Security Officers Service, Inc. v. State Compensation Insurance Fund

Does the implied covenant of good faith and fair dealing require a workers’ compensation insurer to defend and resolve claims with due regard to the impact of outstanding claims and reserves on the premiums the insured will be assessed and on policy dividends it may receive? Alleging it had been damaged by defendant State Compensation Insurance Fund’s (SCIF) systematic failure to process claims diligently, and its unreasonable inflation of the reserves assigned to them, plaintiff Security Officers Service, Inc., brought this action for breach of contract and implied covenant, as well as fraud and negligence. The trial court sustained without leave to amend a demurrer to plaintiff’s second amended complaint, apparently accepting SCIF’s contentions that its alleged conduct did not constitute a breach of contractual duty, and that SCIF was immune from suit in tort.

The immunity contention having been soundly discredited by two recent decisions in similar cases, we confront the primary issue of liability they did not reach. We hold that under an insurance regime in which the insured’s annual claims experience inexorably influences its premiums, the insurer may be liable if…