Insurance Law Update: Louisiana Supreme Court Rules on Bad Faith for Insurers

KELLY v STATE FARM FIRE & CASUALTY COMPANY, 169 So.3d 328, 2015 WL 2082540 (May 5, 2015)

In a very important decision for insurers in Louisiana, the federal 5th Circuit Court of Appeals recently certified two questions to the Louisiana Supreme regarding liability for bad faith under Louisiana Revised Stature 22:1973. In the case of Kelly v State Farm Fire & Casualty Company decided May 5, 2015, the Supreme Court found an insurer can be found liable for a bad faith failure to settle under Louisiana Revised Statute 22: 1973 (A) even if the insurer never received a firm settlement offer. The Supreme Court also found an insurer can be found liable for misrepresenting or failing to disclose facts that are not related to coverage under its policy under Louisiana Revised Statute 22:1973 (B)(1).

The facts of the case: Kelly (“Kelly”) was injured on November 21, 2005 in an automobile accident with Thomas (“Thomas”) who had liability insurance with State Farm. Thomas and Kelly were driving in opposite directions, when Thomas turned left and struck Kelly. Thomas had failed to yield to oncoming traffic but maintained he was not at fault. Kelly was taken to a hospital by ambulance and treated for a fractured femur. He remained hospitalized for approximately six days. The cost of his medical care totaled $26,803.17.

Kelly’s attorney mailed a letter to State Farm in January 2006 regarding Kelly’s injuries which included copies of his hospital records and bills concerning his treatment. In that letter, he noted he would release State Farm and the insured Thomas if they paid the policy limits which were $25,000. The letter asked State Farm to call within ten days but State Farm did not respond to the letter. Kelly’s attorney did speak with State Farm representatives two months later in March 2006 during which time the State Farm representative offered to settle the case for $25,000. It followed that conversation with a letter sent to Kelly’s attorney memorializing the offer. Kelly’s attorney responded that the offer was rejected and later filed suit against Thomas. The same day State Farm received word its offer was rejected, it sent Thomas a letter informing him of the possibility of personal liability and suggesting he retain independent counsel. The letter from State Farm did not mention the letter from Kelly’s attorney, the later State Farm offer to Kelly, nor the amount of Kelly’s medical bills.

Kelly’s lawsuit against Thomas proceeded to a trial and Thomas was found liable and cast in judgment for $176,464.07, plus interest. State Farm paid Kelly the policy limit of $25,000. After judgment was rendered against him, Thomas entered into a compromise agreement with Kelly in which Thomas assigned to Kelly his right to pursue a bad faith action against State Farm. In exchange, Kelly promised not to enforce the judgment against Thomas’ personal assets. Kelly filed suit against State Farm, alleging State Farm was liable for bad faith practices under Louisiana law. State Farm removed the case to federal district court. The district court discerned two potentially actionable claims from the petition, which were described by the appeals court as: “(1) failing to notify Thomas of Kelly’s letter with the medical records and bills and offer to settle and (2) failing to accept Kelly’s settlement offer.”

State Farm filed a motion for summary judgment seeking dismissal of both claims. The district court partially granted State Farm’s motion finding the letter from Kelly’s lawyer did not constitute a settlement offer and that State Farm did not have a duty to notify Thomas when the letter was received. The district court denied summary judgment on the second claim, however, stating Kelly might be able to prove State Farm’s failure to settle his insurance claim constituted bad faith.

State Farm moved the district court for reconsideration arguing State Farm could be liable for bad faith failure to settle only if it failed to accept an actual offer and acted in bad faith. According to State Farm’s argument, the district court’s finding the letter from Kelly’s lawyer did not constitute an offer necessarily precluded liability on Kelly’s second claim. The district court agreed and revised its opinion to grant a full summary judgment in State Farm’s favor. Kelly appealed the summary judgment dismissal of his two claims.

On appeal, a three-judge panel of the Fifth Circuit court of appeals affirmed in part and reversed in part. The original panel of the 5th Circuit court affirmed dismissal of what the court would later identify as the second claim (i.e., the duty to settle claim), reasoning that “[b]ecause Kelly’s purported settlement letter and medical receipts did not constitute ‘a satisfactory proof of loss from the insured,’ Kelly cannot maintain a claim as a matter of law.” However, the court reversed dismissal of the first claim (i.e., the duty to inform claim), explaining:  The only communication between State Farm and Thomas alleged here consisted of a single letter in which State Farm told Thomas he might face personal liability and that he should consider seeking independent counsel. At no point did State Farm inform Thomas the extent to which Kelly’s medical bills exceeded his policy limits, nor did State Farm tell Thomas that it had made a settlement offer that was rejected by Kelly. In short, State Farm sent a single, cursory communication to Thomas, and it cannot be said as a matter of law that this letter communicated the pertinent facts necessary for Thomas to determine what was in his best interest. Therefore, State Farm was not entitled to judgment as a matter of law on Kelly’s claim under § 22:1973(B)(1).

