E.I. DuPont De Nemours & Co. v. Pressman

In this appeal, we consider the scope of the employment-at-will doctrine (the “Doctrine”) and the correlative application of the implied duty or covenant of good faith and fair dealing (the “Covenant”) as a limitation on the Doctrine. We conclude that the scope of the Doctrine is broad. The Covenant is applicable here, but its scope is narrower than that articulated by the trial court. We reverse the judgment of the Superior Court on the ground that the jury instructions erroneously overstated the Covenant, and we direct that a new trial be ordered consistent with this Opinion.

The Doctrine generally permits the dismissal of employees without cause and regardless of motive. Nevertheless, we hold that the Covenant permits a cause of action against an employer for the deceitful acts of its agent in manufacturing materially false grounds to cause an employee’s dismissal. *438Our holding here reinforces and reaffirms the breadth of the Doctrine and the narrow and carefully crafted nature of the Covenant.

We also hold that punitive damages and damages for emotional distress are not available to remedy the breach of an employment contract absent possible circumstances not present here. Additionally, we hold that the Superior Court did not abuse its discretion in ruling on certain evidentiary matters raised by both parties. Accordingly, we AFFIRM IN PART; REVERSE IN PART; and REMAND with instructions to order a new trial consistent with this Opinion.

1. Procedural Posture

E.I. DuPont de Nemours and Company (“DuPont”), defendant below, appeals from a judgment entered upon a jury verdict in favor of Norman J. Pressman (“Pressman”).2 The jury verdict for Pressman, which was based on his claim that DuPont breached the Covenant, awarded Pressman $422,700 in compensatory damages for lost wages. The jury also awarded Pressman $25,000 for emotional distress and interest, and $75,000 in punitive damages on the breach of the Covenant claim.

The jury rendered a verdict for DuPont on a claim for breach of an implied-in-fact contract requiring good cause for a termination of employment and for David Pensak (“Pen-sak”), Pressman’s former supervisor, on a claim for defamation. Claims against DuPont for defamation and negligent evaluation were-dismissed prior to trial.3

With respect to the Covenant, the Superior Court instructed the jury as follows:

[Ujnder Delaware law, DuPont owed plaintiff a duty of good faith and fair dealing. Plaintiff contends that DuPont breached this duty. The duty of good faith and fair dealing 'is breached by [an] employer if it discharges an employee maliciously, that’s as a result of hatred, ill will or intent to injure, or effects the discharge in bad faith, that is through acts of fraud, deceit or intentional misrepresentation.

What constitutes malice or bad faith depends on the intent of the persons effectuating the termination. One acts intentionally to cause a certain result. One acts maliciously if actions are [a result of] ill will or intent to injure.

Bad faith implies the conscious doing of wrong because of dishonest purpose. It is not simply bad judgment or negligence. It contemplates a state of mind affirmatively operating with a furtive design or ill will. If you believe that by a preponderance of the evidence that Pensak or any other employee acted maliciously or in bad faith in terminating the plaintiff from his employment at DuPont, then you should find that DuPont violated its duty of good faith and fair dealing to Norman Pressman. If, however, Norman Pressman was terminated without malice or bad faith, or terminated for legitimate business reasons, then your verdict must be for the defendants.

(Emphasis supplied.) The jurors were also instructed that they could award punitive damages and damages for emotional distress if they found a breach of the duty of good faith and fair dealing. We find that the trial court’s instructions to the jury erroneously overstated the Covenant and the allowable bases for awarding damages.

II. Facts

We view the evidence in the light most favorable to Pressman. Pressman presented evidence that his immediate supervisor, Pen-sak, engaged in a retaliatory campaign to persuade Pensak’s superiors that Pressman should be fired. The campaign began after Pressman confronted Pensak with evidence that Pensak may have had a conflict of interest. DuPont presented evidence that Pressman was hired as a high level scientist and simply failed to meet the high expectations inherent in the position. The jury apparently credited Pressman’s version of events and did not credit DuPont’s.

