The History of Bad Faith Claims in Missouri
When insurance litigation issues first started to appear before courts, the focus was on coverage interpretations and technical policy defenses. Anthony G. Fussner, Overview of Bad Faith Litigation in Missouri, 62 Mo. L. Rev. 806, 808 (1997), http://scholarship.law.missouri.edu/mlr/vol62/iss4/3. Insurance policies were considered contracts and damages that were awarded were generally those available for breach of contract. Id. However, eventually courts started also allowing insured plaintiffs to bring various types of bad faith claims against their insurance companies. Id. These bad faith claims allowed for damage awards above and beyond the insurance policy limits. Id. Bad Faith claims were also considered by the courts to be actions in tort, not in contract. Id. at 823. This is an area of law that has continued to expand in Missouri under more recent rulings by the Missouri Supreme Court.
Bad faith liability claims generally fall into two general categories – either first party claims or third party claims. Fussner, supra at 809. First party insurance reimburses the insured for losses covered by the contractual terms of the actual insurance policy. Id. In a first party claim, the insured would bring a breach of contract action or an actionable tort against his insurer for failure to reimburse the insured on a claim covered by a policy. Id. at 809. 1
A third party cause of action is one in which the insured or the insured’s assignee brings a cause of action against the insurer for a bad faith refusal to settle or bad faith failure defend a claim made against the insured. Fussner, supra at 809. The insurance policy itself usually contains provisions requiring the insurer to defend and indemnify claims against the insured. Id. This allows the insured to bring a breach of contract claim against the insurance company for failure to defend, but in addition, the insurer also has a duty to act in “good faith” when handling claims against the insured. Id. This duty exists under the implied covenant of good faith and fair dealing that is a part of all contracts under law. Id. Under this duty, the insurer must act in good faith when considering settlement offers during its defense of the insured. Id. When the insurer has an opportunity to settle a claim within the policy limits and fails to do so, the insured may be able to bring an additional action for bad faith refusal to settle. Id. A bad faith refusal to settle claim is not treated like a breach of contract action, but is considered a tort. Id. There are generally three situations in which a third party action may arise:
- When an insurer acts in bad faith in failing to settle a claim against its insured within the policy limits
- When an insurer, in bad faith, fails to defend a claim against it’s insured
- When an insurer acts both in bad faith in failing to settle and failing to defend a claim against the insured
Bad Faith Failure to Settle
Up until the ruling in Scottsdale, 2 as outlined below, the elements of a bad faith failure to settle claim were as follows:
- The insurer has assumed control over negotiations, settlement, and legal proceedings brought against the insured
- The insured has demanded that the insurer settle the claim brought against the insured
- The insurer refuses to settle the claim within the liability limits of the insurance policy
- In doing so, the insurer acts in bad faith, rather than negligently
Dyer v. General Amer. Life Ins. Co., 541 S.W2d 702, 704 (Mo. App. 1976).
It also appeared up until Scottsdale, that a bad faith failure to settle claim was not assignable. Quick v. Natl. Auto Cred., 65 F.3d 741, 746 (8th Cir. 1995). Insurers have the following defenses available to them in third party failure to settle actions:
- Where the company in good faith believes that there is a valid defense to the claim, even though the defense proves unsuccessful and results in a judgment against the insured above the policy limits.
- Where the insurance policy contains provisions requiring the insured to cooperate with the insurer in the preparation and defense of the case against the insured, and the insured fails to cooperate, where the failure is inexcusable and substantially material causing prejudice to the insurer.
- Where there has been no offer to settle from the plaintiff.
- Where the insurer has relied upon the advice of competent counsel showing that the insurer acted reasonably and with proper cause in failing to accept a settlement offer within the policy limits.
- Where the insured has acted in bad faith, by procuring a policy through fraud or breached the insurance contract. Issues of comparative fault may also come into play in this situation.
Fussner, supra at 827-8. 3
Claims of Bad Faith Failure to Defend
If an insurer acts in bad faith in failing to provide a defense it may find itself subject to both a breach of contract claim and a bad faith claim. Fussner, supra at 833. An insured’s duty to defend in tort also arises out of the covenant of good faith and fair dealing that is inherent in all contracts. Id. The duty to defend however is also a contractual duty, and is provided to the insured and not the injured party. Id. Parties to an insurance policy can contractually limit the duty to defend. Id. at 836. This allows an insurer to protect itself from a failure to defend action by showing that the insured’s claim fell within a specific policy exclusion. Id. 4
Claims for Bad Faith Refusal to Settle and Failure to Defend
In this situation, the insurer has refused to defend the insured and in the process also has refused to settle the suit against the insured within the limits of the policy although such settlement was demanded. Fussner, supra at 836. The question then becomes to what extent the insurer is liable for the judgment in excess of the policy limits. Id. at 837. In Missouri, where an insurance company is guilty of both a failure to defend and a bad faith refusal to settle, the insured is given the right to recover in excess of the policy limits. Landie v. Century Indem. Co., 390 S.W.2d 558, 563 (Mo. App. 1965).
