March 23, 2009

TO ALL INTERESTED COMPANIES

I.

INSURED PROHIBITED FROM SUING FIRST PARTY PROPERTY INSURER ON THEORIES OF TORT AND NEGLIGENT MISREPRESENTATION

The Missouri Court of Appeals for the Eastern District (St. Louis) has recently ruled in Ryann Spencer Group, Inc. v. Assurance Company of America, ___ S.W. 3d ___ (Mo. App. E.D. 2008) (2008 WL 4330329), that dismissal of claims for fraud and negligent misrepresentation was proper, where suit was brought for coverage under property insurance policy.

In this case the insured, Ryann Spencer Group, obtained a policy of insurance from Assurance Company of America through an insurance broker and requested that its property be insured to its “full fair market value” against risks of fire and other perils.  A fire occurred and within 31 days following the fire, Ryann Spencer sued Assurance and the agent because the claim had not been paid.  In addition to alleging breach of contract and vexatious refusal to pay, Ryann Spencer alleged fraud on the basis that Assurance represented that it would pay claims in a timely manner as required under Missouri statutes.  It also alleged negligent misrepresentation based on failure to pay the claim. 

The court, in it analysis, held that although the petition, on its face, set forth sufficient facts to plead fraud and negligent misrepresentation, those claims cannot be asserted on a property insurance policy, unless the tort liability arises from an independent tort.  Where, the insurer simply fails to pay, this does not rise to the level of an independent tort.  The court distinguished the case of Overcast v. Billings Mutual Ins. Co., 11 S.W. 3d 62 (Mo. Banc 2000) because that case concerned a defamation suit which the court held was a separate tort, independent of the failure to pay under the policy. 

In substance, the court held that the insured could not re-characterize a breach of contract claim as a tort claim and where the insurer simply refuses to pay, the action is in breach of contract and not in tort.  The court also recognized that the fraud and negligent misrepresentation claims fell within the insured’s claim for vexatious refusal to pay, which claim is ancillary to the claim for breach of the insurance contract.

II.

MISSOURI COURT OF APPEALS HOLDS THAT CLAIM REPRESENTATIVE
IS NOT PERSONABLY LIABLE FOR BAD FAITH FAILURE TO SETTLE

In Shobe v. Roxanne Kelly & Allstate, ___ S.W. 3d ___ (Mo. App. W.D. 2009) the Missouri Court of Appeals held that an insurance claim representative was not personably liable for claims made against her for bad faith failure to settle under an auto liability policy.  However, the insurance company that employed the claim representative was liable. 

In this case the insured, Shobe, had an accident with a vehicle that she was test driving for a possible purchase.  She had actually given the owner a $500 down payment and was allowed to keep the vehicle for an extended test drive.  She apparently had kept the vehicle for several days before the accident occurred.  Before the accident she told the Allstate agent that she had the vehicle and the agent advised her that she thought there was a problem with the vehicle identification number, which problem was not resolved before the accident in January of 1998. 

Allstate assigned claim representative Kelly to handle the liability claim.  Kelly had concerns about coverage but did not advise Shobe of her concerns.  Kelly wrote to the claimant stating that Allstate did not have coverage for the accident and obtained an opinion from “in house counsel” who advised that the accident was not covered.  Later, Kelly gave a deposition and said  she made a conclusive determination of no coverage before speaking with a lawyer and that she did not consider Shobe’s financial interest. 

Kelly also obtained a coverage opinion from outside counsel, who was of the opinion that Shobe was not covered for the accident.  An examination under oath of Shobe was taken by outside counsel who gave a second opinion that the accident was not covered.  In November of 1998 Allstate advised Shobe that it would not cover the accident.

In February of 1999 suit was filed by the claimant and, while Allstate originally decided to defend under a reservation of rights and file a declaratory judgment action, it later retracted this decision and apparently refused to defend Shobe.  In June of 2000 the claimant sent a letter offering to settle the claims for Shobe’s policy limit of $50,000, which was rejected on the basis that there was no coverage for the accident.  A judgment was later entered in favor of the claimant against Shobe for $138,339. 

