Kathy J. Maus is a partner with Butler Weihmuller Katz Craig LLP, having joined the firm in 1991. Julius F. "Rick" Parker III is an associate with the firm, having joined the firm in 2004. Ms. Maus and Mr. Parker both practice in the firm's Tallahassee office and focus their practices on first and third party extracontractual litigation defense, casualty litigation and first and third-party coverage matters. Ms. Maus serves on DRI's Insurance Law Committee Steering Committee where she serves as Membership Chair. She also serves on DRI's Membership Committee. Ronald "Gene" Murray is a Corporate Claims Manager for Royal & SunAlliance Insurance in Charlotte, North Carolina. His practice areas include bad faith and extracontractual claims. Mr. Murray is a CPCU member.
In recent years, the term "bad faith" has become a term which may strike terror in the heart of defense attorneys, claims handling professionals and in-house counsel for insurers; and for good reason. An action for bad faith, whether it be "first-party" or "third-party" can and has led to "extra-contractual damages," i.e., damages which are not governed by limits of insurance or other limitations on coverage contained in the insurance contract. Allegations of bad faith attempt to re-write the rules for claims handling in the middle of the game. For this reason, bad faith exposure cannot be actuarially predicted or accurately accounted in the setting of premiums based on the risk presented. It therefore has the potential to cost insurers more than the maximum exposure traditionally presented by a particular risk under a policy with defined limits of coverage. This article explores the risks typically presented by each type of bad faith claim and bad faith theories recently presented in the context of automobile policies.
Bad faith allegations are asserted in both the first-party and third-party contexts. Each presents its own set of challenges and traps for the unwary. An action for first-party bad faith arises out of the handling of a claim made directly against the insurer by the insured, for example in claims for collision, medical payments and uninsured/ underinsured motorist ("UM/UIM") coverages. By contrast, third-party bad faith arises out of the handling of a claim made against the insured by a third-party, typically under the property damage or bodily injury liability coverages. In order to understand the recent trends and assertions, we must take a step back and understand the history of the development of bad faith and the various burdens of proof available to prove a bad faith claim.
II. First-Party Bad Faith
First-party bad faith, as the name suggests, means bad faith in carrying out the insurer's duties once the insured makes a direct claim under his or her own insurance policy. At common law, since an insurance policy is a contract, courts generally did not recognize actions for bad faith failure to settle brought by an insured against his insurer. Because the parties' rights were defined by a written contract, to recognize a cause of action based in tort would blur the line between tort and contract law. Thus, courts generally left the parties to the remedies either provided in the insurance policy itself or under general principles of contract law. In the automobile context, this meant that an insured who had to sue her insurer to recover UM/UIM benefits could recover no more than the policy limits, and in some cases attorney's fees were recoverable, but only if permitted by statute.
In the early 1970's, however, courts began to plow new ground and recognize the tort of common law bad faith. More recently, even in the absence of statutory mandate, at least 26 state courts of last resort have recognized the tort of bad faith in first-party cases. See, e.g., Chavers v. National Sec. Fire & Casualty Co., 405 So.2d 1 (Ala. 1981); State Farm Fire & Casualty Co. v. Nicholson, 777 P.2d 1152 (Alaska 1989); Noble v. National Am. Life Ins. Co., 624 P.2d 866 (Ariz. 1981); Aetna Casualty and Sur. Co. v. Broadway Adams Corp., 664 S.W.2d 463 (Ark. 1984); Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 510 P.2d 1032, 108 Cal. Rptr. 480 (Cal. 1973); Travelers Ins. Co. v. Savio, 706 P.2d 1258 (Colo. 1985); Buckman v. People Express, Inc., 530 A.2d 596 (Conn. 1987); The Best Place, Inc. v. Penn Am. Ins. Co., 920 P.2d 334 (Haw. 1996); White v. Unigard Mut. Ins. Co., 730 P.2d 1014 (Idaho 1986); Erie Ins. Co. v. Hickman, 662 N.E.2d 515 (Ind. 1993); Dolan v. Aid Ins. Co., 431 N.W.2d 790 (Iowa 1988); Curry v. Fireman's Fund Ins. Co., 784 S.W.2d 176 (Ky. 1989); State Farm Fire & Cas. Co. v. Simpson, 477 So. 2d 242 (Miss. 1985); Lipinski v. Title Ins. Co., 655 P.2d 970 (Mont. 1982)(common-law bad-faith tort actions against insurers abolished by Mont. CODE Ann. § 33-18-242 (1993)); Braesch v. Union Ins. Co., 464 N.W.2d 769 (Neb. 1991); United Fire Ins. Co. v. McClelland, 780 P.2d 193 (Nev. 1989); State Farm Gen. Ins. Co. v. Clifton, 527 P.2d 798 (N.M. 1974); Corwin Chrysler-Plymouth, Inc. v. Westchester Fire Ins. Co., 279 N.W.2d 638 (N.D. 1979); Hoskins v. Aetna Life Ins. Co., 452 N.E.2d 1315 (Ohio 1983); Christian v. American Home Ins. Co., 577 P.2d 899 (Okla. 1978); Bibeault v. Hanover Ins. Co., 417 A.2d 313 (R.I. 1980); Nichols v. State Farm Mut. Ins. Co., 306 S.E.2d 616 (S.C. 1983); In re Certification of a Question of Law from the U.S. District Court, 399 N.W.2d 320 (S.D. 1987); Arnold v. National County Mut. Ins. Co., 725 S.W.2d 165 (Tex. 1987); Anderson v. Continental Ins. Co., 271 N.W. 2d 368 (Wis. 1978); McCullough v. Golden Rule Ins. Co., 789 P.2d 855 (Wyo. 1990).
Five other states have allowed recovery of extra-contractual damages without recognizing the tort. See, e.g., Tackett v. State Farm Fire & Cas. Ins. Co., 653 A.2d 254 (Del. 1995); Marquis v. Farm Family Mut. Ins. Co., 628 A.2d 644 (Me. 1993); Lawton v. Great S.W. Fire Ins. Co., 392 A.2d 576 (N.H. 1978); Beck v. Farmers Ins. Exch., 701 P.2d 795 (Utah 1985); Hayseeds, Inc. v. State Farm Fire & Cas., 352 S.E.2d 73 (W. Va. 1986). At least four state courts of last resort have rejected the "tort" of bad faith in first-party insurance cases. Spencer v. Aetna Life & Cas. Ins. Co., 611 P.2d 149 (Kan. 1980); Kewin v. Massachusetts Mut. Life Ins. Co., 295 N.W.2d 50 (Mich. 1980); Haagenson v. National Farmers Union Property & Cas. Co., 277 N.W.2d 648 (Minn. 1979); Halpin v. Prudential Ins. Co. of Am., 401 N.E.2d 171 (N.Y. 1979); Rocanova v. Equitable Ins. Soc'y, 634 N.E.2d 940 (N.Y. 1994); New York Univ. v. Continental Ins. Co., 662 N.E.2d 763 (N.Y. 1995).
