Can insureds recover consequential damages for express breaches of insurance contracts? Machan v. UNUM Life Insurance Company of America Explained

In Machan v. UNUM Life Insurance Company of America, the Utah Supreme Court addressed critical questions about damage recovery in first-party insurance disputes, providing important guidance for practitioners handling insurance breach claims.

Background and Facts

Gary Machan, a corporate executive, purchased a disability income insurance policy from UNUM in 1988. After cardiac bypass surgery complications in 1999, Machan filed claims for benefits but UNUM failed to pay beyond an initial two-week period. Machan sued for breach of express contract terms and breach of the implied covenant of good faith and fair dealing, seeking consequential damages including worsening psychological condition, inability to obtain employment, deprivation of medical treatment, and depletion of assets. The federal district court certified two questions to the Utah Supreme Court regarding the availability of consequential damages and private rights of action under Utah’s timely payment statute.

Key Legal Issues

The court addressed whether insureds may recover consequential damages for breach of express insurance contract terms, how such damages differ from those available for bad faith breaches, and whether Utah Code section 31A-26-301 creates a private right of action for untimely claim payments.

Court’s Analysis and Holding

The court held that consequential damages are available for breach of express insurance contract terms, rejecting the traditional view that insurance contracts are merely commercial contracts for money. Building on Beck v. Farmers Insurance Exchange, the court recognized that insurance contracts provide “peace of mind” and security, not just monetary compensation. However, the scope of consequential damages for express breaches may be more limited than those for bad faith breaches, depending on the contract language and whether damages were actually caused by the breach. The court also held that the 2000 version of Utah Code section 31A-26-301 did not create a private right of action, noting the absence of express statutory language and the legislature’s explicit denial of private rights in related provisions.

Practice Implications

This decision clarifies that Utah practitioners can pursue consequential damages for express insurance contract breaches, but must carefully establish causation and foreseeability. The distinction between express breach and bad faith claims becomes crucial for damage calculations, as bad faith breaches may encompass broader damages due to the extended duration of improper conduct. Practitioners should also note that statutory violations alone may not create separate causes of action, emphasizing the importance of contract-based remedies in insurance disputes.