Insurers’ Duty To Re-Evaluate Claims

In Bamford, Inc. v. Regent Ins. Co., 822 F.3d 403 (8th Cir. 2016), the Court upheld a jury verdict against an insurer for a settlement entered into by the insured in excess of policy limits.

An employee of the insured was involved in an automobile accident, causing significant injuries to the other driver.The other driver’s attorney sent a $6 million policy limits demand to the insurer.  The demand stated that if the offer was not accepted by a certain date, the demand would increase to $10.6 million. The insured sent a letter to its insurer, demanding that the insurer settle within policy limits. However, appointed insurance defense counsel valued the case at only $1 million and told the insurer that he was working on a defense based on the argument that the employee had lost consciousness before the accident.  The defense attorney claimed that if the defense was accepted by the court, there would be no liability.

The other driver filed a lawsuit and filed a motion for summary judgment.  The trial court granted the motion, rejecting the loss of consciousness defense and finding the insured liable as a matter of law.  The trial was to proceed only on the issues of damages.

Defense counsel then requested from the insurer authority to settle up to $3 million, but the insurer refused.  As trial approached, defense counsel indicated that the case could settle in the $3 million range and that the case would never settle in the $2 million range.  The insurer’s highest offer was $2.05 million.   The plaintiff’s last demand prior to trial was $3.9 million.  At trial, the jury awarded the plaintiff $10.6 million.  The insured appealed and during the appeal, the case settled for $8 million, with the insured responsible for $2 million of the settlement beyond the $6 million policy limits.

The insured sued the insurer for breach of fiduciary duty and bad faith.   The jury returned a verdict for $2,037,754.33.  In upholding the verdict, the Court noted that the insurer failed to adjust its evaluation of the case after the trial court’s grant of summary judgment.  The Court further noted that the insurer rejected the defense counsel’s and even the adjuster’s request to increase the settlement authority to $3 million and did not increase its reserves from the previously set amount of $2.25 million. The Court indicated that the jury could have concluded that the insurer’s evaluation at the beginning of the case was reasonable but that the insurer acted in bad faith by failing to reassess the value of the claim as the case developed.

While the facts of Bamford, Inc. are unique and fairly egregious, the case illustrates the need for an insured to update the insurer constantly with all developments in the case, which might increase the insured’s exposure.  Normally, appointed defense counsel should be informing the insurer of the developments in the case but when there is significant, potential exposure, it is often helpful for the insured’s personal counsel to become involved and to provide notice to the insurer of potentially adverse developments in the case.

If potential exposure exists for a verdict or judgment beyond policy limits, the insured should inform the insurer of that exposure and request that the insurer mitigate the risks by settling within policy limits.

If actual bad faith litigation ensues, it is important to get through discovery the insurer’s internal communications among adjusters, supervisors, and managers and reserves information. Insurers are often reluctant to provide such information but as seen in Bamford, Inc., such information can be crucial for an insured to establish that the insurer improperly evaluated the case and failed to update its position in light of new information or developments in the case.

Bamford, Inc.is consistent with Hawai`i law in recognizing an insurer’s good faith obligation to consider new information and developments related to a claim.  In fact, the Hawai`i Court of Appeals has held that an insurer has a duty to consider information presented by the insured even after denying a claim and that a failure to do so constitutes bad faith. See Gamata v. Allstate Ins. Co., 90 Haw. 213, 225, 978 P.2d 179, 191 (Haw. App. 1997), overruled on other grounds, Ahn v. Liberty Mut. Fire Ins. Co., 126 Haw. 1 (Haw. 2011).