Moreover, as in Florida, several jurisdictions have rejected first-party bad faith, at common law in tort or contract. Allstate Ins. Co. v. Douville, 510 So. 2d 1200, 1201 (Fla. 2d DCA 1987); Tate v. Aetna Cas. & Sur. Co., 253 S.E.2d 775, 777 (Ga. 1979); Mazur v. Hunt, 592 N.E.2d 335 (Ill. App. 1992); Spencer v. Aetna Life & Cas. Ins. Co., 611 P.2d 149, 158 (Kan. 1980); Bye v. American Income Life Ins. Co., 316 So. 2d 164 (La. Ct. App. 4th Cir. 1975); Marquis v. Farm Family Mut. Ins. Co., 628 A.2d 644 (Me. 1993); Yuen v. American Republic Ins. Co., 786 F. Supp. 531 (D. Md. 1992) (Maryland does not recognize a tort or hybrid tort/contract claim for bad faith in first-party cases); Kewin v. Massachusetts Mut. Life Ins. Co., 295 N.W.2d 50, 56 (Mich. 1980); Haagenson v. National Farmers Union Property & Cas. Co., 277 N.W.2d 648, 652 (Minn. 1979); Duncin v. Andrew County Mut. Ins. Co., 665 S.W.2d 13, 20 (Mo. Ct. App. W.D. 1983); New York Univ. v. Continental Ins. Co., 662 N.E.2d 763 (N.Y. 1995); Employers' Fire Ins. Co. v. Love It Ice Cream Co., 670 P.2d 160, 165 (Or. 1983); D'Ambrosio v. Pennsylvania Nat'l. Mut. Cas. Ins. Co., 431 A.2d 966, 970 (Pa. 1981); Chandler v. Prudential Ins. Co., 715 S.W.2d 615, 621 (Tenn. Ct. App. 1986). Still others expressly have refused to extend the cause of action for bad faith in a first-party case. See Lawton v. Great Southwest Fire Ins. Co., 118 N.H. 607, 613-14, 392 A.2d 576, 580 (1978); and Levine v. Selective Ins. Co. Of America, 250 Va. 282, 462 S.E.2d 81 (1995).
A. Statutory Actions
In the absence of common law causes of action (and occasionally in combination therewith), several jurisdictions have created statutory causes of action for bad faith either by recognizing the tort directly, or otherwise allowing a private cause of action under consumer protection, or unfair competition statutes. These include Colorado (Colo. Rev. Stat. § 10-3-1113), Florida (Fla. Stat. § 624.155), Georgia (Ga. Code Ann. § 33-4-6), Louisiana (La. Rev. Stat. Ann. § 22:1220), Pennsylvania (42 Pa. Cons. Stat. § 8371) and Rhode Island (R.I. Gen. Laws § 9-1-33). Others, including Massachusetts, Montana, New Hampshire and New Mexico, permit private causes of action under Unfair Claim Settlement Practices statutes. See, e.g., Massachusetts Gen. Law, Chapter 93A, § 9 (making violations of Massachusetts' Unfair Claim Settlement Practices Statute actionable under the Massachusetts Consumer Protection Statute); Mont. Code Ann. § 13-18-242; New Hampshire Rev. Stat. Ann. § 417:19(I); and N.M. Stat. Ann. § 59A-16-30. Similarly, consumer protection and unfair competition statutes exist in other states, including Illinois, New Hampshire, North Carolina, Pennsylvania, Texas, Washington, Alaska, California, Louisiana, Michigan, and New Jersey.
B. Standards of Care
Most all jurisdictions which recognize first-party bad faith actions have essentially adopted one of the following standards: (1) the "fairly debatable" standard, or (2) negligence. Although some jurisdictions have articulated more elaborate variations of these standards, and other jurisdictions have utilized terminology that appears different, in practice the differences are largely semantic. Most jurisdictions fall into one of these two categories.
1. "Fairly Debatable" Standard
Under the "fairly debatable" standard, an insurer may incur liability for bad faith only when a denial or delay in payment lacked any reasonable basis. Where the insurer's position was one on which reasonable minds could differ, the insurer will not be liable for bad faith as a matter of law. Obviously, this is the most insurer friendly standard of care.
The highest courts in at least sixteen different states have adopted the "fairly debatable" standard or a similar variation thereof. National Security Fire & Cas. Co. v. Bowen, 417 So.2d 179 (Ala. 1982); Rawlings v. Apodaca, 726 P.2d 565, 572 (Ariz. 1986); Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1275 (Colo. 1985); White v. Unigard Mut. Ins. Co., 730 P.2d 1014, 1018 (Idaho 1986); Dolan v. Aid Ins. Co., 431 N.W.2d 790, 794 (Iowa 1988); Wittmer v. Jones, 864 S.W.2d 885, 890 (Ky. 1993); Andrew Jackson Life Ins. Co. v. Williams, 566 So. 2d 1172, 1184-85 (Miss. 1990); Tynes v. Bankers Life Co., 730 P.2d 1115, 1124 (Mont. 1986); Pickett v. Lloyd's, 621 A.2d 445, 453 (N.J. 1993); Tokles & Son, Inc. v. Midwestern Indem. Co., 605 N.E.2d 936, 943 (Ohio 1992); Rumford Property & Liab. Ins. Co. v. Carbone, 590 A.2d 398, 400 (R.I. 1991); Walz v. Fireman's Fund Ins. Co., 556 N.W.2d 68, 70 (S.D. 1996); Billings v. Union Bankers Ins. Co., 918 P.2d 461, 464-65 (Utah 1996); Bushey v. Allstate Ins. Co., 670 A.2d 807, 809 (Vt. 1995); Warmka v. Hartland Cicero Mut. Ins. Co., 400 N.W.2d 923, 925 (Wis. 1987); and State Farm Mut. Auto. Ins. Co. v. Shrader, 882 P.2d 813, 825 (Wyo. 1994).
Other states have not expressly used the term "fairly debatable." For example, in Anderson v. Continental Ins. Co., 271 N.W.2d 368, the Wisconsin Supreme Court held the insured must prove: (1) the absence of a reasonable basis for denying benefits under the insurance policy, and (2) the insurer's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. Similarly, in Erie Ins. Co. v. Hickman, 622 N.E.2d at 515, 519 (Ind. 1993), the Indiana Supreme Court held an insured must plead and prove two elements to establish bad faith. First, the Plaintiff must prove the insurer breached its obligation to refrain from (1) making an unfounded refusal to pay policy proceeds, (2) causing an unfounded delay in making payment, (3) deceiving the insured, or (4) exercising any unfair advantage to pressure an insured into a settlement of his claim. Id. Second, the insured must establish the insurer acted with intent. 622 N.E.2d at 520. As an example, an insured may satisfy the intent element by proving the insurer acted "knowing that there is no rationale, principled basis" for denying or delaying a claim. Id. Merely showing the lack of a diligent investigation, however, is insufficient. Id., citing Continental Cas. Co. v. Novy, 437 N.E.2d 1338 (Ind. Ct. App. 1982). In other words, under Indiana law, bad faith is closer to an "intentional" tort which cannot be established upon evidence of mere negligence.
2. Negligence Standard
Other jurisdictions equate bad faith with negligence. For example, under California Law, bad faith simply means the insurer acted tortuously or negligently. See Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 108 Cal. Rptr. 480, 510 P.2d 1032 (1973); Lunsford v. American Guar. & Liab. Ins. Co., 775 F. Supp. 1574 (N.D. Cal. 1991). Remarkably, in Idaho, an inference of bad faith can be established by the "merest showing that the insurer's conclusions . . . are or may be incorrect or that the insured's investigation was not complete in all details." State Farm Fire & Cas. Co. v. Trumble, 663 F. Supp. 317, 321 (D. Idaho 1987).