Pressman, a Ph.D. graduate of the University of Pennsylvania in Biomedical Engineer*439ing, was hired away by DuPont from the Johns Hopkins School of Medicine in December 1986. DuPont sought Pressman’s skills to develop the company’s medical imaging technology. From the time he began work in early 1987 until April 1988, Pressman worked at various projects, receiving raises and positive evaluations from his superiors, including Pensak.

In January 1988, Pressman met with Pen-sak to discuss a possible conflict of interest created by Pensak’s involvement as a technical advisor with a medical imaging technology company, Genesis. Pensak was paid $2,000 by Genesis to provide the company with information about and evaluations of new imaging technologies and to assist the company in identifying new business opportunities. Pressman raised his concerns with Pensak after Pensak arranged for representatives of Genesis to meet with Pressman about Genesis equipment and Pressman’s knowledge of medical imaging technology.

When Pressman expressed his concerns about Pensak’s relationship with Genesis, Pensak became livid and told Pressman to mind his own business. Shortly thereafter, on January 26, 1988, Pensak ordered Pressman “grounded.” As a result, Pressman was not allowed to “travel off site ... even to other DuPont locations.” Pensak also told Pressman that he could have “no visitors without my [Pensak’s] permission.” In the first half of 1988, Pensak also began to express to Charles Ginnard, the personnel representative for Pressman’s division, purported concerns regarding Pressman’s performance. Pensak placed an “anonymous unsigned” negative evaluation in Pressman’s file. Pressman’s performance rating was lowered to satisfactory in October 1988. In February 1989 his status was lowered to marginal. He was informed by Pensak of his termination on April 12, 1989. He left DuPont in June 1989.

Evidence was admitted at trial from which a rational jury could conclude that Pensak; (1) misrepresented Pressman’s responsibilities to superiors so that it would appear that Pressman was not completing assigned tasks; (2) edited a progress report to superiors which would have had the effect of understating Pressman’s accomplishments; and (3) failed to pass along the progress report showing some of Pressman’s significant accomplishments during the critical time period in which Pressman’s termination was decided.

III. Pressman’s Procedural Argument

Pressman contends that DuPont has waived its right to challenge the jury verdict because it failed to present its arguments below. Supr.Ct.R. 8; Jeffery v. Seven Seventeen Corp., Del.Supr., 461 A.2d 1009 (1983). Pressman also contends that DuPont’s failure to object to the jury instructions and its submission of proposed jury instructions prevents it from challenging the judgment.4

*440DuPont challenges the judgment below based on a view that the Covenant simply does not extend to the undisputed facts here. DuPont asserted this position in its motion for summary judgment which was denied by the trial court. Since the denial of a motion for summary judgment is interlocutory and there is no appeal as of right, DuPont continued to litigate the claims. Once the ease was ready for submission to the jury, and after having moved unsuccessfully for a directed verdict, DuPont had no choice but to submit proposed jury instructions in conformity with prior rulings of the Superior Court. Therefore, DuPont’s contention is not waived and is preserved on appeal. Thus, the Court reaches the merits.

IV. Good Faith And Fair Dealing in At-Will Employment

DuPont contends that the Covenant does not extend to the facts of this case.5 It points to the central importance of the Doctrine which “provides a heavy presumption that a contract for employment, unless otherwise expressly stated, is at-will in nature, with duration indefinite.” Merrill v. Crothall-American, Inc., Del.Supr., 606 A.2d 96, 102 (1992).6 The Doctrine has a long history in Delaware7 and the United States.8 The Covenant, perhaps in less robust form and by a different name, also has a long history. See Blish v. Thompson Automatic Arms Corp., Del.Supr., 64 A.2d 581 (1948); Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917); Heney v. Sutro & Co., 28 Cal.App. 698,153 P. 972 (1915).9

A. Merrill v. Crothall-American

While at-will employment remains a “heavy presumption,” this Court recognized the limited application of the Covenant to an at-will employment contract in Merrill v. Crothall-American, Inc., Del.Supr., 606 A.2d 96 (1992). In so holding, this Court stated:

It has been said that “to constitute a breach of the implied covenant of good faith, the conduct of the employer must constitute ‘an aspect of fraud, deceit or misrepresentation.’ ” We think this characterization of an employer’s duty under the covenant is accurate. The lodestar here is candor. An employer acts in bad faith when it induces another to enter into an employment contract through actions, words, or the withholding of information, which is intentionally deceptive in some material way to the contract. Such conduct constitutes “an aspect of fraud, deceit or misrepresentation.”

