RECOGNIZING BAD FAITH CASES Michael J. Mohlman Smith Coonrod Mohlman, LLC 7001 W. 79th Street Overland Park, KS 66204 Telephone: (913) 495-9965; Facsimile: (913) 894-1686 mike@smithcoonrod.com www.smithcoonrod.com A. INTRODUCTION Bad faith is a state of mind, indicated by acts and circumstances, and is provable by circumstantial as well as direct evidence. Zumwalt v. Utilities Ins. Co., 228 S.W.2d 750 (Mo. 1950). A bad faith action involves three parties: the injured party, the insured and the insurer. An insurance bad faith claim may arise when the insurer fails to defend a lawsuit or fails to keep the insured s interest in mind when negotiating settlement. The most common bad faith claim arises when the insurer fails to settle a claim against within the applicable policy limits and the resulting judgment is in excess of those limits. An insurance company has a fiduciary duty under its contract of insurance to defend and indemnify its insured. In doing so, the insurer must give at least equal consideration to the insured s interest as it does to its own. B. DUTY TO DEFEND A claim for violating the duty to defend sounds both in tort and contract. The duty to defend will arise from the contract of insurance. But if the complaint alleges facts which are state a claim that is potentially or arguably within policy coverage, the insurer has a duty to defend. Bonner v. Automobile Club Inter-insurance Exch., 899 S.W.2d 925 (Mo. Ct. App. 1995). The failure to defend is a breach of the contract between the insurer and insured. If the insurer acts in good faith in refusing to defend a suit brought against the insured, then its only liability will be for breach of contract. If, however, the insurer does not act in good faith in refusing to defend, a bad faith claim may be brought if it is later determined that coverage existed. In that situation, the insurer may be liable for amounts
in excess of the policy limits. Landie v. Century Indemnity Co., 390 S.W.2d 558 564 (Mo. Ct. App. 1965 C. DUTY TO SETTLE Under Missouri law, when an insurer has an opportunity to settle a claim against its insured within the policy limits, but fails to do so, it can be liable for a bad faith refusal to settle. Overcast v. Billings Mut. Ins. Co., 11 S.W.3d 62 (Mo. banc 2000); Ganaway v. Shelter Mut. Ins. Co., 795 S.W.2d 554 (Mo. Ct. App. 1990). The four elements of a bad faith refusal to settle case are: (1) the insurer must assume control over negotiations, settlement, and legal proceedings; (2) the insured must demand that the insurer settle the claim; (3) the insurer must refuse to settle the claim within the liability limits of the policy; and (4) the refusal to settle must be in bad faith. Dyer v. General American Life Ins. Co., 541 S.W.2d 702, 704 (Mo. Ct. App. 1976). Facts that indicate bad faith on the insurer s part include: 1. Attempts to escape policy obligations by intentionally disregarding the financial interests of the insured; 2. Failing to foresee a probably excess verdict; 3. Failing to disclose policy limits to the claimant; 4. Improperly investigating a claim; 5. Improperly evaluating a claim; 6. Failing to advise the insured of a potential excess judgment; and 7. Failing to advise the insured of the existence of settlement offers; If an insurer is found liable for bad faith refusal to settle, it may be held liable over and above its policy limits. Landie v. Century Indem. Co., 390 S.W.2d 558, 563 (Mo. Ct. App. 1965). In fact, an insurer found liable for bad faith refusal to settle is liable for an amount equal to the amount the insured was forced to pay on the claim not settled by virtue of an excess verdict. Dyer, 541 S.W.3d 704-05.