Overall, only a few jurisdictions follow a broad standard of care which would impose liability on an insurer for mere negligence. Those that do appear to follow the lead of Gruenberg in defining the standard: "[The] duty not to withhold unreasonably payments due under a policy," the duty to "act fairly and in good faith in discharging its contractual responsibilities," and, the duty to avoid "refusing, without proper cause, to compensate its insured for a loss covered by the policy." Gruenberg v. Aetna Ins. Co., 510 P.2d 1032, 1037 (Cal. 1973). Violations of these duties "may give rise to a cause of action in tort for breach of the implied covenant of good faith and fair dealing." Id. Other jurisdictions adopting the negligence standard include North Dakota (Seifert v. Farmers Union Mut. Ins. Co., 497 N.W.2d 694 (N.D. 1993)), Oklahoma (Roach v. Atlas Life Ins. Co., 769 P.2d 158 (Okla. 1989)), South Carolina (Nichols v. State Farm Mut. Auto. Ins. Co., 306 S.E.2d 616, 619 (S.C. 1983)), and Washington (Safeco Ins. Co. of America v. JMG Restaurants, Inc., 680 P.2d 409 (Wash. 1984)).
C. Recent Trends
1. Bellville v. Farm Bureau Mut. Ins. Co., 2005 WL 1790609 (Iowa 2005)
On July 29, 2005, the Iowa Supreme Court released its decision in Bellville v. Farm Bureau Mut. Ins. Co., 2005 WL 1790609 (Iowa 2005). Bellville involved a $300,000 UM/UIM policy issued by Farm Bureau to Bellville. Bellville was involved in a motorcycle accident with his wife riding behind him. As they approached an intersection, the traffic light turned yellow, and Bellville decided to proceed through the intersection rather than "lock up" his brakes to stop. At that same time, Guy Schueler was proceeding in the opposite direction in his car and did not see Bellville. He therefore began to make a left turn in front of Bellville, who was unable to avoid him and crashed into the rear of Schueler's car. Bellville was unhurt, but his wife was killed instantly.
Several months after the accident, Bellville's attorney demanded that Farm Bureau tender its policy limits and consent to his settlement with Schueler for the limits of Schueler's policy ($50,000). Farm Bureau rejected both demands and Bellville proceeded to suit under breach of contract and bad faith theories. The jury awarded compensatory damages totalling $756,714.95 and unspecified punitive damages, finding that Farm Bureau had acted in bad faith. Farm Bureau appealed on the ground that the trial court erred in denying its motion for directed verdict. The Court of Appeals reversed under the "fairly debatable" standard and the Iowa Supreme Court granted review. Bellville, 2005 WL 1790609 at 1.
The Iowa Supreme Court upheld the Court of Appeals' reversal, finding that Farm Bureau's rejection of Bellville's policy limits demand was supported by a fairly debatable position on Bellville's fault and the value of the estate's claim. In addition, it upheld reversal based upon Farm Bureau's refusal to consent to settlement with the tortfeasor being objectively reasonable as Iowa law did not require a UM insurer to consent to settlement with the tortfeasor in order to preserve its subrogation rights. (Many states have enacted statutes which require a UM insurer to be given an opportunity to consent to settlement with the tortfeasor before it is deemed to have waived its subrogation rights. Iowa has no such statute.)
Farm Bureau hired an expert to determine whether Bellville was at fault in the accident, and to counter Bellville's expert, who had opined that a jury would find Bellville no more than 5% at fault. Farm Bureau's expert concluded that a reasonable jury could find Bellville at fault up to 30%. In addition, Bellville's expert opined that his economic damages (loss of earnings and loss of support) were between $600,000 and $1,000,000. The jury, however, assessed this total at $250,000. Thus, the only open question as to whether Farm Bureau's valuation of Bellville's UM was reasonable was the valuation of Bellville's loss of consortium claim.
The court considered Farm Bureau's valuation method, which consisted of looking at prior UM settlements and relying on its expert's opinion that the case was worth no more than $300,000. While it rejected the use of prior settlements as an analytical tool, the court found Farm Bureau's reliance on its expert's opinion reasonable. Since Farm Bureau's expert opined that Bellville could be as much as 30% negligent, the court calculated that, in order for the plaintiff to prevail, he would have to show that Farm Bureau had no reasonable basis for valuing his claim at less than $415,000. This figure was calculated by taking Farm Bureau's valuation of $270,000, dividing by 70% for comparative fault and adding in the $50,000 received from Schueler (as a set-off) to determine the raw value of the case. Id. at 14, n. 3. As Farm Bureau's valuation was supported by its expert's opinions, the court concluded as a matter of law that Farm Bureau had not engaged in any bad faith conduct. Id. at 11.
As for Farm Bureau's refusal to consent to the proposed settlement with Schueler for the limits of his liability policy, the court found that Farm Bureau's position was fairly debatable, because no Iowa court had yet held that a UM insurer has a duty to consent to a reasonable settlement with the tortfeasor. It then took the extraordinary step of holding that, where a UM policy contains a provision requiring the insured to consent to reasonable settlements, that clause imposes a reciprocal obligation on the insurer not to withhold consent to a reasonable settlement with the tortfeasor. Since that question had not previously been decided, however, Farm Bureau's position was fairly debatable.
The Bellville opinion is significant as it demonstrates the difficulty an insured faces in attempting to prevail on a first-party bad faith case under the fairly debatable standard. Since the court held that the insured must demonstrate that the insurer had no reasonable basis for concluding that the plaintiff's claim could be valued at less than policy limits, both claims professionals and defense attorneys should breathe a sigh of relief. In order to avoid first-party bad faith in the UM context under a fairly debatable standard, an insurer merely needs to conduct an adequate investigation into both liability and potential damages and document the valuation of the claim. Since the insurer's claim file will be discoverable in a later bad faith claim, it must contain evidence that a competent investigation and valuation of the claim was undertaken. So long as the claim file documents a reasonable basis for concluding that the claim could be worth less than the limits of the policy, in a state which adheres to the fairly debatable standard, the insurer should be protected from liability for bad faith.
The duty to consent issue is for all practical purposes a dead letter after Bellville. While Farm Bureau had a reasonable basis to withhold consent as the issue had not been decided by an Iowa court, it has now been decided unfavorably to Farm Bureau. Thus, in the future, insurers in Iowa must document a reasonable basis for refusing to consent to a settlement with the tortfeasor. From the opinion, we can glean that this would mean that the insured would have to have evidence that the tortfeasor has "assets or other ability to contribute toward satisfaction of the insurer's subrogation rights." Id. at 14. In most states, the duty to consent is governed by statute and therefore reliance on Bellville to exonerate insurers from unreasonably withholding consent to settlement would be unwise.
Critically, the insurer offered $270,000 of the $300,000 limits to resolve the claim. Otherwise, Plaintiff could have argued it was bad faith to fail to offer at least what Farm Bureau believed to be the reasonable value of the claim. This latter argument is certainly the trend among the plaintiff's bar, and the argument is broadened in an attempt to impose a duty to offer some amount even in the absence of a demand to settle. See Powell v. Prudential Property & Cas. Ins., 584 So. 2d 12 (Fla. 3d DCA 1991), rev. denied, 598 So. 2d 77 (Fla. 1992) (under certain circumstances, an insurer may be deemed to owe a duty to offer policy limits even before a demand for limits is made).