Id. at 101 (citations omitted). Merrill produced evidence from which a rational jury could infer that he had been hired by Crot-hall when Crothall had the intention of replacing him as soon as it found a suitable replacement. Construing the facts in favor of Merrill, the non-movant, it appeared that Crothall allowed Merrill to believe that the job offer was for an indefinite duration when, at the very same time, Crothall was actively *441pursuing Merrill’s replacement. Merrill left his prior employment based on that understanding. Merrill’s claim, therefore, survived a summary judgment motion. Thus, Merrill was essentially a case where the Covenant was predicated on fraud in the inducement.10

In Merrill, this Court carefully limited its holding by noting that “[a]n employer has wide latitude in deciding how it conducts its business including its employment undertakings, ...” id. at 101, and explicitly reserving decision with respect to “what constitutes justification for termination of an at-will employment contract,” id. at 102. The Court stated further:

Nothing said here is to be construed as limiting an employer’s freedom to terminate an at-will employment contract for its own legitimate business reasons, or even highly subjective, reasons. Such a contract is still terminable by either party for any reason not motivated by bad faith.

Id. at 103.

B. Recognized Exceptions to Employment At-Will

With respect to the termination of at-will employment, the Court in Merrill held that the duty of good faith “may be breached by termination in some circumstances ... or some other public policy implicated by such a termination_” Id. at 102. Merrill made clear the limited range of situations in which the duty may be breached, citing cases which illustrate the limitation.11 These eases, taken together with the facts of Merrill, support the proposition that the Covenant limits at-will employment only in very narrowly defined categories.12 See Wagenseller v. Scottsdale Mem. Hosp., 147 Ariz. 370, 710 P.2d 1025, 1031 (1985) (“The trend has been to modify the at-will rule by creating exceptions to its operation”).

The Supreme Judicial Court of Massachusetts, in the well-known case of Fortune v. National Cash Register Co., 373 Mass. 96, 364 N.E.2d 1251 (1977), held that a rational jury could find that the employer had breached the Covenant by terminating a commissioned salesman after he had secured a large sale but before he became entitled to the commission at closing, simply to avoid paying him the commission. In Magnan v. Anaconda Indus., Inc., 193 Conn. 558, 479 A.2d 781, 788 (1984), the Supreme Court of Connecticut held that a plaintiff could survive summary judgment on his claim that the employer fired him in retaliation for refusing to sign an untrue statement, noting that breach of the Covenant “cannot be predicated simply upon the absence of good cause for a discharge.”

In Monge v. Beebe Rubber Co., 114 N.H. 130, 316 A.2d 549 (1974), the New Hampshire Supreme Court held that an employer breached the Covenant when it terminated an employee for refusing the sexual demands of her employer. Monge has been cited to stand for a “public policy” exception to at-will employment. Wagenseller, 710 P.2d at 1032. The public policy exception, whether conceived of independently as a tort or as arising from the Covenant, generally requires a clear mandate of public policy. As Chancellor Allen has described this category:

[Ejmployees whp seek protection from firing on the basis that their actions were protected by a public policy, must assert a public interest recognized by some legislative, administrative or judicial authority, and the employee must occupy a position *442with responsibility for that particular interest.

