What is Bad Faith?
Insurance bad faith is the intentional disregard of the financial interest of the insured by an insurance company in the hope of escaping the full responsibility imposed upon it by its policy.
There are two basic types of bad faith cases:
- The failure to defend an insured when a lawsuit is filed
- The failure to properly investigate, negotiate, or settle claims against an insured.
There is significant overlap in duties insurers promise to fulfill. In spite of this, the idea is straightforward. An insurance corporation takes money (in the form of premiums) from its customer. This customer is an ordinary person; not a legal expert with significant insurance experience.
Bad faith arises when the insurance company takes money from a customer but ignores the promises it made in exchange for that money. Rather, the insurance company places its own financial interests ahead of its customer. This may be done through interpreting its contract of insurance to state that either there is no defense, no insurance, or no policy limits.
Insurance bad faith litigation is a legal response to make insurance companies liable for excess verdicts when the insurance company breaches its insurer-insured agreement.
The History of Insurance Bad Faith in Missouri
In 1936, the Missouri Court of Appeals decided the case of McCombs vs Fidelity and Casualty Company, 89 S.W.2d 114 (Mo App. 1936). This initiated the bad faith insurance concept. Fourteen years later, the Supreme Court of Missouri adopted the McCombs principles in the similar case of Zumwalt v. Utilities Insurance Company. In that case the Supreme Court of Missouri held as follows:
[T]he weight of authority is that where the insurer in a liability policy reserves the exclusive right to contest or settle any claim brought against the assured, and prohibits him from voluntarily assuming any liability or settling any claims without the insurer’s consent, except at his own costs, and the provisions of the policy provide that the insurer may compromise or settle such a claim within the policy limits, no action will lie against the insurer for the amount of the judgment recovered against the insured in excess of the policy limits, unless the insurer is guilty of fraud or bad faith in refusing to settle a claim within the limits of the policy.
Zumwalt v. Utilities Insurance Company, 228 S.W. 2d 750 (Mo. 1950).
In addressing the concept of bad faith, the court held an insurer is not permitted to “take a gamble on getting a favorable verdict rather than to make a settlement within the limits of the policy.” Id. at 754. The Supreme Court further held that bad faith must be determined based on the particular facts of each case. Id. Finally, the court concluded that as applied to the facts before it, “bad faith on the part of the insurer would be the intentional disregard of the financial interest of the insured in the hope of escaping the full responsibility imposed upon it by its policy.” Id.
The general idea is that the insurance company assumes control over all settlement negotiations, investigation, and legal proceedings, depriving its insured the chance to protect himself. When the insurance company fails to act in the insured’s best interest, then a lawsuit is created (a tort is committed) by the insurance company.
The Elements of Bad Faith in Missouri
The courts in Zumwalt and Scotsdale set out the essential elements of bad faith. For failing to settle, they are as follows:
- The insurer has the authority to settle a claim against its insured within (or by payment of) 15 the policy limits;
- The insurer has the opportunity to settle a claim against its insured within (or by payment of) the policy limits;
- The insurer fails to settle a claim against its insured within (or by payment of) the policy limits in bad faith; and
- The insured suffers damage as a proximate result.
Bad Faith Insurance Jury Instructions
A time tested method to learn the elements to litigate a bad faith case is to “begin with the end in mind.” Attorneys do this by looking to the jury instructions which is the final goal in winning the case. For a failure to settle with in policy limits case, insurance bad faith jury instructions should roughly appear as follows:
VERDICT DIRECTOR
First, ______________________ insurance company assumed control over negotiations and settlement of claims brought against insured
Second, Victim made offer to settle claims against insured for within policy limits of insurer
Third, Insurer refused to settle within policy limits within the deadline
Fourth, In refusing, acted in bad faith
Fifth, Refusal directly contributed to cause damage to insured.
Patterned after Advantage Building & Exteriors, Inc. v. Mid-Continent Casualty Co., WD76880 (2014).
Insurance Allegations of the Violation of the Duty to Cooperate
The defense to a bad faith lawsuit often includes allegations that the insured customer violated his contractual duty under the insurance policy to cooperate. Most insurance policies require the customer to quickly, and in writing, inform the insurance company of lawsuits filed against the insured that the policy may cover.
Next, the insurance company generally has the option of choosing the legal defense team
Insurance companies may make the following allegations:
- The insurer was not put on notice of the lawsuit
- The insurance company was not given the opportunity to defend the lawsuit
- The insurance company did not consent to any cooperation by the insured
- The insurance company is prejudice by the misconduct of the insured in failing to cooperate
These may come as jury instructions allowing a trial verdict to be for the defendant insurer for this contractual violation.
The Assignment of a Bad Faith Lawsuit
Section 537.065 of the revised statutes of Missouri, allows an insured the legal right to assign his lawsuit to another person in exchange for valuable consideration. The text of 537.065 is as follows:
Claimant and tort-feasor may contract to limit recovery to specified assets or insurance contract–effect
537.065. Any person having an unliquidated claim for damages against a tort-feasor, on account of bodily injuries or death, may enter into a contract with such tort-feasor or any insurer in his 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 he nor any person, firm or corporation claiming by or through him 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 tort-feasor 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 tort-feasor, 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.
(L. 1959 S.B. 259 § 1).
The General Idea of RSMo 537.065 Assignments
The idea is that the perpetrator of the bad act who caused the damages to the victim assigns his right to sue his own insurance company over to the victim in exchange for protection from a judgment against him. This insured assigns his rights, claims, and causes of action, including bad faith he may have against his insurance carrier, coming from the processing or adjusting of his claims.
