KCMBA CLE June 19, I. What are an insurance company s duties to its insured?

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1 KCMBA CLE June 19, 2018 Third-Party Bad Faith I. What are an insurance company s duties to its insured? II. III. If you are attempting to settle a case with an insurance company, how should your settlement demand be crafted to make sure it has to fulfill its duties? What should be done if the insurance company did not fulfill its duties? I. What are an insurance company s duties to its insured? John Tortfeasor gets drunk at a Royals game and attempts to drive home, and on the way home he crosses the center line and runs into Jane Victim, breaking her legs and giving her a concussion. Jane Victim is going to have a claim for damages against John Tortfeasor. Assuming that John Tortfeasor had car insurance, what duties does John s insurance company have to John? a. Duty to defend i. Arises when there is a possibility or potential for coverage at the outset of the case. 1 ii. Determined by comparing the insurance policy language with facts alleged, and with facts the insurer knows or that are reasonably apparent at the outset of the case. 2 iii. To extricate itself from the duty to defend, the insurance company must prove that there is no possibility of coverage. 3 b. Duty to indemnify / to provide coverage 1 Allen v. Bryers, 512 S.W.3d 17 (Mo. Dec. 20, 2016) (citing Allen v. Cont'l W. Ins. Co., 436 S.W.3d 548, 552 (Mo. banc 2014). 2 See id. 3 Id at 31. quoting Truck Ins. Exch. v. Prairie Framing, LLC, 162 S.W.3d 64, 79 (Mo. App. W.D. 2005) (emphasis in original). 1

2 i. The scope of coverage will be based on the language in the insurance policy, as well as applicable state law. ii. The duty to defend is broader than the duty to provide coverage. The insurance company may have a duty to defend a case based on the possibility that there will be coverage, and then later find that there is no coverage. c. Duty to settle within the policy limits i. The insurance company must fully investigate claims ii. It must recognize the severity of the claims iii. It must recognize when the claims are significant enough to exceed the insurance policy limits iv. It must give equal consideration to its insured s interests as it gives to its own interests v. It must communicate with its insured about settlement offers and about the risks of an excess judgment vi. It must consider settlement offers within the policy limits. 4 vii. A demand is not an absolute requirement for a bad faith action: 1. A bad faith refusal to settle action will lie when a liability insurer: (1) reserves the exclusive right to contest or settle any claim; (2) prohibits the insured from voluntarily assuming any liability or settling any claims without consent; and (3) is guilty of fraud or bad faith in refusing to settle a claim within the limits of the policy. Scottsdale Insurance Company v. Addison Ins. Co, 448 S.W.3d 818 (Mo. 2014) III. Elements #1 and #2 are part of standard insurance contracts and the third element has to be shown by the facts of the case. 4 See e.g. Allen v. Bryers, p. 39 2

3 d. The new interpleader statute, Mo. Rev. Stat , and its impact on these duties. i. Under a new revised version of Mo. Rev. Stat , signed by the Governor on June 1, 2018, an insurance company will still have to defend and provide coverage for its insured, but if it is facing multiple claimants for one incident, and the claims total an amount in excess of the insurance company s total limits of coverage, it may file an interpleader action and deposit all applicable limits into the court. If it does this and then defends all of its insureds in good faith, it cannot be held liable for bad faith If, within ninety days after receiving the first offer of settlement or demand for payment by a claimant, a [insurer] files an action for interpleader under this section and the [insurer] timely deposits all of its applicable limits of coverage into court within thirty days of the court's order granting interpleader, the plaintiff shall not be liable to any insured or defendant for any amount in excess of the plaintiff's contractual limits of coverage in the interpleader or any other action, so long as the [insurer] defends all of its insureds in good faith from any claims or lawsuits for damages allegedly caused by the incident or occurrence for which the limits of coverage were paid into court, even after depositing its limits of coverage into court notwithstanding any policy provision releasing the [insurer] of its duty to defend any of the insureds. Any insured's refusal of the plaintiff's good faith defense shall not affect the [insurer s] rights under this section. 3