Shearin v. E.F. Hutton Group, Inc., Del.Ch., 652 A.2d 578, 587-89 (1994) (lawyer employee fired for refusing to violate her ethical duties may have a cause of action).13

Pressman’s claim cannot fit within the public policy category since he does not identify an explicit and recognizable public policy. He alleges that DuPont fired him in retaliation for questioning the propriety of Pensak’s business practices. This fact, standing alone, does not rise to the level of a legally cognizable public policy exception. As one treatise states: “Employees who uncover and blow the whistle on questionable internal financial and business practices [absent illegality] have won no support from the courts.” Holloway & Leech, Employment Termination: Rights and Remedies at 180, (2d ed. 1993) (citing cases).

Another category of exceptions to the Doctrine created by the Covenant is exemplified by Merrill. In these cases, the employer is hable for misrepresenting some important fact, most often the employer’s present intentions, and the employee relies thereon either to accept a new position or remain in a present one. In Shebar v. Sanyo Bus. Sys. Corp., 218 N.J.Super. 111, 526 A.2d 1144 (1987), aff'd, 111 N.J. 276, 544 A.2d 377 (1988), the defendant-employer convinced an executive not to resign in favor of a competitor’s offer. Four months later, the executive was summarily fired. The court held that the executive stated a claim for fraud. Id.; see also Wildes v. Pens Unlimited Co., Me. Supr., 389 A.2d 837 (1978) (claim stated for fraud where company hired employee from another job knowing that position would be eliminated within days). This category is not applicable to the facts of this case.

Another exception applies when an employer uses its “superior bargaining power [to] ... depriv[e] the employee of ‘compensation that is clearly identifiable and is related to the employee’s past service.’” Magnan, 479 A.2d at 788 (quoting Cort v. Bristol-Myers Co., 385 Mass. 300, 431 N.E.2d 908, 910 (1982)); see, e.g. Fortune v. National Cash Register, 373 Mass. 96, 364 N.E.2d 1251 (1977); Zimmer v. Wells Management Corp., S.D.N.Y., 348 F.Supp. 540 (1972); Metcalf v. Intermountain Gas Co., 116 Idaho 622, 778 P.2d 744 (1989). The Arizona Supreme Court has described this line of cases as protecting “an employee from a discharge based on an employer’s desire to avoid the payment of benefits already earned by the employee, such as the sales commission in Fortune_” Wagenseller, 710 P.2d at 1040.14 Pressman’s claim also does not fall in this category. In its verdict for DuPont on the implied-in-fact contract claim, the jury necessarily found that Pressman did not have a promise of secure employment. He has not identified another benefit to which he was entitled, such as earned commissions.

C. The Narrow Application of the Covenant of Good Faith and Fair Dealing to the Facts of this Case

Courts have been reluctant to recognize a broad application of the Covenant out of a concern that the Covenant could thereby swallow the Doctrine and effectively end at-will employment. Wagenseller, 710 P.2d at 1040 (“adopting] such a rule ... would tread perilously close to abolishing completely the at-will doctrine ...”); Magnan, 479 A.2d at 788 (“complexity of the multifarious employment relationships” counsels against broad covenant requiring cause for dismissal); Thompson v. St. Regis Paper Co., 102 Wash.2d 219, 685 P.2d 1081 (1984); see also *443Arthur Leonard, A New Common Law of Employment Termination, 66 N.C.L.Rev. 631, 656 (1988). The presumption of at-will employment is a fixture of American law, and continues to be followed in Delaware and in the vast majority of jurisdictions.

Although the Covenant is a generally acknowledged principle, its precise contours are not fixed. We begin with an analysis of various contexts where the concept of “good faith” is employed. Although both the Doctrine and the Covenant are products of deci-sional law and not statutory law, the Uniform Commercial Code (“UCC”) is appropriate to consider by analogy. The UCC defines good faith as “honesty in fact in the conduct or transaction concerned,” 6 Del.C. § 1-201(19), and “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade,” 6 Del.C. § 2 — 103(l)(b). The Restatement comments:

The phrase “good faith” is used in a variety of contexts, and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving “bad faith” because they violate community standards of decency, fairness or reasonableness.

