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Insurance Bad Faith Litigation Reform is Sweeping into Missouri

May 5, 2017 | Angela Higgins

As practitioners and insurers doing business in Missouri know, this is one of the most insurer-hostile jurisdictions in the country. Missouri insurance law is something of a perfect storm of archaic insurance statutes, uneven jurisprudence, and outright collusion in service of the bad faith setup.  The Missouri legislature has recently taken important steps toward reforming these abuses, and the state’s new governor is expected to sign the legislation.

On April 26, the House passed the Senate Substitute for the Senate Committee Substitute for the House Committee Substitute for House Bills 339 and 714, which we will just identify by the House Bill numbers.  This legislation replaces Mo. Rev. Stat § 537.065 with provisions designed to take several pounds of weight off the scale in favor of bad faith plaintiffs.  Assuming Governor Greitens signs off, which is expected, § 537.065 will be repealed and replaced effective August 28, 2017.  H.B. 339 was sponsored by Representative Bruce DeGroot and H.B. 714 was sponsored by Representative Kevin Engler.

I.    REPEAL AND REPLACEMENT OF § 537.065

Together, H.B. 339 and 714 repeal and replace existing Mo. Rev. Stat. § 537.065.  H.B. 174 enacts an entirely new section, § 537.068, as follows:

1.  As used in this section, the following terms shall mean:

(1) "Extra-contractual damages", any amount of damage that exceeds the total available limit of liability insurance for all of a liability insurer's liability insurance policies applicable to a claim for personal injury, bodily injury, or wrongful death;

(2) "Time-limited demand", any offer to settle any claim for personal injury, bodily injury, or wrongful death made by or on behalf of a claimant to a tort-feasor with a liability insurance policy for purposes of settling a claim against such tort-feasor within the insurer's limit of liability insurance, which by its terms must be accepted within a specified period of time;

(3) "Tort-feasor", any person claimed to have caused or contributed to cause personal injury, bodily injury, or wrongful death to a claimant.

2. A time-limited demand to settle any claim for personal injury, bodily injury, or wrongful death shall be in writing, shall reference this section, shall be sent certified mail return-receipt requested to the tort-feasor's liability insurer, and shall contain the following material terms:

(1) The time period within which the offer shall remain open for acceptance by the tort-feasor's liability insurer, which shall not be less than ninety days from the date such demand is received by the liability insurer;

(2) The amount of monetary payment requested or a request for the applicable policy limits;

(3) The date and location of the loss;

(4) The claim number, if known;

(5) A description of all known injuries sustained by the claimant;

(6) The party or parties to be released if such time-limited demand is accepted;

(7) A description of the claims to be released if such time-limited demand is accepted; and

(8) An offer of unconditional release for the liability insurer's insureds from all present and future liability for that occurrence under section 537.060.

3. Such time-limited demand shall be accompanied by:

(1) A list of the names and addresses of health care providers who provided treatment to or evaluation of the claimant or decedent for injuries suffered from the date of injury until the date of the time-limited demand, and HIPAA compliant written authorizations sufficient to allow the liability insurer to obtain such records from the health care providers listed; and

(2) A list of the names and addresses of all the claimant's employers at the time the claimant was first injured until the date of the time-limited demand, and written authorizations sufficient to allow the liability insurer to obtain such records from all employers listed, if the claimant asserts a loss of wages, earnings, compensation, or profits however denominated.

4. If a liability insurer with the right to settle on behalf of an insured receives a time-limited demand, such insurer may accept the time-limited demand by providing written acceptance of the material terms outlined in subsection 2 of this section, delivered or postmarked to the claimant or the claimant's representative within the time period set in the time-limited demand.

5. Nothing in this section shall prohibit a claimant making a time-limited demand from requiring payment within a specified period; provided, however, that such period for payment shall not be less than ten days after the insurer's receipt of a fully executed unconditional release under section 537.060 as specified in subsection 2 of this section.

6. Nothing in this section applies to offers or demands or time-limited demands issued within ninety days of the trial by jury of any claim on which a lawsuit has been filed.

7. In any lawsuit filed by a claimant as an assignee of the tort-feasor or by the tort-feasor for the benefit of the claimant, a time-limited demand that does not comply with the terms of this section shall not be considered as a reasonable opportunity to settle for the insurer and shall not be admissible in any lawsuit alleging extra-contractual damages against the tort-feasor's liability insurer.

Existing § 537.065 is technically repealed and replaced, but the changes to the existing language are identified below, with the new language in bold.

1. Any person having an unliquidated claim for damages against a tort-feasor, on account of personal injuries, bodily injuries, or death, provided that, such tort-feasor's insurer or indemnitor has the opportunity to defend the tort-feasor without reservation but refuses to do so, may enter into a contract with such tort-feasor or any insurer on his or her 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 such person nor any other person, firm, or corporation claiming by or through him or her 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. 