Recently, with Scottsdale, the Court stepped into the middle of bad faith law in Missouri and opened the door a little wider for claimants, by allowing bad faith claims to be brought by third party excess insurance carriers against primary insurance companies.
Current Bad Faith Law in Missouri As Clarified by Scottsdale
In Scottsdale Ins. Co. et. al. v. Addison Ins. Co., et. al., 448 S.W.3d 818 (Mo. banc. 2013), the Missouri Supreme Court seems to simplify the elements of a bad faith refusal to settle claim in Missouri. The Court started out in it’s bad faith analysis noting that it had first recognized a bad faith refusal to settle action in the case of Zumwalt v. Utilities Ins. Co., 360 S.W.2d 750 (1950). The Court stated that under Zumwalt, where an insurer is guilty of fraud or bad faith in refusing to settle a claim against an insured within the policy limits, a claim of bad faith refusal to settle can be made against the insurance company. Id. at 753. According to the Supreme Court of Missouri, the elements of a bad faith refusal to settle action exist when a liability insurer:
- Reserves the exclusive right to contest or settle any claim
- Prohibits the insured from voluntarily assuming any liability or settling any claims without consent
- Is guilty of fraud or bad faith in refusing to settle a claim within the limits of the insurance policy
Of interest, is that the court did not include as an element of the claim that the insured must demand that settlement within the policy limits be made. This is a change from Missouri case law under the approach taken in the Dyer case. It appears that the insured is no longer required to demand that settlement be made within the limits of it’s insurance policy for a bad faith refusal to settle claim to proceed in Missouri Courts.
Under Scottsdale, Excess Insurance Carriers Now Can Pursue Bad Faith Claims Against Primary Insurance Companies
In Scottsdale Ins. Co, et. al. v. Addision Ins. Co., et al, 448 S.W.3d 818, 821 (2014), the Supreme Court also took up the unanswered question of whether or not an excess insurance carrier could pursue a claim of bad faith against a primary insurance company. In 2007, an employee of Wells Trucking was involved in an automobile accident that resulted in the death of another driver. Id. The employees speed and failure to drive in the proper lane were cited as contributing to cause the accident. Id. At the time of the accident, Wells Trucking had a primary insurance policy with United Fire with a liability limit of one million dollars. Id. at 822. Wells Trucking also had an excess insurance policy for two million dollars with Scottsdale Insurance Co. (hereafter referred to as “Scottsdale”) that would not apply unless and until the underlying United Fire policy had paid its policy limits. Id.
The family of the driver who was killed in the accident entered into negotiations with United Fire to try to settle any claims they might have against Wells Trucking. Scottsdale, 488 S.W.3d. at 822. They ultimately filed a wrongful death suit against Wells Trucking and its employee, but settlement discussions continued. Id. From April 2008 to October 2009, the Plaintiff’s repeatedly attempted to settle the case with United Fire. Id. at 822-23. Wells Trucking and Scottsdale continually demanded that United Fire settle the lawsuit for up to its one million dollar policy limits which is the amount that the plaintiff’s were demanding in settlement. Id. The information and evidence in United Fire’s possession clearly showed that Wells Trucking was exposed to a possible judgment in excess of the one million dollar policy limits. Id. at 823. Eventually the deceased driver’s family withdrew their one million dollar settlement demand and raised their demand to three million dollars. Id. The plaintiff’s then offered to go after Scottsdale for the additional two million dollars if United Fire would pay its one million dollar policy limits. Id. Only then did United Fire give plaintiff the one million dollar policy limits in settlement of the wrongful death claim against its insured. Id. In October of 2009, United Fire, Scottsdale, and the plaintiff’s mediated the case, which resulted in United Fire and Scottsdale each tendering one million to settle the case for a total settlement of two million dollars. Id. at 822. Wells Trucking then assigned to Scottsdale its rights to pursue a bad faith refusal to settle claim against united Fire, and Wells Trucking and Scottsdale filed a bad faith refusal to settle claim against United Fire. Id.
At the trial court level, United Fire filed a Motion for Summary Judgment alleging that Scottsdale as an excess carrier could not bring a bad faith refusal to settle claim against United Fire under any legal theory and that Scottsdale and Wells Trucking could not establish all the elements of a bad faith refusal to settle claim. Scottsdale, 488 S.W.3d at 822. Specifically, United Fire stated that it did settle the wrongful death case within the policy limits and also pointed out that Wells Trucking never suffered an excess judgment. Id. The trial court granted United Fire’s Motion for Summary Judgment, and held that:
- There was no duty of good faith between primary and secondary insurers
- That Missouri law does not permit an excess insurer to bring an action for bad faith refusal to settle based upon any theory of subrogation
- That Wells Trucking was not subjected to a judgment in excess of the policy limits
- That United Fire did not refuse in bad faith to settle the claim within the liability limits of the policy at issue
Id. at 824.