Restatement (Second) of Contracts § 205, cmt. a. (1979).15 See also Summers, “Good Faith” in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 Va.L.Rev. 195, 201 (1968):

[Good faith is] an excluder. It is a phrase without general meaning (or meanings) of its own and serves to exclude a wide range of heterogenous forms of bad faith. In a particular context the phrase takes on specific meaning, but usually this is only by way of contrast with the specific form of bad faith actually or hypothetically excluded.

The Covenant is best understood as a way of “implying terms in the agreement.” Farnsworth, Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code, 30 U.Chil.L.Rev. 666, 670 (1963). It is a way of “honoring the reasonable expectations created by the autonomous expressions of the contracting parties.” Tymshare, Inc. v. Covell, D.C.Cir., 727 F.2d 1145, 1152 (1984); accord Pierce v. International Ins. Co. of III., Del.Supr., 671 A.2d 1361, 1366 (1996).

One method of analyzing the Covenant is to ask what the parties likely would have done if they had considered the issue involved. See Katz v. Oak Indus., Inc., Del.Ch., 508 A.2d 873, 880 (1986) (“[I]s it clear from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of ... had they thought to negotiate with respect to that matter?”); Market St. Assoc. Ltd. Partnership v. Frey, 7th Cir., 941 F.2d 588, 595 (1991) (the Covenant “is a stab at approximating the terms the parties would have negotiated had they foreseen the circumstances that have given rise to their dispute”); accord Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv.L.Rev. 369, 387 (1980); but see Lillard, Fifty Jurisdictions in Search of a Standard: The Covenant of Good Faith and Fair Dealing in the Employment Con- . text, 57 Mo.L.Rev. 1233, 1241 (1992) (asserting that good faith and at-will employment are “incompatible”).16

The application of the Covenant here relates solely to an act or acts of the employer manifesting bad faith or unfair dealing achieved by deceit or misrepresentation in falsifying or manipulating a record to *444create fictitious grounds to terminate employment. Since an assurance of continued employment is antithetical to at-will employment, no legally cognizable harm arises solely from the termination itself. See Wagen-seller, 710 P.2d at 1040. Here, the harm derives from Pensak’s creation of false grounds and manufacturing a record in order to establish a fictitious basis for termination. The evidence viewed in the light most favorable to Pressman shows that Pensak set out on a campaign to discredit Pressman by creating fictitious negative information about Pressman’s work and hiding positive information. Based on the distorted record he created, Pensak went to his superiors and caused Pressman to be terminated.

If the jury believed that Pensak did these acts, and did them intentionally, they amounted to a breach of the Covenant. But the trial court overstated the issue in its charge to the jury by permitting the jury to find in Pressman’s favor if they found that DuPont discharged Pressman “maliciously, that is as a result of hatred, ill will or intent to injure, or effects the discharge in bad faith, that is through acts of fraud, deceit or intentional misrepresentation” (emphasis supplied).

Employment relationships are complex, ambiguous and, ultimately, personal. One commentator has described the peculiar features of employment:

Employment agreements are intrinsically different from commercial contracts in many fundamental ways. Employment agreements create an ongoing personal relationship between employee and employer — or in larger companies, with the employer’s managerial and supervisory agents — which transcends purely economic interests.

Leonard, 66 N.C.L.Rev. 631, 656 (1988). This aspect of employment relationships counsels caution about creating causes of action based solely on personal motivations. Employees and their supervisors work closely together and personality clashes have the potential to interfere seriously with the achievement of an organization’s mission. Dislike, hatred or ill will, alone, cannot be the basis for a cause of action for termination of an at-will employment. The jury instruction here, which is expressed in the disjunctive, would permit a cause of action where an employee was discharged because of dislike, openly expressed. Here, if the jury believed that Pensak, not having authority unilaterally to fire Pressman, maliciously employed deceit and subterfuge to manufacture grounds for Pressman’s dismissal at the hands of Pensak’s superiors, Pensak went beyond the broad, permissible scope of the Doctrine and crossed into the limited zone of the Covenant. DuPont was made aware after the fact of this course of events and ratified Pensak’s actions. Thus, DuPont can be held liable to Pressman on this claim based upon carefully limited instructions to the jury.

