In its ruling, last week, the court summarized the issue as "whether an insurance company's breach of the covenant sounds in tort when it retroactively overcharges a premium it knows is not owed."

The case, Jonathan Neil & Assoc. vs. Jones, involved a dispute between trucking company Jones Trucking, owned by Fred and Mildred Jones, and their insurers, Cal-Eagle Insurance Company, a subsidiary of Bethpage, N.Y.-Eagle Insurance Company.

The Joneses obtained coverage from Cal-Eagle through the state's assigned risk program. An audit of the Joneses' operations found the trucking company was subcontracting business to other trucking companies.

A rule governing the state's assigned risk plan called for Jones Trucking to pay for the subcontractors insurance. Cal-Eagle sought to retroactively collect increased premiums from the Joneses, and brought in Jonathan Neil & Assoc., a collection agency.

The increased premium dispute involved whether the Joneses should be required to pay for extra insurance coverage or a much lower premium for excess coverage for the subcontractors. The Joneses sued, claiming the company acted in bad faith by trying to collect extra premiums after issuing a quote and a bound policy.

A lower court ruled in favor of the Joneses, awarding them $13 million, which was later reduced to more than $6 million. The state Supreme Court vacated the verdict.

Bad faith tort has a very specific scope in the Golden state, generally limited to contract damages, but with an exception to include insurance claims issues.

The scope of that exception, however, has not been fixed, according to Paul Glad, chairman of the national insurance practice for the law firm of Sonnenschein Nath & Rosenthal, which represented the state Assigned Risk Association in the case, as well as three insurance associations and Fireman's Fund.

"In California there have been a number of cases over the years that tried to expand the tort of bad faith," he said, adding that such cases have not been limited to insurance issues. However, he noted that within the last ten-to-fifteen years, the courts "have been cutting back on that."

Mr. Glad said that the Supreme Court's decision will prove to be "very, very important" for insurers, particularly in collection cases involving cross complaints from the insured.

The Joneses argued in their complaint that other disputes involving overcharging of premiums had been upheld as eligible for bad faith tort action, specifically the case of Security Officers Service Inc. vs. State Compensation Ins. Fund.

However, the court held that the Security Officers case contained an important distinction from that of the Joneses. In that case, Security Officers had obtained coverage from the SCIF with a provision including an "experience rating," based on the number of outstanding claims at the end of the year and the amount of reserves that the SCIF had set aside to cover the unresolved claims. Security Officers alleged that the SCIF intentionally delayed resolving claims and inflated its reserves, allowing it to charge excess premiums and diminish Security Officers' dividends.

"Security Officers Service is clearly distinguishable from the present case," the court said in its ruling. "There, the overcharging of premiums was inextricably linked to the deliberate mishandling of claims?precisely the kind of bad faith behavior that goes to the heart of the special insurance relationship and gives rise to tort remedies. The premium over-billing alleged in this case is separate from any allegations of claims mishandling."

Mr. Glad said that the court's decision gave a "very strong endorsement" to the doctrine of primary jurisdiction.

The court's opinion mandates that further proceedings on the facts of the dispute should take place through the state Department of Insurance's administrative remedies, specifically to the state Assigned Risk Plan's committee with the right of appeal to the state insurance commissioner.

"If the commissioner decides in the Joneses' favor, then the Joneses may proceed with their lawsuit," the court said, "but trial will be assisted by the fact that the commissioner has made a decision on the billing dispute that is the predicate for the suit."