The claimant then filed an equitable garnishment against Allstate and collected the $50,000 policy limit.  In that case the court determined that Shobe was covered by Allstate’s policy and this decision was affirmed on appeal (Lott v. Allstate, 131 S.W. 3d 439 (Mo. App. W.D. 2004).  Allstate then paid the policy limit of $50,000 and interest; however, $124,341 was still owed on the judgment to the claimant which Allstate did not pay.. 

Shobe then filed a bad faith suit against Allstate and Kelly and obtained a verdict for $500,000 in actual damages and $500,000 in punitive damages.  On appeal the court determined that the claim representative, Kelly, had no personal liability for bad faith failure to settle.  In reaching this decision the court reasoned that bad faith failure to settle is based on a tort theory of liability arising from the fiduciary relationship between an insurer and its insured.  A claim representative only acts as the agent of the insurer and does not personally control the settlement.  Thus, a claim representative cannot be held personally liable for bad faith failure to settle.  However, the activities of the claim representative, including the claim representative’s mental state, can be imputed to the insurer, as was done in this case.

ELEMENTS OF BAD FAITH

One of the elements of bad faith refusal to settle is that the insurer has assumed control over the legal proceedings brought against its insured.  In this case, however, Allstate refused to defend and therefore, argued that it did not assume control and could not be held for bad faith failure to settle.  The court, in refusing to accept this argument, held that where an insurer wrongfully denies coverage and refuses to defend or engage in settlement negotiations, it cannot avoid liability for wrongful refusal to settle.  Also, the court held that wrongful denial of coverage excuses the insured from having to demand that the insurer settle within policy limits. 

In this case, Allstate argued that Shobe had not proven bad faith by sufficient evidence; however, the court disagreed.  The elements that the court pointed out which were sufficient for the jury to find bad faith on the part of Allstate were:

1. Allstate concluded that Shobe had no coverage before investigating the facts.
2. Allstate denied coverage to injured claimants before a full investigation.
3. Allstate accepted legal conclusions from outside counsel which contained no citation to legal case authorities.
4. Allstate ignored Shobe’s financial interest, made no inquiry as to the extent of the claimant’s injuries or the risk to Shobe of an excess judgment.
5. Allstate rejected a settlement offer within policy limits without advising Shobe of the offer.
6. Allstate considered defending under a reservation of rights and filing a declaratory action which implied that coverage was in doubt.

PUNITIVE DAMAGES

In order to obtain punitive damages in a bad faith case, more than a showing of bad faith is required.  (The bad faith showing simply allows the insured to recover “actual” damages for bad faith.)  For punitive damages the plaintiff must present “clear and convincing evidence that the insurer’s conduct was outrageous because of evil motive or reckless indifference.  The court held that the evidence also supported punitive damages in that:

1. Kelly testified that Allstate did not consider Shobe’s interest as its insured.
2. There was evidence that the coverage decision was made before investigation, was confirmed without adequate investigation and made contrary to existing law. 
3. Outside counsel’s opinion letter to Allstate included information about Shobe’s age, race, number of children and occupation.  At trial Shobe asked the jury to infer that Allstate denied coverage because it presumed Shobe did not have the financial resources to challenge its decision. 

ACTUAL DAMAGES

The actual damages (also referred to as “compensatory damages”) awarded were in the amount of $500,000; however, the amount of the unpaid excess verdict at the time of trial was $160,000.  Allstate argued that this amount plus Shobe’s attorney fees in the underlying action (which Allstate refused to defend) should be the limit of recoverable damages for bad faith.  The court disagreed holding that since bad faith is a tort action, the insurer is liable for the damages proximately caused by its bad faith.  The court held that Shobe’s damages could include a recovery for the 10 years of litigation that she has undergone, her fears of bankruptcy, her economic losses in credit, interest rates and insurance as well as “intangibles” not easily calculated.  Shobe’s experts testified that the judgment against her would affect her credit history for 10 years, that the interest rate she was paying was higher than market rate, that the judgment also had affected her insurance premiums and her ability to obtain insurance.  Therefore, the award of both actual and punitive damages was affirmed.

Please contact us if you desire to have copies of these opinions.

SCHMITT MANZ SWANSON & MULHERN
Stephen D. Manz
1000 Walnut, Suite 800
Kansas City, MO  64106
Phone: 816/472-5310, Ext. 305
smanz@msmlawkc.com