The general elements of the assignment are typically:
- The insured agrees to retain the law offices of the victim, if a court rules that the assignment is not valid
- The insured agrees to cooperate and assist the lawyers of the victim in the bad faith litigation
- Some consideration is exchanged between the parties (typically money or a release)
There are other smaller terms that an 537.065 assignment of a bad faith case can include:
- Waiver of jury trial
- Agreement not to object to the admission of evidence
- Agreement not to cross examine witnesses
- Agreement to offer no evidence
- Waiver of the right to appeal a judgment
- Agreement not to levy the judgment personally against the insured
- Agreement to bring the bad faith case in the insured’s name
- Agreement to pay the proceeds of the case to the victims and their attorneys
Punitive Damages for Bad Faith Insurance Claims
The bad faith failure to settle and failure to defend lawsuits may include a request for punitive damages against the insurance company. In Missouri, punitive damages are appropriate when there is “outrageous” conduct. This is termed as an “evil motive” or “reckless indifference to the rights of others.” Menaugh v. Resler Optometry, Inc., 799 S.W.2d 71, 73 (Mo. banc 1990); Stojkovic v. Weller, 802 S.W.2d 152, 155 (Mo. banc 1991).
The Duty to Defend
A second type of insurance bad faith case is the failure of the insurance company to defend its own insured. This is when the insurers wrongfully refuses to defend its insured and leaves them alone to battle a case where they are at fault. The critical cases on the failure of the duty to defend are as follows.
Missouri Supreme Court:
Columbia Casualty Co. v. HIAR Holding, LLC, 411 S.W.3d 258 (Mo. banc 2013).
Schmitz v. Great American Assurance Co., 337 S.W.3d 700 (Mo. banc 2011).
Gulf Insurance v. Noble Broadcast, 936 S.W.2d 810 (Mo. banc 1997).
Missouri Courts of Appeals:
Hunter v. Moore, 2015 WL 1735076 (Mo. App. E.D. 2015)
Advantage Building v. Mid Continent Casualty Co., 449 S.W.3d 16 (Mo. App. W.D. 2014).
Assurance Co. of America v. Secura Ins. Co., 384 S.W.3d 224, 232 (Mo. App. E.D. 2012)
Shobe v. Allstate, 279 S.W.3d 203 (Mo. App. W.D. 2009).
Auto-Owners Ins. Co. v. Ennulat, 231 S.W.3d 297 (Mo. App. E.D. 2007).
Truck Insurance Exchange v. Prairie Framing, LLC, 162 SW.3d 64 (Mo. App. W.D. 2005).
Cologna v. Farmers & Merchants Ins. Co., 786 S.W.2d 691 (Mo. App. 1990).
Johnson v. Mercantile Trust Co., 510 S.W.2d 33, 40 (Mo. 1974)
Landie v. Century Indemnity Co, 390 S.W.2d 558 (Mo. App. 1965).
Other Jurisdictions:
McGrath v. Everest National Insurance Co., 668 F.Supp.2d 1085, 1107 (N.D. Ind. 2010)
Newhouse v. Citizens Security Mutual Ins. Co., 501 N.W.2d 1 (Wis. 1993)
State ex rel Mid Century Ins. Co. v. McKelvey, 666 S.W.2d 457 (Mo. App. 1984
Learned Treatises:
17 LEE R. RUSS, COUCH ON INSURANCE sec. 239:73 (3d ed. 1995).
No Insurance Policy Limits in Bad Faith
Typically, in lawsuits the amount of insurance and therefore, the amount the case is worth is limited by the policy limits of the insurance contract. Insurance bad faith cases do not suffer that limitation, in most cases. The Supreme Court has ruled that the duty to defend is so vital to protecting Missouri citizens, an insurance company’s wrongful failure to defend or settle within policy limits precludes any complaint it might have that it should not be liable to indemnify its customers when its “bet” for money fails to payoff. Accordingly, many bad faith insurance cases settle or receive judgments in excess of a million dollars.
NOTEWORTHY CASES
Columbia Cas. Co. v. Hiar Holding, L.L.C., 411 S.W.3d 258 (Mo. banc 2013).
Schmitz v. Great American Assur., Co., 337 S.W.3d 700 (Mo. banc 2011).
Dhyne v. State Farm Fire and Cas. Co., 188 S.W.3d 454, 457 (Mo. banc 2006).
Gulf Insurance Co. v. Noble Broadcast, 936 S.W.2d 810 (Mo. banc 1997).
Dutton v. Amer. Family Mutual Ins. Co., WD74940 pp. 20 (Mo.App. W.D. 1-21-2014).
Scotsdale Insurance Company and Wells Trucking, Inc. v. Addison Insurance Company, WD 75963 (Oct. 1, 2013).
Durbin v. Deitrick, 323 S.W.3d 122 (Mo.App. W.D. 2010).
Roberts v. Printup, 595 F.3d 1181 (10th Cir. 2010).
Shobe v. Kelly, 279 S.W.3d 203, 221 (Mo.App.W.D. 2009).
Johnson v. Allstate Ins., 262 S.W.3d 655, 663 (Mo.App.W.D. 2008).
Rinehart v. Shelter, 261 S.W.3d 583 (Mo.App. W.D. 2008).
Wade v. Emcasco Ins., 483 F.3d 657 (10th Cir. 2007).
Truck Ins. Exch. v. Prairie Framing, LLC, 162 S.W.3d 64, 94-95 (Mo.App. 2005).
Overcast v. Billings Mutual Insurance Co., 996 S.W.2d 76, 82 (Mo.App. S.D. 1999).
Katz Drug Co. v. Commercial Standard Ins., 647 S.W.2d 831, 841 (Mo.App. W.D. 1983).
Landie v. Century Indemnity Company, 390 S.W.2d 558 (Mo.App. K.C. 1965).