, in states that recognize the tort of bad faith, recovery of emotional distress damages is possible. Additionally, some states have bad faith statutes that specifically allow for the recovery of emotional distress damages, particularly in health insurance cases.

The recovery of emotional distress damages depends on the specific circumstances of each case and the applicable laws in the relevant jurisdiction. While tort actions may provide more opportunities for recovery, contract actions and bad faith actions also offer potential avenues for redress, depending on the nature of the contract, the jurisdiction's laws, and the specific facts of the case.

The impact of a Florida Supreme Court decision on emotional distress recovery

In the case of Time Ins. Co., Inc. v. Burger, the Florida Supreme Court ruled that emotional distress damages are recoverable under the state's bad faith statute, but only in actions based on health insurance. This decision has had a significant impact on the recovery of emotional distress damages in Florida.

The case involved a dispute between Time Insurance Company and their client, Harvey Burger. Burger had submitted a $500 medical bill to Time, but due to a stray mark, it appeared as $1500. As a result, Time launched an investigation into potential fraud by Burger and stopped paying his other outstanding medical bills. Burger claimed that due to Time's failure to pay his bills, he was unable to receive medical treatment and suffered from depression and an inability to communicate with his family. The jury ruled in Burger's favour, awarding him $50,000 in compensatory damages and $1 in punitive damages.

The Florida Supreme Court's decision in Burger held that emotional distress damages do qualify as compensatory damages under the bad faith statute. The court noted that prior to the enactment of the statute, breach of a health insurance contract already gave rise to contract damages and attorney's fees. The court concluded that the legislature may have intended to allow for more than just the recovery of damages available in a breach of contract action.

The Burger decision established the following elements for a bad faith claim for emotional distress: (1) the bad faith conduct must have resulted in the insured's failure to receive necessary or timely health care; (2) based on a reasonable medical probability, this failure must have caused or aggravated the insured's medical or psychiatric condition; and (3) the insured must have suffered mental distress related to the condition or its aggravation, which must be substantiated by a qualified medical examiner.

This decision has had a significant impact on the recovery of emotional distress damages in Florida. It provides a clear framework for plaintiffs to seek emotional distress damages in health insurance-related cases. However, it also limits the recovery of such damages to health insurance cases, suggesting that emotional distress damages in other types of bad faith actions may not be allowed. Practitioners and insurance companies in Florida are now considering the implications of this decision and whether it will be applied narrowly to health insurance cases or more broadly to other types of insurance coverage.

In another case, Metro. Life Ins. Co. v. McCarson, the Florida Supreme Court held that to prove intentional infliction of emotional distress, the plaintiff must prove four elements: (1) the defendant engaged in intentional or reckless conduct; (2) the conduct was "outrageous"; (3) the conduct caused emotional distress; and (4) the emotional distress was severe. This decision also provides guidance on the interpretation of "outrageous" conduct, adopting a strict standard that requires relentless physical and verbal harassment.

The relationship between insured and insurer

The relationship between the insured and the insurer is a contractual one. An insurance policy is a legally binding contract between the insurance company (insurer) and a person/business/entity (insured). The insurer issues insurance policies, handles claims, and sells policies, while the insured is the entity whose loss the insurance policy covers. The insured pays a premium to the insurer to maintain the insurance coverage. The premium is generally set by the insurance company, taking into account various factors such as the type of coverage, health condition, policy lifestyle, and the likelihood to pay the claim.

The insurer promises to provide financial coverage to the insured in the form of a sum assured in case of the occurrence of an event (stated in the policy). This event is often referred to as a contingency, which can include the policyholder's death or the destruction of property. In return for this promise, the insured pays the premium to maintain the insurance coverage.

The insurance contract is based on the principle of 'utmost good faith', which means that both the insurer and the insured must provide truthful and relevant information to each other. The insurer assesses the risk of the proposed cover and provides a quote based on this assessment. The insurer is also responsible for distributing funds to those who incur losses.

In the case of life insurance, the insurer will pay the benefit amount to the nominee if the insured dies within the policy term. Under general and health insurance policies, the insured is entitled to receive the benefit amount from the insurer for the covered financial loss. However, in life insurance plans, only the insured is covered under the plan, and the life cover benefit goes directly to the nominees.

The relationship between the insured and the insurer is a dynamic one, with the insurer taking on the risk of covering the insured against various cases of loss. The insurer must act in good faith when handling claims and provide coverage to the insured in a timely manner. On the other hand, the insured must provide accurate information and pay the premiums to maintain the insurance coverage.

The tort of bad faith in first-party insurance transactions

To establish a bad faith claim in first-party cases, it must be shown that the insurer's delay or withholding of benefits was unreasonable or without proper cause. This can include unreasonable refusal to settle, failure to conduct a thorough investigation, biased investigation or determination of facts, and unduly restrictive interpretation of the claim form, among other things.

When an insurance company acts in bad faith, the insured can sue for both breach of contract and the tort claim of bad faith. In addition to contract damages, damages available under a tort claim can include foreseeable financial losses, emotional distress, and attorney's fees. Punitive damages may also be awarded if the insurance company acted with malice, oppression, or fraud.

The standard for determining whether an insurer acted in bad faith is "reasonableness". Courts will evaluate the actions of the insurer and determine if they were reasonable under the circumstances.

At least 25 states in the US have recognised the tort of bad faith in first-party insurance claims, allowing for the recovery of emotional distress damages in these states.

Emotional distress damages in breach of contract cases

In the United States, the Supreme Court's decision in Cummings v. Premier Rehab Keller, P.L.L.C. in 2022 ruled that emotional distress damages are not available under federal discrimination causes of action based on specific acts, such as the Rehabilitation Act of 1973 and the Patient Protection and Affordable Care Act (ACA). This decision sets a precedent for defendants in discrimination lawsuits to argue against emotional distress damages.

However, it's important to note that Cummings does not limit emotional distress damages as a remedy for breach of contract in general. The Court acknowledged that various exceptions exist in different states, allowing emotional distress damages in certain circumstances. The availability of such damages will depend on the specific state laws and the nature of the contract.

For example, in California, it is generally challenging to recover damages for mental suffering and emotional distress in a breach of an ordinary commercial contract. However, there are exceptions for more personal undertakings where the traumatic results were unavoidable. Contracts involving the mental and emotional well-being of one of the parties may allow for emotional distress damages if breached.

In insurance contract disputes, the outcome varies depending on the jurisdiction and the nature of the insurance policy. In some states, emotional distress damages may be recoverable in bad faith insurance claims, especially in health insurance disputes, as seen in the Florida case, Time Ins. Co., Inc. v. Burger. However, in states that follow traditional contract principles, recovering emotional distress damages in bad faith actions is nearly impossible, as seen in the Michigan case, Kewin v. Massachusetts Mutual Life Ins. Co.

Therefore, when considering emotional distress damages in breach of contract cases, it is crucial to examine the specific facts, the nature of the contract, and the laws of the relevant jurisdiction. Each case will be determined on its unique circumstances, and there is no one-size-fits-all answer.

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