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It is unquestionably one of the most challenging issues to confront an insurer – the demand to settle a claim within the insured’s limits of liability. We all know the drill. An insurer has been defending its insured for a while. The case is coming down to the end and trial is on the horizon. The insurer is at the point where it knows as much about the liability and damages issues as it ever will. And with that information, the possibility of a verdict in excess of the limits of liability is known to be a real one. A demand to settle within the insured’s limit of liability, thereby relieving the insured of the risk of personal liability, is made by the plaintiff. All things considered, the applicable state standard, for whether the insurer should accept the limits demand, has been met. In other words, not accepting the demand will saddle the insurer with liability for an excess verdict. [Of course, when there are also coverage issues, the degree of difficulty here goes from a double lutz to a triple axel. But that’s not the issue today.]But there is another version of this story. Change one fact -- a demand to settle within the insured’s limit of liability is never made. In this situation, insurers generally see themselves as relieved of any risk of exposure for an excess verdict. After all, even though the insured has a legitimate risk of personal liability for a verdict above its policy limit, the insurer’s hands are tied. Right? Without a demand to settle within the insured’s limit of liability, what’s it to do? No matter how much it makes sense to settle the case, the opportunity to do so just isn’t there.This is the fundamental issue at the core of the Louisiana Supreme Court’s decision in Kelly v. State Farm Fire & Casualty Co., No. 2014-CQ-1921 (May 5, 2015), [enhanced version available to lexis.com subscribers]. Kelly involves an automobile accident, a low limits auto policy and an excess verdict. But the particular facts of Kelly are not necessary to address the issues and overarching lessons from the case. So I’ll skip all that and get right to big picture. The Louisiana Supreme Court, at the request of the Fifth Circuit, [enhanced version available to lexis.com subscribers], had this question before it: Can an insurer be found liable for a bad-faith failure-to-settle claim, i.e., an excess verdict, when the insurer never received a firm settlement offer?To be more specific, the issue was whether an insurer’s liability, for such excess verdict, could be based on its obligations under La. R.S. Section 22:1973(A), [enhanced version available to lexis.com subscribers], which provides as follows:
"An insurer, including but not limited to a foreign line and surplus line insurer, owes to his insured a duty of good faith and fair dealing. The insurer has an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims with the insured or the claimant, or both. Any insurer who breaches these duties shall be liable for any damages sustained as a result of the breach."
The court’s first task was to determine whether an insured possesses a cause of action, under La. R.S. Section 22:1973(A), for bad faith failure to settle. The court held that it did. Among other reasons, the Louisiana high court pointed to the “long lineage” of the state’s case law that has provided insureds with a cause of action to recover a judgment in excess of policy limits. The court referred to Section 22:1973(A) as the legislature’s “essential codification” of the “jurisprudentially-recognized cause of action in favor of insureds for an insurer’s bad faith failure to settle.”
The court put its conclusion, that an insured possesses a cause of action, under La. R.S. Section 22:1973(A) for bad faith failure to settle, this way: “[I]t is presumed the Legislature enacts each statute with deliberation and with full knowledge of all existing laws on the same subject. It therefore stands to reason that the legislature did not intend its remedial measures to take away any rights, but to add rights.”
Having determined that Section 22:1973(A) supports a cause of action for bad faith failure to settle, the court turned to the next question: must an insurer receive “a firm settlement offer” as a condition for an insured to recover for the insurer’s bad-faith failure-to-settle?
The court answered this question in the negative. First, the court was persuaded by the statute’s use of the phrase “affirmative duty,” which it noted means “to take positive action(s) to comply with a legal standard.” Then, the court noted that two positive steps listed in the statute, to meet this duty, are: “adjust claims fairly and promptly” and “make a reasonable effort to settle claims with the insured or the claimant, or both.”
Following these observations, the court explained its conclusion, that an insurer need not receive “a firm settlement offer,” as a condition for an insured to recover for the insurer’s bad-faith failure-to-settle, as follows (lengthy quote follows (citations omitted), but it’s worth setting out the court’s explanation in full):
“The clearest indicator is that a firm settlement offer is not listed anywhere in the statute. To impose the requirement of a firm settlement offer would essentially amount to adding words not included in the statute. As we understand State Farm’s brief, not only would we have to essentially add wording requiring a ‘firm’ or ‘actual’ offer to settle, but State Farm would have us further qualify that an offer must be ‘within the available policy limits.’ The wording proposed by State Farm amounts not to statutory interpretation, but to a wholesale rewriting of La. R.S. 22:1973(A). Such rewriting is not, however, the role of this or other Louisiana courts.
Practical considerations also support our interpretation of La. R.S. 22:1973(A) as not requiring a firm offer as a condition for finding the insurer has acted in bad faith. The insured has no control over whether a firm offer will be submitted. For that matter, neither does the insurer. Yet, the insurer has undertaken the obligation to protect the insured. [I]n every case, the insurance company is held to a high fiduciary duty to discharge its policy obligations to its insured in good faith-including the duty to defend the insured against covered claims and to consider the interests of the insured in every settlement. Therefore, we see no practical reason why the insurer’s obligation to act in good faith should be made subject to the tenuous possibility that an insurer will receive a firm settlement offer. Instead, the insurer’s obligation to act in good faith is triggered by knowledge of the particular situation, which knowledge [t]he insurer has an affirmative duty to gather during the claims process. See La. R.S. 22:1973(A). See also Smith, 95–2057 at 9–10, 679 So.2d at 377 (finding that an insurer has a duty to conduct ‘a thorough investigation’ and to consider ‘the evidence developed in the investigation’ when determining whether to litigate or settle).”
Held: “[A]n insurer can be found liable for a bad-faith failure-to-settle claim under La. R.S. 22:1973(A), notwithstanding that the insurer never received a firm settlement offer.”
There is much that can be said about Kelly v. State Farm.
On one hand, it is a Louisiana case interpreting a Louisiana statute. And Louisiana’s jurisprudence holds statutes in high regard (you know that whole French influence thing that they have going on down there). So the case can be dismissed as having no applicability beyond the Pelican State.
On the other hand, the statute at issue is part of Louisiana’s version of the National Association of Insurance Commissioner’s Unfair Claims Settlement Practices Act. And just about every state in the country has adopted some version of the NAIC’s Act. But the NAIC Act does not contain the “affirmative duty” language that was an important consideration in the Kelly court’s analysis. Rather, many states’ Unfair Claims Settlement Practices Acts instead likely provide that it is an unfair claims practice for an insurer to “not attempt in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear.” But could this provision be considered as having the same purpose of the Louisiana provision? And could the Kelly court’s reasoning (this is why I used that long quote) be persuasive, even if the statutory language is different?
Here’s what Kelly v. State Farm is all about. Is Kelly “Louisiana-enough” such that the decision does not have reach outside of Louisiana? Or has the Louisiana Supreme Court handed a playbook to policyholders and courts to change the bad faith landscape? Will insurers still be able to consider themselves without risk of exposure for an excess verdict because a demand to settle within the insured’s limit of liability was never made?
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
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