2. DeLaGarza v. State Farm Mut. Auto. Ins. Co., 2005 WL 1648208 (Ct. App. Tex. 2005)
On July 14, 2005, a Texas intermediate appeals court released its decision in DeLaGarza v. State Farm Mut. Auto. Ins. Co., 2005 WL 1648208 (Ct. App. Tex. 2005). DeLaGarza is a fairly simple case involving a $25,000 UM policy. DeLaGarza was allegedly injured in an accident in October, 2002. On October 18, 2002, his attorney wrote to State Farm notifying it of the accident and providing formal notice of his claim for PIP and UM benefits under the policy. On October 25, 2002, State Farm responded, requesting documentation of the claim, including medical bills and names and addresses of his medical providers. On October 31, it sent an additional letter requesting an authorization to release medical records to be executed by DeLaGarza.
On March 6, 2003 (almost 5 months later), State Farm received a letter from DeLaGarza's attorney enclosing medical records and bills, but no signed authorization. In this letter, the attorney demanded the limit of DeLaGarza's UM policy of $25,000. On March 27, 2003, State Farm responded with an offer of $10,000 based upon evidence it obtained showing DeLaGarza had significant pre-existing degenerative disease and again asking for all of DeLaGarza's pre-accident medical records.
Rather than respond further, DeLaGarza simply filed suit seeking the limits of the UM policy and attorney's fees pursuant to the Texas bad faith statute. Three weeks after suit was filed, State Farm sent DeLaGarza a check for $10,000, and after conducting discovery, sent him the balance of the policy limits: $15,000. At this point, the only claim remaining in the lawsuit was DeLaGarza's claim for delay damages and attorney's fees. State Farm moved for summary judgment on the ground that it had satisfied its contractual obligations, and the trial court granted the motion, stating that DeLaGarza take nothing by the action.
The Texas appeals court upheld the summary judgment, stating:
It is undisputed that DeLaGarza never established the liability of the uninsured motorist who allegedly caused the car accident made the basis of his insurance claim. It is also undisputed that there has never been a determination of the amount of damages suffered by DeLaGarza as a result of the accident. ... Based on the foregoing, we conclude the trial court properly granted summary judgment in favor of State Farm on DeLaGarza's claims under article 21.55 of the Texas Insurance Code and section 38.001 of the Texas Civil Practice and Remedies Code.
DeLaGarza, 2005 WL 1648208 at 4-5.
DeLaGarza simply points out the generally prevailing view among states with statutory bad faith laws that no action for bad faith can arise when the insurer pays the limit of its policy after conducting a reasonable investigation. DeLaGarza predicated his bad faith claim on the alleged bad faith by State Farm in requesting additional information, in particular his medical records regarding the state of his injuries prior to the accident. Where the insurer has a reasonable good faith reason to seek additional information, the request for information will generally not be regarded as unreasonable delay. DeLaGarza also demonstrates that in a first party claim, the insured bears the burden of proving entitlement to benefits under the policy. DeLaGarza's failure to provide any evidence that the other driver in the accident was negligent and/or uninsured was clearly fatal to his claim that State Farm acted in bad faith. Thus, like Bellville, the DeLaGarza opinion should serve as a measure of reassurance to claims professionals and defense attorneys alike. Reasonable investigation and evaluation should not constitute unreasonable delay.
3. Macola v. Gov't Employees Ins. Co., 410 F.3d 1359 (11th Cir. 2005)
In June, 2005, the Eleventh Circuit Court of Appeals certified the following questions to the Florida Supreme Court:
(1) In the context of a third party bad faith claim where there is a possibility of an excess judgment, does an insurer "cure" any bad faith under § 624.155 when, in response to a civil remedy notice, it timely tenders the policy limits after the initiation of a lawsuit against its insured but before the entry of an excess judgment?
(2) If so, does such a cure of the statutory bad faith claim constitute a full satisfaction of the judgment such that the insured and derivative injured third parties are barred from bringing a common law bad faith claim to recover the difference between the policy limits and the excess judgment?
Macola v. Gov't Employees Ins. Co., 410 F.3d 1359, 1365 (11th Cir. 2005). As is obvious from the text of the questions certified, Macola appears to be a third-party bad faith case. However, as explained below, Macola involves the question of "cure" under a statutory notice of alleged bad faith filed by the insured. In addition, it demonstrates the interplay between first-party and third-party bad faith, as well as a novel question of law, which does not appear to have been answered by any state in which statutory bad faith statutes contain a cure period.
Section 624.155, Florida Statutes states, in pertinent part:
(3)(a) As a condition precedent to bringing an action under this section, the department and the authorized insurer must have been given 60 days' written notice of the violation. ...
(d) No action shall lie if, within 60 days after filing notice, the damages are paid or the circumstances giving rise to the violation are corrected.
Section (3)(a) provides for what is commonly referred to as a "civil remedy notice." Section (3)(d) is referred to as the "cure" period. As is plain from the statute, once the aggrieved party files a civil remedy notice, the insurer has a 60 day period during which to cure the violation by paying the damages or correcting the circumstances giving rise to the violation.
The Florida Supreme Court first took occasion to construe this newly-enacted statute in Blanchard v. State Farm Mut. Auto. Ins. Co., 575 So. 2d 1289 (Fla. 1991). Blanchard answered a question certified by the Eleventh Circuit Court of Appeals and held simply that a cause of action for first-party bad faith under section 624.155 could not accrue until the insured obtained a final judgment in its favor determining that the policy provided coverage for the insured's loss.
The Court again considered the statute in Time Ins. Co., Inc. v. Burger, 712 So. 2d 389 (Fla. 1998). In Burger, the Court expanded its holding in Blanchard to hold that emotional distress damages were recoverable in a first-party bad faith claim brought pursuant to section 624.155, provided such damages were substantiated by the testimony of a qualified health care provider. Burger, 712 So. 2d at 393.
Finally, in Vest v. Travelers Ins. Co., 753 So. 2d 1270 (Fla. 2000), the Court considered the "cure" provisions of section 624.155 and held that, notwithstanding the holding of Blanchard, an aggrieved party could file a civil remedy notice prior to entry of a final judgment against the insurer and start the clock running on the 60 day cure period. Thus, in the absence of a final judgment, the insured, or a third-party claimant, could force the insurer to evaluate whether or not to tender policy limits prior to a binding determination of coverage in favor of the insured. While the Court reiterated that the question of bad faith vel non continues to be a question of fact for the jury, it seemingly endorsed the practice of requiring the insurer to avail itself of the cure period of the statute before its liability was finally determined. Thus the stage was set for Macola.
In June, the Eleventh Circuit Court of Appeals certified the above questions regarding the statutory cure period to the Florida Supreme Court in Macola. In Macola, the insured, Quigley, was involved in an accident with a third-party, Macola. Shortly after the accident, Macola's attorney offered to settle his client's claim for $300,000, the limits of Quigley's policy with GEICO. When GEICO responded with a check for the policy limits and a proposed release, Macola's attorney rejected it as a counter-offer and not an acceptance of his offer to settle.
Macola then filed suit against Quigley. Five months later (and two years prior to final judgment against Quigley), the insured served a civil remedy notice on GEICO, alleging that its failure to settle the claim with Macola when it could have done so constituted bad faith. Pursuant to the civil remedy notice, GEICO sent a check to Macola for $300,000 within 60 days.
