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.

Zumwalt v. Utilities Insurance Co., 228 S.W.2d 750 (Mo. 1950).

This case addresses the following issue:

Can an insurance company be liable to its insured for failing to settle a claim in bad-faith?

The situation in this case is a common scenario with a sinister twist: an offer to settle was made by the injured party in the underlying case, but the offer was refused; in this case, however, the insurer stood to lose only a set amount, which prompted its decision, and the jury ultimately awarded well over the offer and the policy limits of each insurance policy. Id. at 752. The court found that the insurance company was looking out only for its own interests, not the interests of the insured, when it refused to accept the settlement offers made during litigation. Id. at 754. This constituted bad faith and made the insurance company liable to the insured for the amount of the judgment the insured had to pay, i.e., the amount over the policy limits. Id.

Like all bad-faith cases, this matter revolves around the actions of the another case which fell under an insurance policy purchased by Plaintiff from Defendant. Id. at 751. Two construction workers were injured by a large garage door that Plaintiff was installing at a construction site. Id. at 751-52. Plaintiff reported to the injuries to its insurance provider, Defendant. Id. at 752. That insurance policy provided coverage of up to $5,000. Id. Plaintiff had also taken out a second insurance policy with another insurance company, which would provide an additional $5,000 in coverage, but only after Defendant paid the first $5,000. Id. Because of this coverage scheme, Defendant alone provided the legal defense team for Plaintiff, and also had full power to determine the manner of litigation, including when to settle and for what amount. Id. The attorney for the injured workers had made several demands throughout the litigation, each under the full policy limits. Id. These offers were all declined, and a jury ultimately returned a verdict of $15,000 for the workers. Id.

The court begins by noting that this is a “case of first impression in this court,” meaning that liability for bad-faith failure to settle had never been decided by the Missouri high court. Id. at 753. Reviewing the cases of other states, the court found no agreement regarding negligent refusal to settle, but full agreement that an insurer can be liable “where bad faith appears.” Id. The court laid out the elements of such a claim in four parts. Id. First, a proper insurance contract must exist, which gives all power to settle to the insurance company, meaning the insured cannot force a settlement against the company’s wishes. Id. Second, a covered claim is asserted against the insured. Id. Third, an offer of settlement is made to the insurer, within the policy limits, but offer is refused in bad faith. Id. The claim is ultimately resolved for greater than the policy limits, leaving the insured to pay the excess amount. Id.

This case, like most cases which would follow after it, came down to the third element: was refusal to settle within policy limits done in bad faith? Id. The court notes that bad faith is “a state of mind indicated by acts and circumstances,” meaning it generally must be proven by circumstantial evidence. Id. at 754. Most often, bad faith will be “the intentional disregard of the financial interest of the insured in the hope of escaping the responsibility imposed upon” the insurer by the insurance contract. Id. That definition precisely summed up what had occurred in this case. Id. The insured here would never be “liable for more than $5,000, and it would prefer to take a gamble on getting a favorable verdict rather than to make a settlement within the limits of the policy.” Id. Quite simply, the insurance company was playing with someone else’s money: the insured’s! Id. Because the offers were at the insurer’s liability limit, it did not consider the interest of Plaintiff, who would be responsible for the excess judgment amount—textbook bad faith that creates liability for failing to settle. Id.