IN MISSOURI, CAN AN INSURER BE LIABLE FOR BAD-FAITH FAILURE TO SETTLE, IF THE CLAIM ULTIMATELY STILL SETTLED WITHIN THE POLICY LIMITS?

Sometimes the black letter law passed by the legislature is unclear. The legislature can’t anticipate every possible fact scenario when they pass a law, so it lay to the courts to interpret the law and give guidance to what it means. This interpretation is called case law. When the court decides a certain meeting to the law it essentially answers a legal question. Lawyers and other courts then can rely on that ruling when they have a similar issue in their case. The following case answers the question above.

Scottsdale Insurance Co. v. Addison Insurance Co., 448 S.W.3d 818 (Mo. 2014).

This case addresses the following issue:

Can an insurance company be liable to its insured for failing to settle a claim in bad-faith if the claim is ultimately still settled within the policy limits?

Missouri law recognizes a claim against an insurance company when the company fails to settle a claim in bad faith, and the insured later is required to pay more than the policy limits. Id. at 827. This case dealt with the scenario in which a bad-faith refusal to settle occurred early on in litigation, but settlement was ultimately achieved for the policy limits. Id. at 828. The court held that this was ultimately a factor in damages, but a later settlement does not negate the bad-faith refusal to settle that occurred prior to the ultimate settlement and could have prevented further litigation. Id.

This case revolves around a wrongful death action. Id. at 821. The insured had both a standard liability policy with Defendant and an excess insurance policy with Plaintiff. Id. at 822. Defendant was presented with an opportunity to settle the claim for the standard policy’s limits of $1 million. Id. However, despite having sufficient knowledge of what had occurred and knowing that a verdict could easily eclipse such an amount, Defendant declined to settle. Id. Several months later, the parties participated in a mediation, which included the excess insurer, Plaintiff. Id. Ultimately, a settlement was reached where by each insurance company paid its policy limits of $1 million, for a $2 million total settlement. Id. Both the excess insurer and the insured filed a bad-faith claim against Defendant, alleging bad-faith failure to settle. Id. at 823.

Beginning with the history of bad-faith claims for failure to settle, the court noted that no requirement of judgment had ever been imposed. Id. at 827. Instead, an excess settlement poses all the dangers that an excess judgment does, so the court found no reason to differentiate between the two. Id. at 828. Likewise, the court found that “ultimate settlement for its policy limits” is not a shield against past bad-faith refusals. Id. Good-faith settlement attempts are “part of what an insured pays for” and such a “loss is suffered regardless of whether there is an excess judgment or settlement.” Id. These facts are considerations for damages, but do not negate a claim for bad faith. Id.

The court also found that the excess insurer could bring a claim for bad faith to redress the amount that it paid pursuant to the excess insurance policy. Id. at 829-30. The court found that such a claim was assignable, and subject to both contractual and equitable subrogation, or substitution of parties which are appropriately connected. Id.