Macola then obtained a final judgment against Quigley in the amount of $1,541,941.61. He then filed a common law third-party bad faith claim against GEICO based on its failure to settle within policy limits when it had the opportunity to do so. Quigley also filed a common law bad faith suit against GEICO in federal court (the opinion states that Quigley's first-party action was a common law bad faith claim. This is obviously in error as first-party bad faith is not recognized at common law in Florida) and the two actions were consolidated. GEICO defended both suits on the ground that it had "cured" any bad faith by tendering policy limits in response to the civil remedy notice. The district court agreed and entered summary judgment in favor of GEICO on both claims. The action then proceeded to the Eleventh Circuit Court of Appeals, which certified the question to the Florida Supreme Court.
Both claims professionals and defense attorneys should be on the edge of their seats awaiting the Supreme Court's decision, as the ramifications of a decision either way could be far reaching. If the Court decides in favor of GEICO, third-party bad faith claims in Florida could see a major decline. After all, the third-party in Macola had already arguably perfected a common law bad faith claim by offering to settle the claim within policy limits before filing suit. A decision in favor of GEICO would mean that the insured has the power to later defeat a third-party's common law bad faith claim simply by filing a civil remedy notice of a first-party bad faith claim, thereby allowing the insurer a second bite at the apple. Any rational insurer would jump at the opportunity to "cure" a common law bad faith claim by paying the limits of the policy. But what of the insured? Wouldn't he then be subject to an excess judgment? By offering the insurer the opportunity to cure its bad faith, would the insured not be cutting his own throat? The legislature cannot have intended such an anomalous result when it enacted section 624.155, a statute clearly intended to protect insureds.
If on the other hand, the Court rules against GEICO, it would have to ignore the legislature's mandate that an insurer be given 60 days to cure bad faith violations after the filing of a civil remedy notice. The Court is certainly not at liberty to re-write the statute and deny insurers the protection they have been granted by the legislature.
And certainly the rights of the third party must be considered. The Court could conceivably hold that GEICO's cure extinguished the third-party judgment in its entirety. But that would deprive Macola of his right to execute on a valid judgment against Quigley. This is further supported by the fact that the insured's civil remedy notice to force the carrier to pay its policy limits may not be binding on the plaintiff who is no longer willing to accept them.
Perhaps the answer to all of these questions lies in the uniqueness of the facts of Macola. Could it be that the insured simply did not consider the ramifications of allowing GEICO to cure its bad faith at his own expense? Would any rational insured take the same risk regardless of which way the Court decides Macola? Regardless of which way the Court rules, someone will lose in that case despite having complied with the law. History says the loser will likely be GEICO. If that is the case, the legislature will have to amend section 624.155 to "cure the cure."
III. Third-Party Bad Faith
Third-party bad faith arises only in the context of coverage for liability to others. Since most automobile policies contain clauses which reserve to the insurer the right to control litigation and settlement opportunities, as well as to choose defense counsel, courts generally impose a fiduciary duty upon the insurer to act in the best interests of the insured in carrying out its duties. Thus, third-party bad faith generally involves a scenario where the plaintiff offers to settle a case with high exposure within the limits of the insurance policy and the insurer does not accept the offer. Once that has occurred, if the plaintiff then takes the case to trial and obtains a verdict in excess of the policy limits, the plaintiff (either directly or by assignment of rights from the insured) can bring an action for bad faith against the insurer.
At present, every state in the United States recognizes a cause of action for third-party bad faith. The elements of third-party bad faith are generally the same across the country. Once an insurer assumes the duty to defend the insured, the insurer also assumes the duty to act in good faith and with due regard for the interests of the insured. Boston Old Colony Insurance Company v. Gutierrez, 386 So.2d 873 (Fla. 1980). This good faith duty requires the insurer to keep the insured advised as to possible settlement opportunities, the possibility of an excess judgment, the probable outcome of the litigation, and measures that can be taken by the insured to protect his or her own interest. This duty requires an insurer to exercise good faith in the handling of the claim and in making its litigation and settlement decisions. Id. Similarly, the insurer also has a duty to view the settlement negotiation process as if there were no policy limits applicable to the claim, and to give equal consideration to the financial exposure of the insured as if it were it own. Ranger Ins. Co. v. Travelers Indemnity Co., 389 So. 2d 272, 275 (Fla. 1st DCA 1980) (quoting Continental Casualty Co. v. Reserve Ins. Co., 238 N.W.2d 862, 864 (Minn. 1976)). The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so. Id.
A. Standard of Care
The question of whether an insurer has met this duty of good faith is generally one for the jury. Campbell v. GEICO, 306 So.2d 525 (Fla. 1974). The question to be determined by a jury would be whether the plaintiff's claim was handled by the claims professional with the same degree of care and diligence as a reasonably prudent person would exercise in the management of his or her own business.
B. Duty to Initiate Settlement Discussions
In many jurisdictions, an insurer may be found to have acted in bad faith if it has not attempted to settle a claim within its policy limits, even if the claimant has not presented a demand for settlement. Powell v. Prudential Property & Casualty Insurance, 584 So. 2d 12 (Fla. 3d DCA 1991), rev. denied, 598 So. 2d 77 (Fla. 1992). This is especially true when the insured is judgment-proof, or, in other words, has no assets to personally contribute toward a settlement. Id. See also, General Accident Fire & Life Assurance Corporation, Ltd. v. American Casualty Company of Reading, Pa., 390 So. 2d 761 (Fla. 3d DCA 1980), cert. denied, 399 So. 2d 1142 (Fla. 1981) (holding that an offer to settle within policy limits may be a factor to consider in determining an insurer's good faith in the handling of an insured's defense, but it is not a prerequisite to the imposition of liability for a primary insurer's bad faith refusal to settle); Boicourt v. Amex Assurance Corp., 93 Cal. Rptr. 2d 763 (Ct. App. Cal. 2000); Spray v. Continental Cas. Co., 739 P.2d 40 (Or. 1987); Shearer v. Reed, 428 A.2d 635 (Pa. 1981); Fulton v. Woodford, 545 P.2d 979 (Az. 1976); Rova Farms Resort v. Investors Ins. Co. of Am., 306 A.2d 77 (Ct. App. N.J. 1973); State Auto Ins. Co. v. Rowland, 427 S.W.2d 30 (Tenn. 1968).
In Powell, the Court reversed the trial court's entry of a directed verdict on behalf of the insurer in an action for bad faith, concluding there was sufficient evidence of bad faith to take the case to a jury and the issue should not have been decided as a matter of law. The case arose from the insured's daughter striking two pedestrians walking along the side of the road. Within days following the accident, liability was evaluated by the insurer at between 80 and 100 per cent. The insurer further placed the entire policy limits of $10,000 in reserve for the claim at issue, acknowledging the severity of the injury. Within nine days after the accident, an attorney representing one of the injured pedestrians wrote the insurer relating the seriousness of the injuries, the need for immediate funds to satisfy medical bills which already exceeded $20,000 and asked for the disclosure of the policy limits. Two weeks later, another letter to the same effect was mailed. The insurer failed to respond to either letter and the attorney sent a third letter describing his client's dire financial situation and demanded the disclosure of the policy limits within three days. The third letter also indicated that the attorney was interested in promptly settling the case within policy limits.
