The bad faith environment in Missouri is generally hostile to carriers, with marked movement toward plaintiffs in the last ten years. The Missouri Supreme Court has now issued a ruling in Scottsdale Ins. v. Addison Ins. Co., Case No. SC93792 (on transfer from the Western District Court of Appeals) which will have a significant, and generally negative, impact on the landscape of bad faith liability in Missouri.
Bad Faith Pre-Scottsdale.
Zumwalt v. Utilities Insurance Company, 228 S.W.2d 750, 756 (Mo. 1950) established the tort of “bad faith refusal to settle” in Missouri. Zumwalt held that, by virtue of the insurer’s exclusive right to investigate, defend, and settle claims under the policy, it has a duty to protect the insured’s financial interests. Hence, “bad faith on the part of the insurer would be the intentional disregard of the financial interest of the insured in the hope of escaping the responsibility imposed upon it by its policy.” Id. at 754. The Supreme Court’s opinion in Scottsdale reaffirms Zumwalt. Slip Op. at p. 12.
Over time, the Missouri case law, mostly at the intermediate appellate level, has attempted to refine what constitutes “bad faith”:
An insurer’s bad faith in refusing to settle is a state of mind, which is indicated by the insurer’s acts and circumstances and can be proven by circumstantial and direct evidence. Id. Circumstances that indicate an insurer’s bad faith in refusing to settle include the insurer’s not fully investigating and evaluating a third--party claimant’s injuries, not recognizing the severity of a third--party claimant’s injuries and the probability that a verdict would exceed policy limits, and refusing to consider a settlement offer. . . . Other circumstances indicating an insurer’s bad faith include not advising an insured of the potential of an excess judgment or of the existence of settlement offers.
Johnson v. Allstate Ins. Co., 262 S.W.3d 655, 662 (Mo. App. W.D. 2008). Scottsdale does not generally break any new ground on what constitutes bad faith.
The specific elements of the bad faith refusal to settle claim are generally recognized to have been established by Dyer v. Gen. Am. Life Ins. Co., 541 S.W.2d 702, 704 (Mo. App. 1976). The elements of the tort appear to be that:
(1) the liability insurer has assumed control over negotiation, settlement, and legal proceedings brought against the insured;
(2) the insured has demanded that the insurer settle the claim brought against the insured;
(3) the insurer refuses to settle the claim within the liability limits of the policy; and
(4) in so refusing, the insurer acts in bad faith, rather than negligently.
These elements have been altered by Scottsdale.
The Scottsdale Appeal.
Scottsdale is an action by an excess insurance carrier and insured against a primary carrier, in which it was alleged that the primary carrier refused to settle the claim within its policy limits, in bad faith. The primary carrier declined to accept a $1 million policy-limits demand, and the claimants ultimately filed a wrongful death action. The excess carrier became involved, and ultimately the case settled after the excess carrier tendered $1 million of its $2 million limits, and the primary carrier paid its $1 million limit. The case resolved at mediation, with the primary carrier paying out its policy limits and the insured not exposed to any excess judgment.
One reason that we have been watching this case is that the Western District Court of Appeals held that the elements of the bad faith claim identified in Dyer are not the true elements of the cause of action, and established its own elements for the claim:
(1) That the insurer has the authority to settle a claim against its insured within (or by payment of) the policy limits;
(2) That the insurer has the opportunity to settle a claim against its insured within (or by payment of) the policy limits;
(3) That the insurer fails to settle a claim against its insured within (or by payment of) the policy limits in bad faith; and
(4) That the insured suffers damage as a proximate result.
Scottsdale Ins. Co. v. Addison Ins. Co., 2013 Mo. App. LEXIS 1141, *54, 2013 WL 5458918 (Mo. App. W.D. Oct. 1, 2013). The Western District expressly rejected the prior requirement that the claimant make a clear and definite demand within or for policy limits, instead applying a more amorphous standard of an “opportunity to settle,” which requires the insurer to be proactive to create such an opportunity.
In Missouri, the Supreme Court does not review the holding of the intermediate appellate court. When the Supreme Court accepts transfer, what it is reviewing is the ruling of the trial court. Accordingly, the Western District’s opinion is of no legal effect, and it is important to note that the Supreme Court did not adopt the Western District’s proposed new elements of bad faith.
It appears from the Supreme Court’s opinion that bad faith will only lie where the insurer “refuses to settle a claim within the limits of the policy,” Slip Op. at p. 12, which seems to rest upon a clear and definite settlement offer from the claimants. The Western District’s proposed requirement that the insurer act to create settlement opportunities was not expressly adopted by the Supreme Court.
What is New in Scottsdale.
There are several new, and unfavorable, developments from the Supreme Court in Scottsdale.
1. Bad Faith Claims Are Assignable.
Bad faith has always been a tort under Missouri law, not a contract claim. It has widely been accepted that bad faith claims, as torts, are not assignable, based upon a long-standing Missouri prohibition on the assignment of tort claims (which, for example, bars subrogation and lien claims against an insured’s personal injury recovery). Scottsdale holds that bad faith refusal to settle claims are torts, but are nevertheless assignable. Slip Opinion at pp. 17-18.
2. Bad Faith Claims May be Maintained Even if the Insured Sustains No Damages.
Probably the most surprising aspect of the Supreme Court’s decision in Scottsdale is that an insured may bring a bad faith refusal to settle claim even though it has not been exposed to a judgment in excess of its policy limits. In Scottsdale, the case ultimately settled at mediation for policy limits.
