Louisiana Supreme Court Provides Important Guidance on Bad Faith

Case: Kelly v. State Farm Fire & Cas. Co.
Supreme Court of Louisiana
No. 14-1921, 2015 La. LEXIS 697 (La. 05/05/15)

Plaintiff, Danny Kelly was injured on November 21, 2005, during an automobile accident with Henry Thomas, who had liability insurance with State Farm. On January 6, 2006, Kelly’s attorney mailed a letter to State Farm regarding Kelly’s injury, which included copies of Kelly’s hospital records and stated:

Please find enclosed a copy of Danny Kelly’s Medical Summary with attached medical records/reports and bills concerning his hospital treatment for the above referenced incident involving your insured. I will recommend release of State Farm Insurance Company and your insured, Henry Thomas, Jr., for payment of your policy limits. Please give me a call in the next ten (10) days to discuss this matter.

State Farm did not respond to the letter but Kelly’s attorney conversed with State Farm representatives on March 8 and March 22, 2006. During the March 22 conversation, a State Farm representative offered to settle the case for $25,000, the policy limit, and sent Kelly’s attorney a letter 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 that the offer was rejected, it sent Thomas a letter informing him of the possibility of personal liability and suggesting that he retain independent counsel. The letter from State Farm did not mention the January 2006 letter from Kelly’s attorney, State Farm’s offer to Kelly, or the amount of Kelly’s medical bills.

Kelly’s lawsuit against Thomas proceeded to a trial, in which Thomas was found liable for the accident and cast in judgment for $176,464.07, plus interest. State Farm paid Kelly the policy limit of $25,000. After the judgment was rendered against him, Thomas entered into a compromise agreement with Kelly. Thomas assigned his right to pursue a bad faith action against State Farm to Kelly in exchange for Kelly’s promise 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) failto accept Kelly’s January 2006 settlement offer.” State Farm filed a motion for summary judgment, seeking the dismissal of both claims. The district court partially granted State Farm’s motion, holding that the January 2006 letter 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, however, denied summary judgment on the second claim stating that Kelly might be able to prove that State Farm’s failure to settle his insurance claim constituted bad faith. On reconsideration, the district court revised its opinion to grant a full summary judgment in State Farm’s favor. Kelly appealed, and the court of appeals affirmed the dismissal of the duty to settle claim, reasoning that “because Kelly’s purported settlement letter and medical receipts did not constitute a satisfactory proof of loss from the insured, Kelly cannot maintain a claim under §22:1892(A)(1) as a matter of law.” Both parties filed petitions for rehearing, which were granted. The appeals court then withdrew its earlier opinion and issued another opinion certifying the following questions of Louisiana law:

(1) Can an insurer be found liable for a bad-faith failure-to-settle claim under Section 22:1973(A) when the insurer never received a firm settlement offer?

The Court referenced its prior decision, Smith v. Audubon Ins. Co., 95-2057, p. 8 (La. 9/5/96), 679 So.2d 372, wherein the it held the determination of whether the insurer acted in bad faith turns on the facts and circumstances of each case, and further articulated the following factors for making that determination: the probability of the insured’s liability, the extent of the damages incurred by the claimant, the amount of the policy limits, the adequacy of the insurer’s investigation, and the openness of communications between the insurer and the insured. The Court held that not only is a “firm settlement offer” not listed as a factor, but the case-by-case determination described would necessarily and, hence, explicitly, have been conditioned by a “firm settlement offer” if that had been the intent. Practical considerations were also cited for support for La. R.S. 22:1973(A) as not requiring a firm offer as a condition for finding the insurer has acted in bad faith, particularly given neither the insured nor the insurer has any control over whether a firm offer will be submitted. Therefore, the Court reasoned there was also no practical reason why the insurer’s obligation to act in good faith should be made subject to the tenuous possibility that an insurer will receive a firm settlement offer. Instead, the insurer’s obligation to act in good faith is triggered by knowledge of the particular situation, which knowledge “[t]he insurer has an affirmative duty” to gather during the claims process.

(2) Can an insurer be found liable under Section 22:1973(B)(1) for misrepresenting or failing to disclose facts that are not related to the insurance policy's coverage?

Section 22:1973(B)(1) prohibits “Misrepresenting pertinent facts or insurance policy provisions relating to any coverages at issue.” The Court held that the word “or” must be applied disjunctively, meaning that an insurer can be liable for misrepresenting either: 1) “pertinent facts,” or 2) “insurance policy provisions relating to any coverages at issue” such that a misrepresentation of “pertinent facts” need not relate to any coverages at issue in order to be actionable. In sum, an insurer can be found liable under La. R.S. 22:1973(B)(1) for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage; i.e., the statute prohibits the misrepresentation of “pertinent facts,” without restriction to facts “relating to any coverages.”

After Kelly, in Louisiana, an insurer can be held liable to an insured for bad faith failure to settle under La. R.S. 22:1973(A), ever where no firm settlement offer had been made. The Court clarified that there is no bright line rule in Louisiana for determining whether an insurer took the necessary positive steps to meet its affirmative duties to adjust claims fairly and promptly and to make reasonable efforts to settle those claims.