(Article from Insurance Law Alert, May 2015)
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The Louisiana Supreme Court ruled that an insurer may be liable for bad faith failure to settle under Louisiana statutory law even if the insurer did not receive a firm settlement offer. The court also held that bad faith may be based on an insurer’s failure to disclose facts unrelated to policy coverage. Kelly v. State Farm Fire & Cas. Co., 2015 WL 208254 (La. May 5, 2015).
The bad faith claims arose from an automobile accident between two parties, Kelly and Thomas. Following the accident, Kelly’s attorney sought to initiate settlement negotiations by sending a letter and copies of medical bills to Thomas’ insurer, State Farm. State Farm did not respond. More than two months later, State Farm offered to settle for policy limits ($25,000). Kelly rejected the offer. Thereafter, State Farm sent Thomas a letter noting the possibility of personal liability and suggesting that he retain independent counsel. The letter did not mention the original letter from Kelly, the settlement offer, or the amount of Kelly’s medical bills. In ensuing litigation between Kelly and Thomas, Thomas was found liable and a judgment of approximately $176,000 was issued. Kelly, as assignee of Thomas’ policy rights, sued State Farm for bad faith. The district court ruled in State Farm’s favor, finding that State Farm had no duty to notify Thomas of Kelly’s original letter to State Farm because it did not constitute a settlement offer. The court also held that State Farm could not be liable for refusing to settle without a firm settlement offer. The Fifth Circuit reversed in part and affirmed in part. The Fifth Circuit agreed that State Farm could not be liable for bad faith failure to settle because there was no formal settlement offer, but found that it could be liable for failure to communicate pertinent facts to Thomas. Noting that Louisiana appellate courts have issued mixed decisions in this context, the Fifth Circuit withdrew its opinion and sought guidance from the Louisiana Supreme Court.
Louisiana statutory law requires an insurer to make a reasonable effort to settle claims in good faith. La. R. S. 22:1973. The Louisiana Supreme Court undertook a plain language analysis of the statute and held that an insurer may be liable under section 22.1973 even absent a firm settlement offer. The court explained that the statute imposes "an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims," but makes no mention of a settlement offer as a precondition to an insurer’s affirmative duties. Thus, "[t]o impose the requirement of a firm settlement offer would essentially amount to adding words not included in the statute." The court also ruled that bad faith liability could be predicated on section 22:1973 for State Farm’s failure to disclose facts to Thomas, even if those facts were unrelated to policy coverage. The statute prohibits an insurer from "misrepresenting pertinent facts or insurance policy provisions relating to any coverages at issue." La. R. S. 22:1973(B)(1). The court reasoned that the use of the word "or" in the statute was disjunctive, meaning that an insurer can be liable for misrepresenting pertinent facts or policy provisions relating to any coverages at issue. Therefore, State Farm could be held liable for bad faith based on its failure to convey pertinent information (i.e., medical bills and correspondence from an injured party) to its policyholder.