4 II. If you are attempting to settle a case with an insurance company, how should your demand be crafted to make sure it has to fulfill its duties? Jane Victim hires you as her lawyer. John Tortfeasor does not look like a multi-millionaire capable of paying a big monetary judgment to her, and so Jane Victim wants to settle with John s insurance company out of court, if possible. If you send an offer to settle Jane s claims against John, what needs to be included? a. Traditionally, there were certain elements of a demand common in any context, whether it was personal injury or business context. i. Usually you included a time limit, which would be based on the information known or reasonably apparent to the insurer. The time period may be relatively short if the insurance company already has all the information it needs to make a decision. ii. The amount you are seeking, which may simply be all applicable policy limits. iii. Depending on the information known or reasonably available to the insurer, you may not need to include much more information in the demand. b. But now, in personal injury and wrongful death cases, under certain circumstances, you need to send a particular type of demand that complies with Section c. When does Section , RSMo apply? i. To personal injury, bodily injury, or wrongful death cases where ii. There is a time-limited demand to settle iii. If you plan on there later being a lawsuit 1. filed by the claimant [the injured party] as an assignee of the tot-feasor, or 2. filed by the tort-feasor for the benefit of the claimant 4

5 iv. And you want to be able to argue that the demand was a reasonable opportunity to settle, and you want to introduce the time-limited demand into evidence in any lawsuit alleging extracontractual damages against the tort-feasor s liability insurance company. d. When does the statute not apply? i. To other kinds of cases, such as breach of contract cases, breach of fiduciary duty cases, and other types of business cases. ii. If you send a demand without a time limit iii. If the case is small and you do not think there is any chance there will be judgment greater than the policy limits, so you don t think there will ever be an action for bad faith against the insurance company. e. If you want to send a time-limited demand in an injury case under the circumstances described above, then make sure to review the statute Personal injury, bodily injury, or wrongful death, time-limited demand to settle, requirements. 1. As used in this section, the following terms shall mean: (1) "Extra-contractual damages", any amount of damage that exceeds the total available limit of liability insurance for all of a liability insurer's liability insurance policies applicable to a claim for personal injury, bodily injury, or wrongful death; (2) "Time-limited demand", any offer to settle any claim for personal injury, bodily injury, or wrongful death made by or on behalf of a claimant to a tort-feasor with a liability insurance policy for purposes of settling a claim against such tort-feasor within the insurer's limit of liability insurance, which by its terms must be accepted within a specified period of time; (3) "Tort-feasor", any person claimed to have caused or contributed to cause personal injury, bodily injury, or wrongful death to a claimant. 5

6 2. A time-limited demand to settle any claim for personal injury, bodily injury, or wrongful death shall be in writing, shall reference this section, shall be sent certified mail return-receipt requested to the tort-feasor's liability insurer, and shall contain the following material terms: (1) The time period within which the offer shall remain open for acceptance by the tort-feasor's liability insurer, which shall not be less than ninety days from the date such demand is received by the liability insurer; (2) The amount of monetary payment requested or a request for the applicable policy limits; (3) The date and location of the loss; (4) The claim number, if known; (5) A description of all known injuries sustained by the claimant; (6) The party or parties to be released if such time-limited demand is accepted; (7) A description of the claims to be released if such time-limited demand is accepted; and (8) An offer of unconditional release for the liability insurer's insureds from all present and future liability for that occurrence under section Such time-limited demand shall be accompanied by: (1) A list of the names and addresses of health care providers who provided treatment to or evaluation of the claimant or decedent for injuries suffered from the date of injury until the date of the time-limited demand, and HIPAA compliant written authorizations sufficient to allow the liability insurer to obtain such records from the health care providers listed; and (2) A list of the names and addresses of all the claimant's employers at the time the claimant was first injured until the date of the time-limited demand, and written authorizations sufficient to allow the liability insurer to obtain such records from all 6

7 employers listed, if the claimant asserts a loss of wages, earnings, compensation, or profits however denominated. 4. If a liability insurer with the right to settle on behalf of an insured receives a time-limited demand, such insurer may accept the time-limited demand by providing written acceptance of the material terms outlined in subsection 2 of this section, delivered or postmarked to the claimant or the claimant's representative within the time period set in the timelimited demand. 5. Nothing in this section shall prohibit a claimant making a time-limited demand from requiring payment within a specified period; provided, however, that such period for payment shall not be less than ten days after the insurer's receipt of a fully executed unconditional release under section as specified in subsection 2 of this section. 6. Nothing in this section applies to offers or demands or time-limited demands issued within ninety days of the trial by jury of any claim on which a lawsuit has been filed. 7. In any lawsuit filed by a claimant as an assignee of the tort-feasor or by the tort-feasor for the benefit of the claimant, a time-limited demand that does not comply with the terms of this section shall not be considered as a reasonable opportunity to settle for the insurer and shall not be admissible in any lawsuit alleging extra-contractual damages against the tort-feasor's liability insurer. 7

