The Supreme Court of Louisiana has ruled that an insurer can be found liable for a bad faith failure-to-settle claim even absent a firm settlement demand. Kelly v. State Farm Fire & Cas. Co., No. 2014-CQ-1921 (La. May 5, 2015). The court stated, however, that its holding did not impose a bright-line rule requiring insurers to affirmatively make settlement offers. Courts instead should determine whether an insurer has made a “reasonable effort to settle claims” on a case-by-case basis.
The insured was involved in an automobile collision with the claimant. The claimant’s attorney mailed a letter to the insurer, enclosing medical records and stating that the attorney would “recommend release” of the insurer and the insured upon payment of “the policy limit.” The insurer did not respond to the letter in writing, but subsequently offered to settle the claim for the policy limit of $25,000. The claimant’s attorney rejected the settlement offer and subsequently filed suit against the insured. Upon learning of the suit, the insurer sent a letter warning the insured of possible personal liability and advising him to retain independent counsel, but the letter did not mention the amount of the claimant’s medical bills, the attorney’s letter to the insurer, or the insurer’s offer to settle. At trial, the claimant recovered more than $176,000 against the insured, and the insurer promptly paid the policy limit of $25,000. The insured subsequently assigned his rights against the insurer to the claimant, who brought a bad faith action. The district court granted summary judgment in favor of the insurer, finding that the attorney’s letter did not constitute an actual settlement demand and thus concluding that (1) the insurer had no duty to notify the insured when the attorney’s letter was received, and (2) the absence of an actual demand precluded a failure-to-settle claim. The claimant appealed.
On several questions certified from the United States Court of Appeals for the Fifth Circuit, the Louisiana Supreme Court first determined, as a preliminary matter, that Louisiana statute 22:1973(A), which provides that insurers have a good faith “affirmative duty to … make a reasonable effort to settle claims with the insured or the claimant,” created a cause of action for bad-faith failure to settle. The court thus distinguished its holding in Theriot v. Midland Risk Insurance Co., 694 So.2d 184, 193 (La. 1997), in which the court ruled that third-party claimants do not have a generalized “bad faith” cause of action and are limited to enumerated actions in La. R.S. 22:1973(B).
The court also concluded that a “firm settlement offer is unnecessary for an insured to sustain a cause of action against an insurer for a bad-faith failure-to-settle claim, because the insurer’s duties to the insured can be triggered by information other than the mere fact that a third party has made a settlement offer.” According to the court, the statute’s plain language did not limit the insurer’s good faith “affirmative duty” only to situations where the insurer received a demand within policy limits. Instead, the insurer’s “obligation to act in good faith is triggered by knowledge of the particular situation, which knowledge the insurer has an affirmative duty to gather during the claims process.” The court posited that courts should determine whether an insurer has made “a reasonable effort to settle claims” on a case-by-case basis.
In addition, the court held that an insurer can be held liable under La. R.S. 22:1973(B), which prohibits an insurer from “[m]ispresenting pertinent facts or insurance policy provisions relating to any coverages at issue,” for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage. According to the court, the word “or” in the statute meant that an insurer could “be held liable for misrepresenting either: 1) ‘pertinent facts,’ or 2) ‘insurance policy provisions relating to coverages at issue.’” In so holding, the court overruled the Louisiana intermediate court decisions in Talton v. USAA Casualty Insurance Co., 981 So. 2d 969, 709-10 (La. App. Ct. 2008), and Strong v. Farm Bureau Insurance Co., 743 So. 2d 949, 953 (La. App. Ct. 1999), in which the courts held that an insurer can only be found liable under La. R.S. 22:1973(B) if the insurer misrepresents the coverage provided by the insurance policy.