In light of the particular facts of Scottsdale, the excess carrier’s grievance with the primary carrier is obvious – had the primary carrier accepted an early $1 million limits demand, the excess carrier would not have had to pay any portion of its limits. There is no contractual relationship between the primary and excess carriers, and this case represents the creation of a new duty under Missouri law owed by the primary carrier to the excess carrier to attempt to resolve claims within the primary limits without implicating the excess limits.
While the interests of the excess carrier are understandable in this context, Scottsdale does not provide a clear roadmap for carriers to understand their duty to the insured. Here, within 18 months after receiving the claim, the matter was resolved at mediation within policy limits, exposing the insured to no excess judgment. The primary carrier defended the insured. The Court’s explanation of this holding is unusual, in that it uses what appears to be a contractual rationale for permitting a bad faith tort claim to proceed under these circumstances, stating that the insurer’s good faith consideration of settlement offers is “part of what the insured pays for with its premiums.” Slip Op. at p. 14. However, under either contractual or tort theories, damages are always an essential element of the cause of action. Entirely absent from the court’s analysis in Scottsdale is an explanation of how the insured had been harmed by the primary carrier’s supposed delay in accepting a policy-limits demand. The court simply holds that the insured has lost “the benefit of an important obligation owed by the insurer,” regardless of whether the insured has sustained any actual financial loss. Slip Op. at p. 14.
Furthermore, some of the opinion appears to be dicta unrelated to the particular facts of this case. The court states that the insured should have the option to settle, perhaps through execution of a “covenant not to enforce” or Mo. Rev. Stat. § 537.065-type agreement, without needing to proceed to an excess judgment. Slip Op. at pp 13-14. Whether the insured has the option to treat the insurer’s obligations under the policy as breached and to pursue its own settlement is certainly a frequent issue in these cases, but is a scenario that is not presented by the facts of Scottsdale and this language is, therefore, of questionable precedential effect.
However, both this language and the express holding of Scottsdale suggest that insurers will not have much luck in arguing that an insured who is fully protected by a 537.065 agreement may have sustained some damages provable on a bad faith claim, but that the amount of those damages is not the amount of the judgment from which the insured is fully protected by virtue of the covenant not to execute. The Missouri courts continue to carve out exceptions to fundamental legal principles in the insurance context – insurers begin to occupy an arena in which they alone can be liable without proof of damages.
3. An Insurer May Act in Bad Faith Even if it Tenders its Policy Limits.
Again, surprisingly, the Supreme Court held that even payment of policy limits in connection with a full release of claims against the insured is not enough to insulate the carrier from a bad faith claim. In so doing, the court holds that the insured “lost its opportunity to fully settle the claim” within the primary policy limits. Slip Op. at p. 15. Certainly, the excess carrier was impacted by these facts, but the insured? The insured has also paid premiums for its excess coverage – why is a settlement that requires contribution from the excess policy harmful to the insured? The court does not elaborate.
While this is understandably an issue for the excess carrier, how a supposed delay in accepting a policy limits demand that ultimately results in a full release within policy limits, after the insured has been provided with a defense, could give rise to damages sufficient to maintain a bad faith claim on the part of the insured is mystifying. The court states that “mere payment up to the policy limits does not make Wells Trucking whole or put Wells Trucking in the same position” as if the insurer had settled sooner (Slip Op. at 15), but identifies absolutely no actual loss sustained by the insured as a result of the supposed delay.
4. Excess Carriers Can Pursue Bad Faith Claims Against Primary Carriers.
This is one of the biggest developments in Scottsdale, as it truly is a new statement of Missouri law. As noted above, the insured can expressly assign its bad faith rights to an excess carrier. Additionally, the court found that an excess carrier has a right of contractual subrogation to pursue the insured’s bad faith claim against the primary carrier, even in the absence of an assignment by the insured. The excess carrier also has a right of equitable subrogation to recover sums that it was required to pay by virtue of the primary carrier’s bad faith. The court declined to create a direct duty owed by a primary carrier to the excess carrier – the excess carrier’s remedies are derivative of the insured’s bad faith claim. However, as noted above, the insured appears not to have sustained any actual financial loss that would support recovery in tort or contract with respect to the primary carrier’s conduct. The court held that an excess carrier can recover its own damages by “piggybacking” onto the insured’s supposed bad faith claim, without needing to prove that the insured sustained damages.
5. No Need for the Insured to Demand Settlement.
This is an element of Dyer v. Gen. Am. Life Ins. Co., 541 S.W.2d 702, 704 (Mo. App. 1976) that has long been in question, and the Supreme Court has now definitely put paid to the insured’s demand for settlement as a prerequisite for a bad faith claim. See Slip Op. at pp. 12-13 fn. 5.
Ultimately, Scottsdale has significantly altered the bad faith landscape in Missouri. This case continues a recent trend that dramatically expands bad faith liability in the state. See, e.g., Columbia Cas. Co. v. HIAR Holding, L.L.C., 411 S.W.3d 258, 263 (Mo. banc 2013) (imposing bad faith liability upon the insurer without requiring the policy holder to prove any of the elements of bad faith, including, critically, the insurer’s bad faith mental state). Carriers operating in the state should be mindful of the risks and potential exposure on bad faith claims.