8 III. What should be done if the insurance company breaches its duties to the insured? John Tortfeasor s insurance company acts in bad faith, and either wrongfully fails to defend him, or wrongfully denies coverage, or refuses to settle the case within the policy limits when it should have done so. What are John Tortfeasor and Jane Victim s options? a. An insured who has been harmed by the breach of contract and/or the bad faith of his insurer can bring a breach of contract action, and, if appropriate, a bad faith failure to settle claim. (So if John Tortfeasor is harmed by his insurance company s bad faith, John has a claim against his own insurance company.) b. The injured party (here, Jane Victim) who has a judgment against a tortfeasor whose insurance committed bad faith has several options for how she can collect her judgment: i. collecting from the tortfeasor in the traditional ways, such as garnishing wages and putting liens on personal property ii. attempting to seize any bad faith settlement or judgment that the tortfeasor pursues iii. asking the tortfeasor to assign their bad faith claim against the defendant s insurance company iv. garnishment actions against the insurance company c. Because the first two options involve collecting upon an individual defendant, which has big disadvantages, the latter two options, assignment and garnishment, will be discussed here. d. A bad faith claim may be assigned: i. An insurer s duty to act in good faith in settling third-party claims arises from the insurer s reservation in the policy of the exclusive right to contest and settle third-party claims. An action for the breach of that duty, while a tort, arises from a contract of insurance, which is not of a purely personal nature. Therefore a 8

9 bad faith refusal to settle action falls within the category of assignable torts. 6 e. In tort cases, agreements are the most common method of assignment, and the new statute is below, with changes in bold: 1. Any person having an unliquidated claim for damages against a tort-feasor, on account of personal injuries, bodily injuries, or death, provided that, such tort-feasor's insurer or indemnitor has the opportunity to defend the tort-feasor without reservation but refuses to do so, may enter into a contract with such tort-feasor or any insurer on his or her behalf or both, whereby, in consideration of the payment of a specified amount, the person asserting the claim agrees that in the event of a judgment against the tort-feasor, neither such person nor any other person, firm, or corporation claiming by or through him or her will levy execution, by garnishment or as otherwise provided by law, except against the specific assets listed in the contract and except against any insurer which insures the legal liability of the tort-feasor for such damage and which insurer is not excepted from execution, garnishment or other legal procedure by such contract. Execution or garnishment proceedings in aid thereof shall lie only as to assets of the tortfeasor specifically mentioned in the contract or the insurer or insurers not excluded in such contract. Such contract, when properly acknowledged by the parties thereto, may be recorded in the office of the recorder of deeds in any county where a judgment may be rendered, or in the county of the residence of the tortfeasor, or in both such counties, and if the same is so recorded then such tort-feasor's property, except as to the assets specifically listed in the contract, shall not be subject to any judgment lien as the result of any judgment rendered against the tort-feasor, arising out of the transaction for which the contract is entered into. 2. Before a judgment may be entered against any tort-feasor after such tort-feasor has entered into a contract under this section, the insurer or insurers shall be provided with written notice of the execution of the contract and shall have thirty days after receipt of such notice to intervene as a matter of right in any pending lawsuit involving the claim for damages. 6 Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818, (Mo. 2014). 9

10 f. Garnishment 3. The provisions of this section shall apply to any covenant not to execute or any contract to limit recovery to specified assets, regardless of whether it is referred to as a contract under this section. 4. Nothing in this section shall be construed to prohibit an insured from bringing a separate action asserting that the insurer acted in bad faith i. Following entry of an excess judgment, "There are two avenues for a judgment creditor to collect money from an insurance company: (1) a traditional garnishment under section and Rule 90 or (2) a direct action against the insurer authorized by section " 7 ii. In the first type of garnishment, a traditional garnishment, recovery may be limited to the available insurance coverage. iii. But in the equitable garnishment under , plaintiff may assert claims that go beyond the mere satisfaction of the underlying judgment for the contractual limits, and if there was bad faith, the plaintiff may receive recovery beyond the policy limits. 7 Allen v. Byers, p. 30 (Mo. 2016) 10