2. Before a judgment may be entered against any tort-feasor after such tort-feasor has entered into a contract under this section, the insurer or insurers shall be provided with written notice of the execution of the contract and shall have thirty days after receipt of such notice to intervene as a matter of right in any pending lawsuit involving the claim for damages.

3. The provisions of this section shall apply to any covenant not to execute or any contract to limit recovery to specified assets, regardless of whether it is referred to as a contract under this section.

4. Nothing in this section shall be construed to prohibit an insured from bringing a separate action asserting that the insurer acted in bad faith.

II.    THE PROBLEMS ADDRESSED BY THE LEGISLATION

A.    THE UNREASONABLE TIME-LIMITED DEMAND

This is not the Missouri legislature’s first attempt in recent memory to tackle the problem of the quick-trigger time-limited demand, which is the foundation of the bad faith setup.  In 2005, as part of comprehensive tort reform efforts, the legislature amended § 408.040 to provide that, before a settlement demand could trigger the accrual of prejudgment interest, it must be transmitted by certified mail, be accompanied by an affidavit of the claimant and, where applicable, medical or wage loss records and authorizations, and be left open for 90 days.  The expectation of many was that this would curtail the short-fuse time-limited demands that form the basis of Missouri’s bad faith tort claim.  Experience, however, has proven that attorneys looking to set up a bad faith claim are willing to forego the possibility of recovering prejudgment interest and continue to transmit short time-limited demands without documentation supporting the claim.  The courts briefly seemed to toy with holding that a demand in the format specified by § 408.040 was a necessary predicate for a bad faith claim.  See Johnson v. Allstate Ins. Co., 262 S.W.3d 655, 664 (Mo. App. W.D. 2008). In Johnson, the court held that claimants’ “demand letter satisfied the requisites of Section 408.040, RSMo 2000, which authorizes individuals with a claim like the Johnsons' to make a demand to an insurance company for either the policy limits or for a specific amount of money.”  However, this language was not subsequently interpreted to require that demands be made in conformity with § 408.040 to support a bad faith claim.

The new § 537.058 pulls from the prior changes to § 408.040, and requires that demands be left open for 90 days and be accompanied by medical and wage authorizations.  Subsection 7 of this new statute is intriguing, and we hope it is interpreted as the legislature intended.  This subsection provides that a time-limited demand that does not comply with the requirements of the statute shall not be admissible in a lawsuit “alleging extracontractual damages” (i.e., an amount exceeding the insurance policy limit(s)). 

This subsection is triggered by the filing of a claim for extracontractual recovery “by a claimant as an assignee of the tort-feasor or by the tort-feasor for the benefit of the claimant.”  The Missouri Supreme Court, in Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818 (Mo. banc 2014), appears to have authorized the assignment of bad faith claims from the insured to the claimant, a departure from Missouri’s general rule that tort causes of action are not assignable and cannot be subrogated.  However, in practice we are not seeing cases explicitly filed by the claimant/judgment creditor as an assignee of the insured. 

Moreover, while it is understood that the filing of a bad faith claim by the insured or putative insured is “for the benefit” of the claimant, in practice both the insured and claimant vehemently resist this conclusion, going to extraordinarily lengths to attempt to conceal their § 537.065 agreement and their cooperation in the lawsuit, and expressly denying that the insured is merely recovering money as a pass-through for the claimant.  As a practical matter, there are probably two options to establish that the insured has filed the claim “for the benefit of the claimant.”  The first would be to authorize routine discovery of § 537.065 agreements, which the Missouri courts have historically resisted.  The second would be for the courts to presume that a bad faith action, where the underlying judgment remains unsatisfied, is presumptively for the benefit of the claimant/judgment creditor.  Either option would be an improvement over the current circumstances.