The precise problem with the trial court’s instruction to the jury is that its disjunctive formulation did not tie the malice of Pensak toward Pressman to the intent to injure him by causing him to be terminated based on falsified grounds. The instruction would have permitted the jury, for example, to render a .verdict for Pressman if they found he was terminated because Pensak “hated” him or harbored “ill will” toward him. The breadth of the jury charge therefore was inconsistent with the breadth of the Doctrine and the limited exception created by the Covenant.

Y. Availability of Damages for Emotional Distress and Punitive Damages

DuPont also challenges the award of damages in favor of Pressman for emotional distress and punitive damages. The jury was instructed that it could award emotional distress and punitive damages to Pressman if it found that “DuPont acted maliciously to terminate plaintiffs employment or breached its duty of good faith and fair dealing_” Although we reverse the judgment below, the interest of judicial economy suggests that we reach the question of emotional distress and punitive damages. The two measures 'of damages will be addressed separately.

A. Damages for Emotional Distress

Damages for emotional distress are not available for breach of contract in the *445absence of physical injury or intentional infliction of emotional distress. Pierce v. International Ins. Co. of III., Del.Supr., 671 A.2d 1361, 1367 (1996); Tackett v. State Farm Fire & Cas. Ins. Co., Del.Supr., 653 A.2d 254, 265 (1995). Pressman has not suffered physical injury, and he did not establish the elements of intentional infliction of emotional distress. The instruction with respect to emotional distress damages, therefore, was error.

B. Punitive Damages for Breach of Contract

The question of punitive damages is more difficult. The nature of the conduct which gives rise to a breach of the Covenant in the context of at-will employment requires consideration of the broader question of punitive damages as a remedy for breach of contract.

Historically, damages for breach of contract have been limited to the non-breaching parties’ expectation interest. See Restatement (Second) of Contracts § 347. Also, punitive damages are not recoverable for breach of contract unless the conduct also amounts independently to a tort.17 Id. § 355. See also Farnsworth, Contracts § 12.8 (“[N]o matter how reprehensible the breach, damages that are punitive, in the sense of being in excess of those required to compensate the injured party for lost expectation, are not ordinarily awarded for breach of contract) (citing J.J. White, Inc. v. Metropolitan Merchandise Mart, Inc., Del.Super., 107 A.2d 892, 894 (1954)).18 As the introductory note to the remedies portion of the Restatement (Second) of Contracts states:

The traditional goal of the law of contract remedies has not been compulsion of the promisor to perform but compensation of the promisee for the loss resulting from the breach. “Willful” breaches have not been distinguished from other breaches, punitive damages have not been awarded for breach of contract, and specific performance has not been granted where compensation in damages is an adequate substitute for the injured party.

The Uniform Commercial Code also adheres to the traditional view that expectation damages are the standard remedy for breach of contract. 6 Del.C. § 1-106. Although the UCC imposes a duty of good faith and fair dealing, 6 Del.C. § 1-201 & 2-103, punitive damages generally are not awarded for a breach of the Covenant.

Unless the bad faith rises to the level of an independent tort, which itself would support an award of punitive damages, mere bad faith on the part of a party to a contract will not give rise to punitive damages.

Anderson, Damages Under the Uniform Commercial Code § 11:35 (1992 & Supp. 1995).

Traditional contract doctrine is also supported by the more recent theory of efficient breach. The theory holds that properly calculated expectation damages increase economic efficiency by giving “the other party an incentive to break the contract if, but only if, he gains enough from the breach that he can compensate the injured party for his losses and still retain some of the benefits from the breach.” Restatement (Second) of Contracts, Reporter’s Note to Introductory Note to ch. 16, Remedies; see also Barton, The Economic Basis of Damages for Breach of Contract, 1 J.Legal Studies 277 (1972). The notion of efficient breach “accords remarkably with the traditional assumptions of the law of contract remedies.” Farnsworth, *446Contracts § 12.3 at 155.19 Punitive damages would increase the amount of damages in excess of the promisee’s expectation interest and lead to inefficient results. Id. at 155-56.

