No Firm Settlement Offer Needed to Trigger Insurer’s Duty to Settle
An insurer in Louisiana potentially faces damages for bad faith failure to settle a claim, even if it does not receive a firm offer to settle the claim.
Louisiana Revised Statute 22:1973(A) provides: “An 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.” Last May, the Louisiana Supreme Court issued an important decision interpreting this statute, Kelly v. State Farm Fire & Casualty Co., 2014-1021 (La. 5//5/15); 169 So. 3d 328. This case had been certified to the Supreme Court by the U.S. Fifth Circuit Court of Appeals.
The Supreme Court began its analysis by clearly holding, for the first time, that an insured has a cause of action under La.R.S. 22:1973(A) if its insurer fails to settle a claim and is in bad faith. In reaching this holding, the Court relied upon earlier 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.” Moving on from this precedent, the Court answered the more difficult question, which was whether an insurer could be liable for damages for failure to settle a claim under Section 1973(A) if it did not receive a firm settlement offer. In Kelly, the claimant’s attorney had simply written to the insurer indicating that he would “recommend” settlement of the claim for policy limits.
In deciding this issue, the Court confirmed existing jurisdiction which held that 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.” Instead, the Court observed that 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 continued its analysis by noting that the statute, La.R.S. 22:1973(A), does not include any language limiting it to the receipt of a firm settlement offer. The Court also observed that neither the insurer nor the insured has control over whether a firm settlement offer is received, yet the insurer nonetheless has an obligation to protect the insured. As a result, the Supreme Court held that the insurer’s duty to settle a claim in good faith is not dependent upon the receipt of a firm settlement offer. “Therefore, we see 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.”
The Court also decided a second question certified by the U.S. Fifth Circuit. This issue involved the interpretation of the next section of La.R.S. 22:1973, section B(1), which provides: “(B) 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 held that an insurer violates this section only if it misrepresents facts relating to coverage. However, the Supreme Court explicitly overruled those cases, determining that Section B(1) was clearly disjunctive, setting forth two potential violations: (1) misrepresenting “pertinent facts” or (2) misrepresenting “insurance policy provisions relating to any coverages at issue.” This issue arose because, after the insurer failed to settle the claim with the claimant, it merely advised the insured that it faced potential personal liability in the claim and advising the insured to retain counsel. It did not advise the insured about the claimant’s attorney’s offer to recommend settlement or the insurer’s response, or advise the insured about the amount of the claimant’s medical bills. Although the Supreme Court answered the certified question, it did not have to determine whether the circumstances presented by the case violated La.R.S. 22:1973(B)(1).