Your insurance company owes you a duty to settle your claims in good faith.
Louisiana’s implied covenant of good faith and fair dealing is derived from the Restatement Second of Contracts and is expressly conveyed in LSA—R.S. 22:1973(A). LSA—R.S. 22:1973(A) provides that good faith and fair dealing are paramount to any insurer/insured relationship, and Insurers who are not in good faith can be penalized and punished. The state’s law is best applied in Kelly v. State Farm Fire & Cas. Co.
Kelly v. State Farm Fire & Cas. Co. and its impact on bad faith insurers.
Kelly v. State Farm involves a case where an insured person carrying State Farm Insurance caused an accident injuring Kelly, the plaintiff. Kelly’s injuries were so severe he spent six days in the hospital. Subsequently his attorney mailed a letter to State Farm including the hospital records. At the time the letter was sent the lawyer stated he would recommend a release of state farm insurance company and the insured in exchange for their policy limits. State Farm never responded to the letter and at a later time made its own offer to settle the case for $25,000. The plaintiff’s attorney rejected the offer. Upon the rejection of the offer State Farm notified the insured that he may need to seek independent counsel. Kelly sued the insured and obtained a judgment for $176,464.07, plus interest. After the judgment was rendered the insured entered into a judgment agreement whereby he would be released from all liability and assigned his right to purse the bad faith action against State Farm.
State Farm argued that they were not in bad faith because the attorney’s offer was not a valid offer letter. Additionally, State Farm argued they did not fail to disclose pertinent facts to their client when they did not inform him of the plaintiff’s first “offer letter.”
There was much tension among the courts in determining whether Kelly v. State Farm involved a bad faith insurance claim. The case made its way all the way to the state’s Supreme Court. The Louisiana Supreme Court relied on LSA—R.S. 22:1973(A) and held that State Farm was in bad faith. The Court stated that an 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. The court further stated that because of this affirmative duty the insurer was in bad faith regardless of whether he received a firm settlement offer. Addressing the argument regarding the non-disclosure of facts, the Court held that the statute prohibits misrepresentation of “pertinent facts,” without restriction to facts “relating to any coverages.” Therefore, Kelly prevailed in his claims and State Farm was held to be in bad faith.
Bad Faith and Damages
Insurance companies who fail to deal in good faith may be liable for a judgement against its insured in excess of the policy limits.Unlike Kelley the Fifth Circuit court of appeals in Larios v. Martinez held that the 24th Judicial District Court erred in finding Imperial Insurance Company in bad faith. In Larios the Plaintiffs were involved in a car accident with an insured of Imperial Insurance Company. The insured was intoxicated at the time of the accident and subsequently could not be located to be served. In the defendant’s absence the plaintiff and the insurance company entered into an agreement dismissing the claims against the insured. The district court rendered a verdict in favor of the plaintiffs, awarding them almost twice as much as Imperial’s liability limits. Imperial Insurance Company appealedand the Fifth Circuit agreed, the damages were excessive for an insurance company who was not in bad faith. At all times afterImperial was notified they promptly engaged with the plaintiffs and they equally shared an interest in resolving the claim. Therefore, the court amended the award of damages to the extent that it was in excess of Imperial’s policy limits.
Why is this case so important?
This case provides that insurance companies have a duty of good faith and fair dealing and an affirmative duty to adjust claims fairly and promptly. Insurers have the additional duty to make reasonable effort to settle claims with its insured or claimants. Any insurance company who breaches the duty of good faith and fair dealing may be liable for a judgement against its insured in excess of the policy limits.