SNR Denton on National Surety Corp. v. Hartford Casualty Insurance Co.: No Insurer Liability for Failure To Settle Absent Outrageous Conduct

   By William T. Barker, Partner, SNR Denton LLP

At one time, Kentucky held that an insurer would be liable to its insured for an excess judgment if the insurer's failure to settle exposed the insured to an unreasonable risk of such a judgment.  Language in first-party bad faith cases suggests no liability unless the insurer engaged in outrageous conduct.  This unreported decision took that to be the law and affirmed judgment for the insurer.  But that may not correctly read Kentucky law.

Sufix produced a head for a weed trimmer that shattered in operation, injuring Cook.  Hartford provided $1 million in primary insurance National provided $10 million in excess insurance.  Hartford rejected a $1 million demand.  The jury verdict was for $5,783,816.09, comprised of $43,988.81 for past medical expenses, $250,000 for future medical expenses, $463,742 for past and future loss of earnings, $2,051,000 for pain and suffering, and $2,975,084.28 in punitive damages.  Hartford paid its policy limit and National paid the balance.  National then sued Hartford for breach of the duty to settle.

The district court concluded that a high evidentiary threshold applied:

Evidence must demonstrate that an insurer has engaged in outrageous conduct toward its insured. Furthermore, the conduct must be driven by evil motives or by an indifference to its insureds' rights. Absent such evidence of egregious behavior, the tort claim predicated on bad faith may not proceed to a jury. Evidence of mere negligence or failure to pay a claim in timely fashion will not suffice to support a claim for bad faith. Inadvertence, sloppiness, or tardiness will not suffice; instead, the element of malice or flagrant malfeasance must be shown.

It found that the evidence did not show this level of culpability, and the Sixth Circuit agreed.  National apparently conceded that the standard identified by the district court was the correct one, so the Sixth Circuit had no reason to critically examine it.  That concession may have been ill advised.

This commentary first describes the development of bad faith law nationally, both with respect to claims for bad faith refusal to protect an insured against a possible excess judgment and with respect to bad faith delay or denial of benefits due.  It then examines the development of Kentucky law.  When the only bad faith cause of action concerned an insurer's duty to settle to protect its insured from a possible excess judgment, the standard was whether the insurer's failure to settle exposed the insured to an unreasonable risk of such a judgment.  More recently, Kentucky law has imposed duties to insureds and claimants to pay in good faith where benefits are clearly due, and breach of that duty requires the heightened culpability which the district court applied in National Surety.

While some language in the cases may seem to suggest that this standard applies to all bad faith cases, a close reading suggests that it may only apply to cases involving the duty to pay in good faith, not to the duty to settle.  That reading is reinforced by examination of the different ways in which Kentucky law and the law elsewhere has treated the two types of cases

The commentary concludes:

Future Kentucky plaintiffs ought not to concede that the standard for failure to pay in good faith also applies to the duty to settle.  They should argue for the continued vitality of the [Manchester Insurance & Indemnity Co. v.] Grundy standard.

William T. Barker is a member of SNR Denton's Insurance Litigation & Coverage Practice Group and practices in the firm's Chicago office. He has a nationwide practice in the area of complex commercial insurance litigation, including coverage, claim practices, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author, with Ronald D. Kent of The New Appleman Insurance Bad Faith Litigation, Second Edition and with Charles Silver of the forthcoming Professional Responsibilities of Insurance Defense Counsel; he has written over 100 published articles on insurance and litigation subjects. He has been described as "[t]he leading lawyer commentator" on the relationships between insurance and civil procedure. Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995). He is an Adviser to the American Law Institute project on Principles of the Law of Liability Insurance. He is a member of the Editorial Board of The New Appleman on Insurance Law Library Edition and The New Appleman Insurance Law Practice Guide. He is Editorial Board Director and Senior Contributing Editor of Insurance Litigation Reporter and a member of the Board of Editors of Defense Counsel Journal.

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