This statute does not specifically address a related, troubling problem in Missouri bad faith litigation.  In Catron v. Columbia Mut. Ins. Co., the Missouri Supreme Court held that the goal behind recognition of the tort of bad faith failure to settle claims is not to provide redress to the injured party.  723 S.W.2d 5, 6 (Mo. 1987).  Rather, the goal of a bad faith claim is to provide redress to the insured for an insurer’s bad faith refusal to settle.  Catron, 723 S.W.2d at 6.  Damages recoverable in a bad faith refusal to settle claim are limited to “the amount of money which the insured was forced to pay on the claim not settled by virtue of a judgment of liability in excess of the policy limits.”  Dyer v. Gen. Am. Life Ins. Co., 541 S.W.2d 702, 704-05 (Mo. App. St. L. 1976) (citing Zumwalt v. Utilities Ins. Co., 360 Mo. 362, 228 S.W.2d 750 (Mo. 1950) and Landie v. Century  Indem. Co., 390 S.W.2d 558 (Mo. App. 1965), where both insureds paid the amount of the excess judgment against them).  The essence of a bad faith cause of action is that the insured suffered tangible economic loss as a result of her insurer’s tortious refusal to settle claims against her.  Like any tort claim, damages are an essential element of the cause of action.  Heartland Stores, Inc. v. Royal Ins. Co., 815 S.W.2d 39, 41 (Mo. App. W.D. 1991).  “Actual damages are compensatory and are measured by the loss of injury sustained.”  Stiffelman v. Abrams, 655 S.W.2d 522, 531 (Mo. banc 1983) (citing Chappell v. City of Springfield, 423 S.W.2d 810, 814 (Mo. 1968); State ex rel. St. Joseph Belt Ry. Co. v. Shain, 108 S.W.2d 351, 356 (Mo. 1937); Hussey V. Ellerman, 215 S.W.2d 38, 42 (Mo. App. St. L. 1948)). 

What has always been problematic is the Missouri courts’ willingness to allow an insured to argue that he or she has sustained damages measured by a judgment from which the insured is fully protected by virtue of a § 537.065 or similar agreement.  Other courts resist this conclusion, and Missouri’s position is inconsistent with logic and well-settled precedent.  A Texas court, for example, held that allowing the insured, protected by a covenant not to execute, to collect all or part of the judgment amount “perpetrates a fraud on the court, because it bases the recovery on an untruth, i.e., that the judgment debtor may have to pay the judgment.” H.S.M. Acquisitions, Inc. v. West, 917 S.W.2d 872, 82 (Tex. App. Corpus Christi 1996) (citations omitted).  “Allowing recovery in such a case encourages fraud and collusion and corrupts the judicial process by basing the recovery on a fiction.... the courts are being used to perpetrate and fund an untruth.” Id.  Allowing an insured with a §537.065 agreement to recover the amount of the underlying judgment, apparently for the benefit of the claimant/judgment creditor, is a legally dubious proposition.  To the extent that Missouri might have an interest in penalizing insurers for not settling claims, punitive damages are recoverable in bad faith actions.  Permitting insureds to recover as “damages” amounts which do not represent damages actually sustained by them is utterly unjustified, however.  A bad faith action can be “for the benefit of the claimant” in securing the insurance policy proceeds to the claimant/judgment creditor without misrepresenting the amount of damages that were actually sustained by the insured. 

B.    RIGHT TO KNOW OF § 537.065 AGREEMENTS AND TO INTERVENE

As a preliminary matter, one odd aspect of Missouri insurance law that is not fully addressed by this legislation is the courts’ belief that any reservation of rights or coverage question presents an insurmountable conflict of interest that constitutes an insurer’s breach of its duty to defend, freeing the insured from the cooperation clause of the policy.  See State Farm Mut. Auto. Ins. Co. v. Ballmer, 899 S.W.2d 523, 527 (Mo. banc 1995).  In virtually every other jurisdiction, an insurer may defend through Cumis counsel without the inexplicable brinksmanship created by the Missouri courts, in which insurers are often pressured to drop their coverage defenses and defend without reservation at a time when they have minimal information about the claim (and certainly less than the insured).  Why the Cumis counsel approach is not acceptable in Missouri remains a mystery. 

The amended § 537.065, however, will allow an insurer the opportunity to either defend without reservation, or to intervene in the tort action (presumably to litigate its coverage defenses) before judgment may be taken against the insured or putative insured.  This is a tremendously favorable development for insurers who have generally learned only after the fact that their insured has entered into a § 537.065 agreement and stipulated to judgment, often in cases that are truly defensible as to liability and/or damages.  The new provisions of § 537.065, which deem any covenant not to execute, however denominated, as falling within the scope of the statute, will also be helpful in securing disclosure of these types of agreements.

III.    CONCLUSION

The Missouri legislature’s efforts to reform bad faith litigation are welcome, and long overdue.  The current assembly has emphasized litigation reform, and we look forward to providing a final report on the session later this month.

Related Services: Insurance

Attorneys: Angela Higgins

A CGL Policy May Provide A Duty To Defend Data Breach Claims – 4th Circuit Court of Appeals Decision

April 14, 2016 | Thomas Rice
The 4th Circuit Court of Appeals has ruled that a commercial general liability policy (CGL) may cover a data breach, at least for the purposes of a duty to defend. In a case involving the publication of private medical records on the internet, the federal appellate court agreed with the lower federal district court in Virginia that coverage included in a CGL for personal and advertising injury applied.  The Travelers Indemn. Co. of Amer. v. Portal Healthcare Solutions, LLC, slip op., Case No. 14-1944 (4th Cir. April 11, 2016).
 
