In a decision handed down in December 2014, the Missouri Supreme Court clarified the topic of insurance bad faith claims in Missouri, bringing this state more in line with the growing majority of the country and creating law that helps those who are insured and insurance companies who act in good faith. In that case, Scottsdale Insurance Company and Wells Trucking v. Addison Insurance Company and United Fire & Casualty Company, the Court held that the insured does not have to suffer an excess judgment to pursue an action for bad faith and; secondly, because an insurer ultimately settles a case for the policy limits, that does not insulate them from a bad faith claim.
When you purchase insurance coverage, part of that policy is the requirement that the insurance company perform its duties in good faith. When the insurer breaches that duty, it’s called bad faith and is a violation of the law. One of the duties an insurer owes its insured is the duty to settle or pay the policy limits in good faith, i.e. when the investigation makes it clear that settling would best protect the insured’s interests. Remember, it’s the insurance company’s job to protect its insured within the scope of the policy. That’s why you pay the premiums.
A claim for bad-faith from refusal to settle arises when:
- The insurer keeps the exclusive right to settle or defend,
- The insurer does not allow the insured to settle without the insurer’s consent; and,
- The insurance company acts in bad faith or commits fraud in refusing to settle a claim within the policy limits.
In this case, Wells Trucking was sued for an injury caused by an employee’s negligence. United Fire is the primary insurer with a $1 million policy limit. Scottsdale is the secondary insurer with a $2 million limit. United Fire entered into negotiations with the original claimant during which they had many opportunities to settle for the policy limits. They finally settled only after the plaintiffs filed a lawsuit and would no longer accept only $1 million. Plaintiff increased the demand to $3 million, requiring Scottsdale, the secondary insurer, to pay the $2 million. The Core of Well’s Trucking and Scottsdale’s claims was United Fire wrongfully refused to settle the lawsuit for the policy limits despite the fact that they had many opportunities to do so.
United Fire clamed in its defense that since they ultimately settled the case for the policy limits they did not commit bad faith. The court determined that United Fire ultimately settling the case and paying the policy limits did not reset the clock. They had already acted in bad faith by not settling when they could. By dragging their feet they exposed their insured; and, by virtue of the secondary insurance policy, they exposed Scottsdale to damages.
The Court’s clarification of the issue of bad faith in lawsuits involving secondary insurers is good for the insured and the insurance companies holding secondary polices. A primary insurer cannot gamble with secondary insurers’ money. Insurers will know they cannot refuse settlement in a case like this one, where they know the case is worth well in excess of the policy limits, exposing their policyholders to unnecessary damages.