Sixty two days elapsed from the date of the accident before the insurer informed the attorney's secretary that it was tendering its policy limits. The offer was rejected at this point. The plaintiff then obtained a verdict of $250,000 at trial. In the bad faith lawsuit, expert evidence was presented that in cases where liability is clear, injuries are severe, and policy limits are minimal, settlements are standard practice in the insurance industry.
The Court in Powell found the lack of a formal demand did not preclude a finding of bad faith:
Where liability is clear, and injuries so serious that a judgment in excess of policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations.
Plaintiffs attempt to use this holding to assert a duty on insurers to initiate negotiations. In fact, they will often send bills only, or no records at all and yet demand policy limits within a particular deadline. However one without the other should be insufficient for a finding of bad faith for failure to initiate settlement negotiations. The Powell Court requires two elements: clear liability and serious damages.
However, how is an insurer to initiate settlement negotiations when it does not have the medical records? Or when it does not have the bills? Or where it has knowledge of pre-existing conditions but no records to know the extent of same?
Part and parcel of the duty to affirmatively initiate settlement negotiations, however, is the right of the insurer to investigate the claim. See Clauss v. Fortune Insurance Company, 523 So. 2d 1177 (Fla. 5th DCA 1988) (a one month period to verify the claim was not excessive and certainly does not rise to the level of bad faith, particularly when the policy limits were tendered one day after the notice of the bad faith failure to settle was sent by Clauss). Under Clauss, an insurer may verify a claim, assuming it is done within a reasonable period of time, without being at risk of acting in bad faith if it does not offer policy limits when demanded by the claimant.
C. Time Demands
Savvy plaintiff's attorneys, armed with the knowledge that an insurer is required to investigate a claim and, where possible, settle it within policy limits, will frequently attempt to "set up" the insurance company by making a demand for policy limits which must be met by a date certain. Courts have traditionally struggled with the concept of time demands and to date no bright-line test has emerged to give guidance to attorneys and claims professionals as to what is a reasonable or unreasonable time in which to demand policy limits. In most jurisdictions, this means each case is unique and must be evaluated on its own facts. A demand for limits within thirty days may be upheld as reasonable in one case, yet found unreasonable under different facts. See, e.g., DeLaune v. Liberty Mut. Ins. Co., 314 So. 2d 601 (Fla. 4th DCA 1975)(ten day period unreasonable); Hartford Accident & Indemnity Co. v. Mathis, 511 So. 2d 601 (Fla. 4th DCA 1987)(ten day period reasonable); Clauss v. Fortune Ins. Co., 523 So. 2d 1177 (Fla. 5th DCA 1988)(one month response to demand for limits reasonable); Powell v. Prudential Prop. & Cas. Co., 584 So. 2d 12 (Fla. 3d DCA 1991)(tender of policy limits 62 days post accident insufficient to avoid bad faith where liability was clear and damages extreme); Government Employees Ins. Co. v. Grounds, 311 So. 2d 164 (Fla. 1st DCA 1975)(two week period reasonable); Southern General Ins. Co. v. Holt, 409 S.E.2d 852 (Ct. App. Ga. 1991), aff'd in part, reversed in part on other grounds, 416 S.E.2d 274 (Ga. 1992)(fifteen days reasonable); Adduci v. Vigilant Ins. Co., 424 N.E.2d 645 (Ill. 1981)(28 days unreasonable); Bailey v. Hardware Mut. Cas. Co., 322 F.Supp. 387 (W.D. La. 1969)(8 days unreasonable); American Mut. Ins. Co. of Boston v. Bittle, 338 A.2d 306 (Md. 1975)(43 days unreasonable); Baton v. Transamerica Ins. Co., 584 F.2d 907 (9th Cir. 1978)(applying Oregon law)(10 days unreasonable).
As the above indicate, and as the decades of the Courts' rulings advance, shorter time demands are being held reasonable for a plaintiff, and insurers are faced with a higher burden to timely investigate, evaluate and settle claims. At a minimum, in most all cases, the issue of an insurer's bad faith in the third-party liability context is a question of fact for the jury. The most challenging obstacle to overcome (which can be done) is the prejudice against insurers when Mr. or Mrs. Innocent Insured is exposed to an excess judgment and the issue is whether the burden to satisfy that judgment should be placed on the shoulders of the innocent insured or the alleged "big-bad insurance company."
For this reason, prudence dictates that insurers pay close attention to certain categories of claims which have the potential to give rise to bad faith exposure. As the following cases illustrate, the old adage that an ounce of prevention is worth a pound of cure, is never more true than in the third-party bad faith context.
A. Recent Trends
1. Berges v. Infinity Ins. Co., 896 So. 2d 665 (Fla. 2004)
In late 2004, the Florida Supreme Court released its decision in Berges v. Infinity Ins. Co., 896 So. 2d 665 (Fla. 2004). In Berges, the insured vehicle was being driven by the insured's friend when it collided with a vehicle driven by Marion Taylor. Taylor was killed in the accident and her minor daughter was seriously injured. The insurer, Infinity, conducted an independent investigation of the accident within 31 days and concluded that the insured driver was intoxicated and was "100% at fault." Within that time, the minor daughter had incurred over $30,000 in medical bills.
Three days later, Mr. Taylor, the unrepresented husband of Marion Taylor and father of the minor daughter, offered to settle the wrongful death case and his daughter's personal injury case for the policy limits of $20,000. The offer, however, was conditioned upon payment of the policy limits within 25 days for the wrongful death claim and 30 days for the personal injury claim. At that point, his attorney had filed a petition to have him appointed as the personal representative of his wife's estate. Taylor's offer included copies of medical bills incurred to date and advised that many more bills would be forthcoming because his daughter was hurt "very bad" in the accident and had scarring from surgery performed as a result of the accident. Infinity did not send a copy of Taylor's demand letter to its insured, Berges, and never informed him of the existence of the offer.
Infinity's claims professional, Robert Fryer, then obtained permission from his supervisor to settle the claim for policy limits. He telephoned Mr. Taylor on May 2 (the deadline to pay the first claim was May 27) and informed him that Infinity would pay the policy limits. He also informed Taylor that court approval would be necessary for settlement of the minor's claim and that Infinity would arrange and pay for the paperwork to accomplish approval. Finally, he informed Taylor that he would meet with Infinity's attorneys on May 14 to discuss the details of the settlement. At trial, Fryer testified that he obtained an extension of time in which to tender settlement funds. Taylor disputed that fact and testified that no such extension was given.
Infinity then hired an attorney, Korth, to seek court approval of the minor's settlement. In its correspondence to Korth, Infinity advised that it was operating under a time demand as outlined in Taylor's letter. Korth then wrote to Taylor three days prior to expiration of the first settlement offer and advised him that obtaining court approval would not be possible within the deadline. Due to an incorrect zip code, the letter never reached Taylor. On June 11, Taylor's attorney wrote to Infinity revoking the settlement offer due to Infinity's failure to pay within the stated deadlines. He then filed a wrongful death suit and a personal injury suit against Berges.
Nearly a month after expiration of the settlement deadlines, Infinity finally wrote to Berges advising him of the possibility of an excess judgment and his right to retain independent counsel. In the letter, Infinity explained, "We have offered to pay your policy limits of $20,000 for the above claim, but Mr. Taylor refused to settle for that amount." Id. at 670. The letter did not inform Berges of the prior settlement demand.
