No Firm Settlement Offer Needed to Trigger an Insurer’s Duty to Settle

5
Jul

No Firm Settlement Offer Needed to Trigger an Insurer’s Duty to Settle

Under existing Louisiana Supreme Court precedent, an insurer who subjects its insured to excess judgment may be liable for bad faith failure to settle claims, even in the absence of formal demand by a claimant.  However, there are some caveats.  Louisiana Revised Statute § 22:1973(A) provides:

[a]n insurer . . . owes to his insured a duty of good faith and fair dealing. The insurer has an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims with the insured or the claimant, or both. Any insurer who breaches these duties shall be liable for any damages sustained as a result of the breach.

In Kelly v. State Farm Fire & Casualty Co., the Court interpreted La. R.S. § 22:1973 upon review of following certified questions of law from the United States Court of Appeals for the Fifth Circuit.  (2014-1021 (La. 5/5/15); 169 So. 3d 328).

  1. Can an insurer be found liable for a bad-faith failure to settle claim under § 22:1973(A) when the insurer never received a firm settlement offer?
  2. Can an insurer be found liable under § 22:1973(B)(1) for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage?

At the outset, the Court ruled the statute provides a cause of action to an insured where their carrier is found to have acted in bad faith in failing to settle a claim.  In reaching this result, the Court relied upon prior jurisprudence which provided that “Subsection A of [La. R.S. § 22:1973] recognizes the jurisprudentially established duty of good faith and fair dealing owed to the insured, which is an outgrowth of the contractual and fiduciary relationship between the insured and insurer.”

The Court subsequently Court addressed the more challenging question of whether an insurer could still be found liable for damages for failure to settle a claim under § 22:1973(A) when it never received a firm settlement offer.  In Kelly, plaintiff’s counsel had simply written to the insurer indicating that he would “recommend” his client settle for policy limits, as opposed to actually making a formal demand for policy limits.

In deciding this issue, the Court began with an acknowledgment of the Fifth Circuit’s decision in Stanley v. Trinchard, which held an “insurer is not obliged to compromise litigation just because the claimant offers to settle a claim for serious injuries within the policy limits, and its failure to do so is not by itself proof of bad faith.”  (500 F.3d at 427).  Nevertheless, the Court noted it was not bound by Stanley, given it perceived the Fifth Circuit’s ruling therein as an “Erie guess as to how this court would rule if faced with the question of whether a bad-faith failure-to-settle claim exists” under § 22:1973(A).

Conversely, the Court observed the “. . . determination of good or bad faith in an insurer’s deciding to proceed to trial involves the weighing of such factors, among others, as the probability of the insured’s liability, the extent of the damages incurred by the claimant, the amount of the policy limits, the adequacy of the insurer’s investigation, and the openness of communications between the insurer and the insured.”

The Court proceeded by noting the plain language of § 22:1973(A) did not restrict the statutory provisions to the receipt of a firm settlement offer.  The Court further observed that neither the insurer, nor the insured, possesses control over whether a firm settlement offer is received.  In any event, the Court reiterated the insurer is nonetheless bound to protect its insured from personal exposure to an excess judgment.

Accordingly, the Court held an insurer’s duty to settle a claim in good faith is not contingent upon its receipt of a firm settlement offer from a claimant.  Rather, the Court reasoned it found “. . . no practical reason why the insurer’s obligation to act in good faith should be made subject to the tenuous possibility that an insurer will receive a firm settlement offer.  Instead, the insurer’s obligation to act in good faith is triggered by knowledge of the particular situation, which knowledge ‘[t]he insurer has an affirmative duty’ to gather during the claims process.”

Thereafter, the Court turned to the second question certified by the Fifth Circuit.  This involved an interpretation of La. R.S. § 22:1973B(1), which provides: “Any one of the following acts, if knowingly committed or performed by an insurer, constitutes a breach of the insurer’s duties imposed in Subsection A of this Section: (1) Misrepresenting pertinent facts or insurance policy provisions relating to any coverages at issue.”

Some lower courts had previously held an insurer violates § 22:1973(B)(1) only if it misrepresents facts relating to coverage.  The Court, in expressly overruling that line of cases, determined § 22:1973(B)1) was clearly disjunctive, and set forth two potential violations: (1) misrepresenting “pertinent facts;” or (2) misrepresenting “insurance policy provisions relating to any coverages at issue.”

In Kelly, the insurer, after failing to reach a settlement with the claimant, merely advised the insured they faced potential personal liability and, as such, they should retain counsel.  Notably, the insurer did not specifically advise the insured about the claimant’s attorney’s offer to recommend settlement for policy limits, the insurer’s response thereto, nor the amount of the claimant’s medical expenses.

In answering the second certified question, the Court confirmed an insurer can be liable under La. R.S. § 1973(B)(1) for misrepresenting and/or failing to disclose facts unrelated to coverage, given the statute’s prohibition of misrepresentation of “pertinent facts” was not restricted to facts “relating to any coverages.”  In any event, the Court opined it was not required to determine whether the facts of Kelly violated § :1973(B)(1).

Significantly, subsequent Louisiana appellate court decisions have distinguished the Supreme Court’s interpretation of § :1973(B)(1) in Kelly as inapplicable in two circumstances.  First, Kelly is inapplicable where there is no evidence in the record to suggest an insurer failed to deal with a plaintiff’s claims against its insured in good faith.  (Larios v. Martinez, 17-514 (La. App. 5 Cir. 2/21/18), 239 So.3d 104).  Second, Kelly does not govern where judgment is rendered not against the insured, but against the insurer under Louisiana’s Direct Action Statute, La. R.S. § 22:1269(B)(1), which provides an “. . . injured person . . . shall have a right of direct action against the insurer within the terms and limits of the policy.”  (emphasis in original quotation).

In Larios, the Louisiana Fifth Circuit affirmed well-settled jurisprudence holding that, absent conflict with statutory authority or public policy, insurers possess the same rights as individuals insofar as their ability to limit liability and enforce any conditions they impose upon their obligations.  Thus, it is the insurance policy that establishes the limits of liability and forms the law between the parties.

In any event, the Supreme Court has consistently affirmed its holding in Kelly and, as such, it remains good law.  (see, e.g., Hartman v. St. Bernard Par. Fire Dep’t, 315 So.3d 823, 2021 LEXIS 725; Luv N’Care, Ltd. V. Jackel Int’l Ltd., 2020 La. LEXIS 229, 2020 WL 499164.)

In sum, the Supreme Court’s ruling in Kelly makes it clear that an insurer can be liable to its insured under La. R.S. § 22:1973 when the insurer’s failure to settle a claim results in the insured’s personal exposure to an excess judgment.  However, recent cases suggest an insurer may avoid liability when there is no evidence of bad faith and when the judgment is granted not against the insured, but against the insurer under the Direct Action Statute.