D. BAD FAITH/VEXATIOUS REFUSAL IN THE UM/UIM CONTEXT. First party bad faith in Missouri is called vexatious refusal to pay. This type of claim typically arises when there is a dispute as to whether or not the claimed loss is covered by the policy. Vexatious refusal to pay is governed by two statutes: RSMo. 375.296 and 375.420. Section 375.296 states: In any action, suit or other proceeding instituted against any insurance company, association or other insurer upon any contract of insurance issued or delivered in this state to a resident of this state, or to a corporation incorporated in or authorized to do business in this state, if the insurer has failed or refused for a period of thirty days after due demand therefor prior to the institution of the action, suit or proceeding, to make payment under and in accordance with the terms and provisions of the contract of insurance, and it shall appear from the evidence that the refusal was vexatious and without reasonable cause, the court or jury may, in addition to the amount due under the provisions of the contract of insurance and interest thereon, allow the plaintiff damages for vexatious refusal to pay and attorney's fees as provided in section 375.420. Failure of an insurer to appear and defend any action, suit or other proceeding shall be deemed prima facie evidence that its failure to make payment was vexatious without reasonable cause. RSMo. 375.296 This section allows for the imposition of penalties and attorneys fees. To succeed under this section, and to obtain those penalties and fees, the insured must show the following: 1. A claim based on an insurance contract issued or delivered in Missouri to a Missouri resident; 2. A demand made by the insured for payment in accordance with the terms of insurance policy;
3. Thirty days have elapsed since the demand was made and the insurer has failed or refused to pay; 4. The refusal to pay was vexatious and without reasonable cause. A vexatious refusal to pay is one where the insurer's refusal to pay the loss was willful and without reasonable cause, as the facts would appear to a reasonable and prudent person. De Witt v. American Family Mut. Ins. Co., 667 S.W.2d 700, 710 (Mo. 1984) In determining whether the carrier s refusal was vexatious, the situation must be examined as presented to the insurer at the time it was called on to pay. Russell v. Farmers & Merchants Ins. Co., 834 S.W.2d 209, 221 (Mo. App. S.D. 1992). A claim for vexatious refusal to pay can be pled in the same petition as the underlying action on the uninsured motorist coverage. Walker v. Commercial Union Ins. Co., 879 S.W.2d 596, 600 (Mo. App. E.D. 1994); Thomas v. American Cas. Ins. Co., 871 S.W.2d 460, 462 (Mo. App. W.D. 1993); Shafer v. Automobile Club Inter-Insurance Exch., 778 S.W.2d 395, 399 (Mo. App. S.D. 1989). The simple fact that a litigable issue exists, either factual or legal, does not preclude a vexatious penalty where there is evidence the insurer s attitude was vexatious and recalcitrant. DeWitt, 667 S.W.2d at 710. Moreover, direct and specific evidence of a vexatious refusal is not required. A jury may find a vexatious refusal upon a general survey and a consideration of the whole testimony and all the facts and circumstances in connection with the case. Id. If the carrier s actions are deemed vexatious, the insured can recover the enhanced damages set out in RSMo. 375.420. That statute allows for the imposition of a statutory penalty of 20% of the first $1,500.00 of the loss, 10% of the loss in excess of $1,500.00, and a reasonable attorneys fee: In any action against any insurance company to recover the amount of any loss under a policy of automobile, fire, cyclone, lightning, life, health, accident, employers liability, burglary, theft, embezzlement, fidelity, indemnity, marine or other insurance except automobile liability insurance, if it appears from the evidence that such company has refused
to pay such loss without reasonable cause or excuse, the court or jury may, in addition to the amount thereof and interest, allow the plaintiff damages not to exceed twenty percent of the first fifteen hundred dollars of the loss, and ten percent of the amount of the loss in excess of fifteen hundred dollars and a reasonable attorney s fee; and the court shall enter judgment for the aggregate sum found in the verdict. RSMo. 375.420. Section 375.420 specifically excepts automobile liability policies. Missouri Court s, however, have held that uninsured motorist coverage is not automobile liability insurance and does not fall within the automobile liability insurance exception of 375.420. Schaffer v. Bess, 822 S.W.2d 871, 878 (Mo. App. E.D. 1991); Shafer v. Auto Club Inter-Ins. Exchange, 778 S.W.2d 395, 398 (Mo. App. S.D. 1989). Examples of situations where a refusal to pay was found to be vexatious are set out in: Anthony G. Fussner, Overview of Bad Faith Litigation in Missouri, 62 Mo. L. Rev. 807, 812 (1997). Those situations include: 1. Refusal to pay based on a suspicion that is unsupported by substantial facts. Allen v. State Farm Mut. Auto Ins. Co., 753 S.W.2d 616, 620 (Mo. App. E.D. 1988); 2. Persistence in refusal to pay after insurer becomes aware that it has no meritorious defense. Ireland v. Manufacturers & Merchants Indem. Co., 298 S.W.2d 529, 534 (Mo. App. E.D. 1957); 3. Refusal to pay based on an inadequate investigation and a denial of liability without stating a ground for denial. Allen, 753 S.W.2d at 620; and 4. Refusal to pay founded not on what appeared to be the facts, but on a possibility that later investigation would develop facts justifying a refusal to pay, even if such investigation did develop such facts. Buffalo Ins. Co. v. Bommarity, 42 F.2d 53, 57 (8 th Cir. 1930).
Kansas does not recognize bad faith. It does, however, require insurance companies to make a good faith investigation of claims. If the carrier, without just cause or excuse, refuses to pay fully a claim, the insured can recover its reasonable attorneys fees: That in all actions hereafter commenced, in which judgment is rendered against any insurance company as defined in K.S.A. 40-201, and including in addition thereto any fraternal benefit society and any reciprocal or interinsurance exchange on any policy or certificate of any type or kind of insurance, if it appear from the evidence that such company, society or exchange has refused without just cause or excuse to pay the full amount of such loss, the court in rendering such judgment shall allow the plaintiff a reasonable sum as an attorney's fee for services in such action, including proceeding upon appeal, to be recovered and collected as a part of the costs: Provided, however, That when a tender is made by such insurance company, society or exchange before the commencement of the action in which judgment is rendered and the amount recovered is not in excess of such tender no such costs shall be allowed. K.S.A. 40-256.