Taylor then proceeded to trial and obtained a verdict of $911,400 in the wrongful death suit and $500,000 in the personal injury suit. Berges then filed a bad faith suit against Infinity and obtained a verdict for $1,893,066.41. Infinity appealed the final judgment to the Second District Court of Appeal, which reversed the judgment, finding that, "because Taylor had neither been appointed personal representative of his wife's estate nor been given court approval for the proposed settlement of his minor daughter's claim, he was without authority to make a valid settlement offer to Infinity." Id., citing Berges v. Infinity Ins. Co., 806 So. 2d 504, 508 (Fla. 2d DCA 2001). The Florida Supreme Court then granted review based on express and direct conflict with the First District Court of Appeal's decision in Government Employees Ins. Co. v. Grounds, 311 So. 2d 164 (Fla. 1st DCA 1975).
The Supreme Court vacated the Second District's opinion and upheld the verdict against Infinity. It based its decision on prior decisions of Florida's lower courts, which consistently held that court approval of a settlement (whether it be by a personal representative of an estate or a guardian of a minor) was not required in order for the settlement agreement to be valid. The court interpreted Florida's statutes regarding court approval of settlements merely as subsequent conditions which must be fulfilled in order to consummate the settlement, but not a pre-condition to the existence of a valid settlement agreement.
The court then concluded its opinion with a scathing comment on Infinity's conduct:
We thus conclude that the Second District erred when it concluded as a matter of law that Infinity could not be liable for bad faith towards its insured because Taylor did not make a valid offer to settle the case. Neither precedent nor the applicable statutes regarding settlements involving minors or on behalf of decedents require prior court approval for a valid settlement offer to be made. The focus in this case extends to Infinity's entire course of conduct in handling the claim and in failing to consummate the settlement and pay the policy limits within the time limits demanded by Taylor.
Berges, 896 So. 2d at 675.
The lessons to be taken from Berges are several. First, claims professionals or attorneys attempting to protect their insured or client from excess exposure, should accept and tender policy limits demands within the time demanded regardless of the fact that court approval may later be necessary for the settlement. Second, where liability is clear and the insured's exposure greatly exceeds policy limits, every effort should be made to settle the case within policy limits if at all possible.
Infinity's claims professional made a number of critical mistakes in handling its insured's claim. He failed to inform the insured of the existence of a settlement offer within policy limits. He failed to document an alleged extension of time in which to respond to the settlement offer. And finally, he attempted to cover up his failure to inform the insured of the settlement offer in his subsequent letter. His representation that Infinity was attempting to settle the claim within policy limits, but that Taylor would not accept, was not accurate. While it should be a matter which goes without saying, Berges poignantly demonstrates that affirmatively misrepresenting the facts to the insured should never be condoned by an insurance company.
How then could Infinity have avoided the ugly consequences of incurring a judgment nearly 190 times the policy limits? It could have written to Taylor and his counsel confirming an extension of time in which to respond to the settlement offer. It could have tendered a settlement check with a transmittal letter stating that the tender was subject to final court approval. Either of these actions would have put the onus on the plaintiff to further "set up" Infinity. If in fact no extension of time had been granted, plaintiff's counsel would have to write back stating that fact. Finally, by delivering the settlement checks, it would become the plaintiff's counsel's burden to obtain court approval in order to disburse the money.
It appears that Berges will likely be the view of most courts regarding this particular issue. Indeed, the Oklahoma Supreme Court has already cited to Berges, though not for the above proposition. See, Badillo v. Mid Century Ins. Co., 2005 WL 1458637, 10 (Ok. 2005)(discussed infra). If the law on this point is unsettled in your jurisdiction, prudence and common sense dictate following Berges.
2. Badillo v. Mid Century Insurance Company, 2005 WL 1458637 (Ok. 2005).
Badillo v. Mid Century Insurance Company, 2005 WL 1458637 (Ok. 2005) is another very recent decision, which vividly demonstrates the consequences of mis-steps in the claims handling process. Badillo involved a $10,000 personal automobile policy which could have been tendered in full satisfaction of a claim, but ultimately resulted in a judgment against the insurer for $2,200,000, 220 times the limits of the policy.
In Badillo, the insured struck a pedestrian after making a right turn. The pedestrian, Loretta Jean Smith, was seriously injured and was comatose for several months after the accident, incurring hundreds of thousands of dollars in medical bills. The insured had a $10,000 liability policy issued by Mid Continent Insurance Company, with claims handled through Farmers Insurance Exchange, both companies falling under the Farmers Insurance Group of Companies. Smith's sister, Johnita Young, employed attorneys on her sister's behalf shortly after the accident.
The attorneys for Smith had telephone discussions with MCIC's claims professional, Mr. Wallis, in which he alleged the matter was settled for payment of the policy limits. Following the conversation, Wallis sent a check for $10,000 along with a release to Smith's attorneys. Wallis never met face-to-face with Badillo (the insured), nor spoke directly with the police officer who investigated the accident, both contrary to MCIC's and FIE's claims manual.
When Smith's attorneys received the settlement check and release, they decided it would not be prudent to accept the settlement and release the insured and insurers until they had determined that Badillo had not been drinking prior to the accident and that he was not working for an employer at the time of the accident, as either situation could reveal possible other defendants with insurance coverage for the accident. In order to confirm those facts, the attorneys requested the insurers make Badillo available for an interview. The Court noted: "Wallis, after conferring with a supervisor, but without consulting [the] insured as to the statement request, refused the request." Id. at 4. Smith's attorneys later testified they would have recommended settlement for policy limits had they been able to determine that no other potential defendants existed. Id. at 5. The attorneys attempted multiple times to obtain a statement from Badillo, but Wallis steadfastly refused, claiming he was protecting the insured from having to give a statement which could later lead to criminal liability (in the event he had been drinking).
Once it was clear that the insurers would not produce Badillo for a statement, the plaintiffs filed suit and returned the settlement check and release. They then proceeded to trial and obtained a judgment against Badillo in the amount of $633,202.63 ($1,000,000 raw verdict, reduced by 40% for comparative fault, plus pre-judgment interest). Smith then entered into an agreement with Badillo to withhold execution on the judgment in return for receipt of any judgment Badillo obtained against the insurers for bad faith. Badillo then filed suit against the insurers and obtained a judgment in the amount of $2,200,000, consisting of compensatory damages for his financial loss, embarrassment and mental pain and suffering.
The insurers defended the case on the ground that Smith's attorneys had no real intention of accepting the policy limits and were only trying to "set up" a bad faith claim. In addition, FIE sought a directed verdict on the ground that it was not the insurer and, therefore, could not be held liable for bad faith. Both claims were denied in the trial court.
The Oklahoma supreme court upheld the judgment and took the occasion to recede from a prior decision which imposed a simple negligence standard as the appropriate duty of care. The court explained:
To the extent American Fidelity & Casualty Co. v. L.C. Jones Trucking Co., [321 P.2d 685 (Ok. 1957)] may have implied that a simple negligence standard was approved or adopted as to the level of culpability necessary to be shown for liability to attach to an insurer for breach of the duty of good faith and fair dealing in relation to the handling of a third-party claim made against the insured, i.e., the situation involved here, that case is expressly overruled, but only to such extent. In our view, under Christian [v. American Home Assurance Co., 577 P.2d 899 (Ok. 1977)], and later cases, the minimum level of culpability necessary for liability against an insurer to attach is more than simple negligence, but less than the reckless conduct necessary to sanction a punitive damage award against said insurer.