Both parties filed petitions for rehearing, which were granted. However, in doing so, the Fifth Circuit appeals court withdrew its earlier opinion and issued another opinion certifying two questions of Louisiana law to the Supreme Court of Louisiana.

These first of these questions called for an interpretation of La. R.S. 22:1973(A), which states as follows:

“An insurer, including but not limited to a foreign line and surplus line 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.”

The first specific question the appeals court posed for the Supreme Court was: Can an insurer be found liable for a bad-faith failure-to-settle claim under subsection A of La. R.S. 22:1973 when the insurer never received a firm settlement offer?

In answering this question, because the rights of Thomas (the policy holder) were assigned to Kelly, the decision of the Supreme Court addressed whether La. R.S. 22:1973(A) afforded an insured a cause of action for a bad-faith failure-to-settle claim. The Court determined that the plain language of the statute supported the existence of a cause of action in favor of the insured under La. R.S. 22:1973(A). The decision reviewed case law and the remedial intent in the enactment of La. R.S. 22:1973 (A) which was a legislative recognition of a cause of action found earlier only in the jurisprudence.

Once they found that a cause of action existed,  they then addressed whether an insurer must receive “a firm settlement offer” as a condition for an insured to recover for the insurer’s bad-faith failure-to-settle. The Supreme Court noted the issue to be whether the legislature imposed a requirement in La. R.S. 22:1973(A) that a claimant submit a firm settlement offer for there to be liability under the statute. They looked at the relevant language of the statute which provided: “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.” In addressing the “affirmative duty” language used in La. R.S. 22:1973(A), the Court found it meant to take positive action(s) to comply with a legal standard and the statute listed two positive steps to meet that duty. Particularly, an insurer is required “to adjust claims fairly and promptly” and also “to make a reasonable effort to settle claims with the insured or the claimant, or both.”

Examining that affirmative duty under the facts of the Kelly case, the Court further narrowed the issue as follows: whether an insurer’s affirmative duty to make a reasonable effort to settle claims is triggered only by receipt of a firm settlement offer. They went on to state that the clearest indicator a firm settlement offer is not required is the fact it was not listed anywhere in the statute. They concluded to impose the requirement of a firm settlement offer would essentially amount to adding words not included in the statute. Then, turning to what it called “practical considerations” the Court noted the insured had no control over whether a firm offer will be submitted. While noting that the insurer also had no control whether a firm offer would be submitted, they noted the insurer undertakes the obligation to protect the insured. “[I]n every case, the insurance company is held to a high fiduciary duty to discharge its policy obligations to its insured in good faith-including the duty to defend the insured against covered claims and to consider the interests of the insured in every settlement.” They therefore concluded an insurer could be found liable for a bad-faith failure-to-settle claim even if the insurer never received a firm settlement offer.

The second certified question asked the Louisiana Supreme Court to decide whether an insurer can be found liable under La. 22:1973(B)(1) for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage.

The pertinent language of La. R.S. 22:1973(B) prohibits: “Misrepresenting pertinent facts or insurance policy provisions relating to any coverages at issue.” 

Because the interpretation of La. R.S. 22:1973(B)(1) hinges on the word “or,” we take direct legislative guidance from La. R.S. 1:9: “Unless it is otherwise clearly indicated by the context, whenever the term ‘or’ is used in the Revised Statutes, it is used in the disjunctive and does not mean ‘and/or’.” While it is possible to interpret “or” to mean “and/or,” La. R.S. 1:9 instructs that we may only reach that conclusion if “clearly indicated by the context.” The Court concluded it must give the word “or” a disjunctive meaning otherwise it would render the first phrase (“pertinent facts”) of the statute “both redundant and meaningless” because misrepresentations about insurance policy provisions are addressed in the second phrase following the word “or.” They conclude that “the wording … is clear and free of ambiguity,” and they therefore applied the word “or” disjunctively. In other words, it meant an insurer can be liable under La. 22:1973(B)(1) for misrepresenting either: 1) “pertinent facts,” or 2) “insurance policy provisions relating to any coverages at issue.”

The Court summarized by answering to the second certified question that an insurer can be found liable under La. R.S. 22:1973(B)(1) for misrepresenting or failing to disclose facts not related to the insurance policy’s coverage. In other words, the statute prohibits the misrepresentation of “pertinent facts,” without restricting those to facts “relating to any coverages.” The Fifth Circuit, in response to this holding, vacated the decision of the district court and remanded the case to be decided in conformity with the Louisiana Supreme Court decision.

This holding of this case emphasizes insurers must exercise greater caution when acting on behalf of their insureds. They must make sure that they disclose all pertinent facts to the insured regarding the handling of claims. They must also take all reasonable steps to settle claims without the necessity of a firm settlement offer being made. The Louisiana Supreme Court appears to have changed the bad faith landscape. Insurers can no longer consider themselves without risk of exposure for an excess verdict merely because a demand to settle within the insured’s limit of liability was never made.