Louisiana Supreme Court Expands Failure to Settle and Misrepresentation Claims Against Insurers

In Kelly v. State Farm Fire & Casualty Co., 2015 La. LEXIS 697 (La. May 5, 2015), the Louisiana Supreme Court answered two critical questions regarding an insurer’s claim handling responsibilities. First, the court held that an insurer can be found liable for bad faith failure to settle, notwithstanding that the insurer never received a firm settlement offer. Second, the court held that an insurer can be found liable for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage.

The plaintiff, Kelly, was injured in an auto accident with Thomas, the policyholder. Kelly reached out to State Farm and provided his medical records and bills, which were in excess of $26,000. State Farm offered Kelly the policy limit of $25,000 to settle the case. Kelly rejected the offer. State Farm notified Thomas of the potential for personal liability and suggested that he retain independent counsel. However, the letter from State Farm did not mention that it and Kelly had discussed settlement or the amount of Kelly’s medical bills.

The matter went to trial. Kelly obtained a judgment of $176,464.07, plus interest. State Farm paid the $25,000 policy limit. Kelly and Thomas entered into an agreement involving an assignment of Thomas’ rights in exchange for a covenant not to execute. Kelly then brought suit against State Farm.

The federal district court granted summary judgment in favor of State Farm. Kelly appealed to the Fifth Circuit Court of Appeals. The Fifth Circuit certified two questions to the Louisiana Supreme Court necessary for determination of the issues:

  1. Can an insurer be found liable for a bad-faith failure-to-settle claim under Louisiana statutory law when the insurer never received a firm settlement offer?
  2. Can an insurer be found liable under Louisiana statutory law for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage?

With regard to the first question, the Supreme Court held that State Farm could be found liable for bad faith failure to settle under Louisiana statutory law, notwithstanding that it never received a firm settlement offer. First, the court reasoned that policyholders have available to them a statutory cause of action for bad faith failure to settle. That is an outgrowth of the insurer’s established duty of good faith and fair dealing. Second, the Court reasoned that a “firm settlement offer” was not a condition to recover for bad faith failure to settle because the statute at issue did not mention a “firm settlement offer” and explicitly stated that the insurer had an “affirmative duty to adjust claims fairly and promptly and make a reasonable effort to settle….”

The Supreme Court also held that State Farm could be found liable under the applicable Louisiana statute for misrepresenting or failing to disclose facts unrelated to the policy coverage. The court announced that any prior case law holding that a misrepresentation of fact must relate to coverage are overruled.

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