Badillo, 2005 WL 1458637 at 8. The court then considered the circumstances of the case, namely that Badillo had little to no financial means and that the case could have been settled by the simple expedient of producing him for a statement. The court also took the extraordinary step of upholding a bad faith verdict in the absence of an unconditional offer to settle within policy limits by the claimant:
We have been unable to unearth any Oklahoma decision that has held the mere tender of policy limits to a third-party claimant and/or the lack of an unconditional settlement offer from the third party, will always be sufficient to defeat an insured's claim for breach of the duty of good faith and fair dealing and, in effect, relieve an insurer of compliance with its duty to safeguard the interests of its insured, irrespective of other salient circumstances or considerations.
Id. (emphasis in original).
The court then cited to Berges v. Infinity Ins. Co., 896 So. 2d 665 (Fla. 2004), for the proposition that the duty to inform the insured is one of the obligations subsumed within the duty of good faith and fair dealing to conclude that the insurers' failure to communicate with Badillo regarding the claimant's request for a recorded statement was a breach of their good faith duties. Id. at 10. It then rejected the insurers' claim that the claimant's failure to testify that she would have accepted policy limits in satisfaction of her claim constituted a failure of proof as to the causation element of the bad faith claim:
To us, the jury was allowed to consider this testimony (from the claimant's attorneys), reasonable inferences from other evidence submitted at trial and to use common sense to reach a reasoned decision that it was more probable than not the matter would have settled for the $10,000.00 policy limits were it not for unreasonable acts and/or omissions of insurers in violation of the duty of good faith and fair dealing.
Id. at 11.
It has been said that bad facts make bad law. Never is that statement more true than in the Badillo case. Again, the adjuster handling the claim in that case made several critical mistakes. The most glaring was his refusal to provide the insured for a recorded statement without consulting the insured. The adjuster attempted to justify his actions under the guise of protecting the insured from criminal liability. The court properly rejected that thinly-veiled excuse on the ground that once suit was filed by the plaintiffs, Badillo would have had to appear for a deposition and testify under oath anyway. He could have pled the benefit of the Fifth Amendment against self-incrimination. Moreover, the adjuster's failure to so much as inform the insured that the plaintiffs were seeking a recorded statement cannot possibly be justified. The proper procedure would have been to contact Badillo immediately and inform him of the request for a statement and thereafter, inform him in writing of the need to appear for the statement in order to possibly resolve the case for the minimal policy limits and protect him from obvious excess exposure. The insured could then choose, presumably with the advice of counsel, whether or not to appear for the statement.
The second critical mistake by the adjuster was his failure to document the initial settlement agreement. When the adjuster transmitted the settlement check to plaintiff's counsel, it should have been sent with a cover letter outlining the telephone conversation in which he alleged the attorneys agreed to accept policy limits in full satisfaction of the claim. Relying on testimony of settlement discussions always opens the door to conflicts. And in the bad faith arena, savvy plaintiff's attorneys will always deny that they agreed to accept policy limits in the absence of written documentation of the fact. This is not to suggest that the plaintiff's attorneys perjured themselves in the Badillo case. The obvious inference, accepted by the jury in that case, from a lack of documentation of a settlement agreement is that no such agreement existed. Thus, a claims professional who is under the impression that plaintiff's counsel has agreed to settle the claim for policy limits must document that fact.
The implications of Badillo are also frightening. Claims professionals and defense attorneys have long accepted the generally prevailing view that, in order to create a bad faith claim, the plaintiff must make an unconditional offer to accept policy limits in full satisfaction of the claim. After Badillo, at least in Oklahoma, no such bright line exists. Any first-year plaintiff's attorney in Oklahoma would recognize that he can now engage in settlement discussions with the insurance company and simply make requests for certain information, rather than an unequivocal offer to accept policy limits, thereby still setting up a bad faith claim. Once the insurer fails to provide the requested information (a possibility which occurs all too frequently), the attorney can later testify that he would have accepted policy limits, without ever having informed the insurance company of that fact.
The authors of this article believe that Badillo was wrongly decided and should be rejected by courts in other jurisdictions. The requirement of an unconditional offer to accept policy limits has always been the cornerstone of third-party bad faith. Prior to Badillo, an attorney reviewing a claims file for evidence of bad faith could always rely on the absence of an unconditional offer as insulation from a bad faith claim. After all, it makes no sense to hold a company liable for failure to settle a claim within policy limits when it never had a real opportunity to do so. The Badillo court's dispensation with this clear requirement opens the door to chicanery by the plaintiffs' bar.
How then can insurance professionals and defense attorneys avoid the Badillo trap in the future? At least in Oklahoma, claims professionals will have to monitor their files very closely to ensure that all reasonable requests for information or statements by the insured are met timely. In addition, it would be highly advisable for claims professionals on "code blue" (the plaintiff's expert witness in Badillo described that situation as a "code blue," i.e., "one involving probably liability, catastrophic injuries and minimum coverage." Badillo, 2005 WL 1458637 at 5. Every insurer should have a system in place for recognizing code blue claims and a detailed set of procedures for handling such claims) claims to offer policy limits as early as possible in writing. Doing so at least puts the onus back on the plaintiff to either accept or reject the offer. By documenting an attempt to settle the case within policy limits, the insurer at least can defend against the Badillo trap of later facing testimony that the plaintiff would have accepted policy limits had they been offered.
The recent decisions in Berges and Badillo vividly illustrate the minefield claims professionals and defense attorneys must wade through to avoid bad faith liability. It takes no rocket scientist or actuarial genius to recognize the implications of paying out multiples of several hundreds of times the limits of an insurance policy. When a risk is accepted by an insurance company based on the calculation that its maximum exposure is equal to the stated limits of the policy, bad faith makes that calculation meaningless. But solid claims practices can virtually eliminate this unnecessary risk, thereby leading to a corresponding reduction in premiums and a competitive edge in the marketplace.
The lesson from Berges and Badillo is simple: on the claims side, insurers must set up a procedure to recognize claims with bad faith potential. Once those claims are recognized, they should be administered by an experienced professional with knowledge of the intricacies of bad faith. Simply assigning claims to adjusters by equating policy limits with claims experience is not a recommended practice. No longer is the minimum limits claim one to be handled by less experienced adjusters simply because the limits (and presumably corresponding exposure) are low. In fact, based on the development of the law in the bad faith arena, the low policy limits claims are potentially the most dangerous. It is those claims which, therefore, should be given close scrutiny by insurers in order to recognize the potentially explosive claim before it explodes.
We conclude by presenting a check-list of those types of claims which may signal future allegations of bad faith if they are not handled correctly. Although not nearly exhaustive, this checklist will provide a starting place to recognizing those claims where the claimant's attorney may be trying to set up the carrier for alleged bad faith.
RED FLAGS FOR A POTENTIAL BAD FAITH SET UP
Verbal indications of serious damages without medical support
Provision of medical billings without medical records
Provision of partial medical records
Refusal to give or no response to request for a settlement demand
Time demand for policy limits
Demand conditioned on insured's financial affidavit "in a form sufficient to the plaintiff" and yet the format thereof is not provided
Demand asking you to give a copy thereof to your insured
Demand requiring limitations on release language
Demand requiring release language "in a form sufficient to the plaintiff" and yet the format thereof is not provided
Refusal to extend time limitation to allow insurer additional investigation