The traditional rule has been subject to a number of limited but well recognized exceptions. Judge Friendly, writing for the Second Circuit, listed the following: breach of a contract to marry; failure of a public monopoly to discharge its obligations to the public; breach of a fiduciary duty; breach accompanied by fraudulent conduct; and bad faith refusal by an insurer to settle a claim. Thyssen, Inc. v. S.S. Fortune Star, 2d Cir., 777 F.2d 57, 63 (1985) (citing authorities).

This Court has permitted punitive damages in the insurance “bad faith” context. Most recently, Pierce v. International Ins. Co. of Ill., Del.Supr., 671 A.2d 1361, 1367 (1996), held that: “[Pjunitive damages may be available in the context of a contract action if the denial of coverage is wilful or malicious ... [and] when the bad faith actions of an insurer are taken with a reckless indifference or malice toward the plight of the injured employee [insured].... ” Also, in Tackett v. State Farm Fire & Cas. Ins. Co., Del.Supr., 653 A.2d 254, 265 (1995), this Court held that: “[A]n insured may be entitled to the recovery of punitive damages in a bad faith action if the insurer’s breach is particularly egregious.”

Whether to expand punitive damages beyond the traditional applications is a question that occurs frequently. Some commentators have argued for greater availability of punitive damages for breach of contract.20 While these arguments have some force, we are reluctant to depart markedly from the well-established body of law.

The reasons for a cautious approach retain much force. The California Supreme Court described these concerns succinctly, stating:

[T]he employment relationship is not sufficiently similar to that of insurer and insured to warrant judicial extension of the proposed additional tort remedies in view of the countervailing concerns about economic policy and stability, the traditional separation of tort and contract law, and finally, the numerous protections against improper terminations already afforded employees.

Foley v. Interactive Data Corp., 47 Cal.3d 654, 254 Cal.Rptr. 211, 234-35, 765 P.2d 373, 396 (1988). Considerations of policy support this view. Parties would be more reluctant to join in contractual relationships, or would expend more effort explicitly defining such relationships, if they faced the prospect of damages which could be out of proportion to the amounts involved in the contract. Contracting is a bargained-for exchange. It is the primary mechanism for the allocation of goods, labor and other resources “in a socially desirable manner.” Restatement (Second) of Contracts, Introductory Note to eh. 16. We recognize the need for caution in fashioning common-law remedies which might inhibit such activity. See Harris v. Atlantic Richfield Co., 14 Cal.App.4th 70, 17 Cal. Rptr.2d 649, 653-654 (1993) (restrictions on contract remedies “promote contract formation by limiting liability to the value of the promise”); Miller Brewing Co. v. Best Beers of Bloomington, Inc., Ind.Supr., 608 N.E.2d 975, 981 (1993) (“well-defined parameters ... lend a needed measure of stability and predictability”).

In Pierce and Tackett, this Court has allowed punitive damages for bad faith breach of an insurance contract. This raises the question: Why should insurance contracts be treated differently from virtually all others? The California Supreme Court has relied upon the “special relationship” between insurer and insured to support such a distinction. The special relationship, according to *447the California Supreme Court, is characterized by: (1) the personal interests — as opposed to commercial interests — sought to be protected by insurance; (2) the public service nature of insurance; and (3) the adhesive nature and unbalanced bargaining position between insurer and insured. Foley, 765 P.2d at 390. Also, we have described the “essential benefits” of an insurance contract as “income security and a reduction in uncertainty.” Pierce, 671 A.2d at 1366.

The California Court distinguished the employment relationship, stating:

[I]n terms of abstract employment relationships as contrasted with abstract insurance relationships, there is less inherent relevant tension between the interests of employers and employees than exists between that of insurers and insureds. Thus the need to place disincentives on an employer’s conduct in addition to those already imposed by the law simply does not rise to the same level as that created by the conflicting interests at stake in the insurance context.

Foley, 765 P.2d at 396.