Scottsdale appealed to the Missouri Court of Appeals for the Western District which found that Scottsdale could pursue its bad faith claim against United Fire under a theory of equitable subrogation. Scottsdale, 488 S.W.2d. at 825. See also, Scottsdale Ins. Co. et. al, v. Addison Ins. Co. et. al., WD75963, 2 (Mo. App. 2013). United Fire then appealed that decision to the Supreme Court.
Wells Trucking and Scottsdale presented the Supreme Court with following theories that would allow them to pursue a bad faith refusal to settle claim against United Fire:
- Assignment from Wells Trucking
- Conventional subrogation
- Equitable subrogation
- A duty of good faith that United Fire owed directly to Scottsdale
Scottsdale, 448 S.W.3d at 825.
The Supreme Court first reversed the trial courts grant of Summary Judgment to United Fire. Id. at 829. The Court pointed out that an excess judgment against an insured was not required in order to bring a bad faith refusal to settle claim against an insurance company. Id. at 828. Nor was the fact that United Fire ultimately did settle the claim within its policy limits a defense to its actions. Id. If Wells Trucking and Scottsdale could prove that United Fire’s failure to act on the plaintiff’s earlier settlement demands was in bad faith, and caused Wells Trucking to lose it’s opportunity to fully settle the claim only within United Fire’s policy limits, United Fire could not then evade liability by later agreeing to pay it’s policy limits. Id. at 828-9. The Supreme Court then went on to outline three legal theories that would allow Scottsdale to pursue a bad faith refusal to settle claim against United Fire. Id. at 829.
An action for bad faith refusal to settle a claim is considered a tort. Scottsdale, 488 S.W.3d at 829. Because it is a tort that arises from a contract of insurance that is not of a purely personal nature, it is considered an assignable tort. Id. at 830. The Court concluded that an action for bad faith refusal to settle is assignable and because Wells Trucking has an action for bad faith refusal to settle, Scottsdale may pursue a bad faith refusal to settle claim under assignment from Wells Trucking. Id. at 830.
2) Conventional Subrogation
Subrogation is the substitution of another in the place of a creditor, so that the party in whose favor subrogation is exercised succeeds to the rights of a creditor. Scottsdale, 448 S.W.3d at 830. Conventional subrogation is a right which arises from a contract. Id. Scottsdale’s policy with Wells Trucking had a provision that granted to Scottsdale a right to subrogate any recovery by Wells Trucking of payment that Scottsdale made under the excess insurance policy. Id. Because Scottsdale paid one million dollars toward the settlement of the wrongful death claim under the policy, it had a right under that provision in the insurance policy to recover that amount, and therefore could use conventional subrogation to do so. Id.
3) Equitable Subrogation
The court then went on to note that Missouri has long recognized a doctrine of equitable subrogation. Evans v. Halleck, 83 Mo. 376 (1884). In this case, the court found the question to be whether an excess insurer who pays a third-party claim on behalf of its insured after a primary insurer refuses in bad faith to settle the claim has a right to equitable subrogation to obtain the amount paid from the primary insurer. Scottsdale, 488 S.W.3d at 831-2. The Court noted that an insurer’s duty to act in good faith does not go away just because a careful insured has obtained excess coverage. Id. at 832. Regardless of the existence of an excess insurer, a primary insurer should be held liable when it acts in bad faith in refusing to settle within its policy limits. Id. Therefore, Scottsdale, as the party that actually paid the loss caused by United Fire’s bad faith, Scottsdale was equitably subrogated to the rights of Wells Trucking and able to bring a bad faith refusal to settle claim in the name of Wells Trucking. Id.
The only bright spot for insurance companies in Scottsdale, was that the Supreme Court declined to find that a primary insurer owes an independent duty to settle in good faith directly to an excess insurer. Scottsdale, 448 S.W.3d at 833. However, under Scottsdale we have the following changes to bad faith law in Missouri:
- The insured no longer has to demand judgment to meet the elements of a bad faith failure to settle claim
- Bad faith claims can proceed even if the insured suffers no direct damages in excess of the policy limits
- Insurers can be found to have acted in bad faith even when they tender the policy limits depending upon the facts of the case
- Excess carriers can pursue bad faith claims against primary carriers under theories of assignment, equitable and conventional subrogation
So it would appear the Supreme Court has expanded and simplified bad faith law in Missouri. Insurance companies would do well to be cautious in deciding not to defend their insureds or failing to accept settlement demands within insurance policy limits if they want to avoid exposure for bad faith claims in the state of Missouri.
1 This would also include claims for vexatious refusal to pay under Missouri Revised Statute §375.296 or §375.420. Fussner, supra at 809-10. These statutory causes of action are related to the subject of this article.
2 Scottsdale Ins. Co., et. al. v. Addison Ins. Co., et. al., 448 S.W.3d 818 (Mo. banc. 2014).
3 It should also be noted that there is a 5 year statute of limitations that applies to bad faith actions as they are considered torts. Fussner, supra at 827.
4 It should be noted that breach of contract actions are governed by a five year statute of limitations. Fussner, supra at 836.