The underlying class-action complaint alleges that Portal and others engaged in tortious conduct that resulted in the plaintiffs’ private medical records being available on the internet for more than four months. During the alleged tortious conduct, Portal was insured under two CGL insurance policies issued by Travelers,  in 2012 and 2013. Travelers argued its 2012 and 2013 CGL policies did not require it to defend Portal because the class-action complaint fails to allege a covered “publication” by Portal or any other covered conduct within the scope of the CGL policies. 
 
The federal appellate court, in finding that Travelers has a duty to defend Portal from the class action, characterized those arguments as “efforts to parse alternative dictionary definitions”.  The federal appellate court applied the Virginia “Eight Corners’ Rule” by looking to “the four corners of the underlying complaint” and “the four corners of the underlying insurance policies” to determine whether Travelers is obliged to defend Portal. 
 
The 4th Circuit Court agreed with the lower court’s opinion that the class-action complaint at least potentially alleges a publication of private medical information by Portal that constitutes conduct covered under the policies. The federal appellate court further explained that such conduct, if proven, could have given unreasonable publicity to, and disclosed information about, patients’ private lives, because any member of the public with an internet connection could have viewed the plaintiffs’ private medical records during the time the records were available online. 
 
This ruling significantly increases the risk of future coverage claims for data breach losses under traditional CGL policies, based on its broader interpretation of the term “publication” as used in those policies.

Insuring Companies from Cyber Risk and Liability

April 1, 2016Recently, privacy, data breaches, and cyber security issues have taken center stage in the media.  In the event of a data breach, a company faces a multitude of expenses both internally and externally including but not limited to investigation, business loss, and remediation.  Companies are responding to the risk of data breach events, in part, by seeking insurance coverage.  Insurance carriers are accommodating this need by selling policies to protect companies in the event of a breach.     

Generally, coverage for cyber risk and liability is divided into two classes: First-Party coverage and Third-Party coverage. First-party coverage applies to protect the insured from the costs to its business in the case of a breach.  Examples of such costs include expenses like business loss/interruption and replacing/repairing equipment that may have been damaged or affected during the breach.

Third-party coverage applies to the costs an insured may have to pay to third parties or due to injuries of third-parties. Examples of such coverage include judgments as a result of a lawsuit and other expenses a company would have to pay to a third-party, expenses associated with notification of a breach to affected persons and credit monitoring.  Also, third-party coverage can insure expenses in responding to government regulators after a breach for purposes of investigation into the breach or penalties/fines as a result hereof.  Investigation into the cause of a data breach is often times costly and time-consuming.

There is not a “one-size-fits-all” policy with respect to insuring cyber liability.  Instead, policies can be tailored to the needs of the company seeking coverage.  By way of example, coverage and premiums can vary based on the following:

  • The industry in which a company operates;
  • The geographical area in which the company operates (local, national, international);
  • The size of the company;
  • Coverage for actions of third party vendors storing/accessing a company’s information;
  • Effective date of the policy (retroactive v. date policy purchased);
  • Remediation coverage; and
  • Business loss.
The above-bulleted list is not comprehensive but highlights some differences between policies.  Not every carrier will have the same types or level of coverage available.  Furthermore, policies insuring from cyber liability can include clauses that exclude certain events from coverage.  

For a company, the decision to purchase cyber liability insurance is not always an easy one.  A company is well-advised to evaluate its risk, exposure, and needs to ensure it purchases the correct level and type of coverage.  Often times, policies have room for negotiation with respect to coverage and price.  Costs can vary between carriers, even for similar levels of coverage.  A company should also be informed on the specific requirements that are sometimes included in a policy.  For example, certain policies may require that a company engage in preventative measures to ensure that its costumer’s data is safely stored.  The issue with some policies, however, is that it will include language like “due care” which is difficult to define.  A company that fails to adhere to the requirements of policy may be denied coverage in the event of a data breach.  When purchasing a policy, a company should also be aware of not only the total limits of the policy, but of any sub-limits.  Specifically, a policy may limit the amount of coverage for investigation, notification, and remediation portions of a breach event that may be smaller than the overall coverage limit.

Cyber liability insurance policies will continue to evolve due to the dynamic nature of cyber security.  Companies are well advised to continuously monitor the risks, exposure, and needs to ensure that they have adequate protection in the event of breach.           
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About Insurance Law Blog

The BSCR Insurance Blog examines topics and developments of interest to insurance carriers, with a particular focus on Missouri and Kansas law. Learn more about the editor, Angela M. Higgins, and our Insurance practice.

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