Bad Faith Failure to Settle

Shannon Howard-Eldridge


No. 2014-CQ-1921



             In an opinion issued May 5, 2015, the Louisiana Supreme Court answered two questions that were certified to the Court by the United States District Court of Appeals for the Fifth Circuit:

(1) Can an insurer be found liable for bad-faith failure-to-settle a claim under LSA-R.S. 22:1973(A) when the insurer never received a “firm offer of settlement”?

(2) Can an insurer be found liable under LSA-R.S. 22:1973(B)(10 for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage?

Kelly v. State Farm Fire & Cas. Co., 582 Fed. Appx. 290, 296 (5th Cir. 2014).

            The Court’s responses to these questions is significant because it clarifies the application of a key statute, as relates to an insurer’s obligation to keep its insured advised of significant developments in the claim process and litigation as well as the insurer’s potential exposure when it does not settle a case within policy limits.

            The Court considered one of the two “bad faith” statutes, Louisiana Revised Statute 22:1973. The relevant language of LSA-R.S. 22:1973 is:

(A) 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 damage sustained as a result of the breach.

(B) Any one of the following acts, if knowingly committed or performed by an insurer, constitutes a breach of the insurer’s duties imposed in Subsection A of this Section:

(1) Misrepresenting pertinent facts or insurance policy provisions relating to any coverages at issue.

            The facts of the underlying case are as follows. Danny Kelly was injured on November 21, 2005 in a motor vehicle accident with Henry Thomas, who had liability insurance with State Farm. State Farm’s policy limit was $25,000.00. Thomas and Kelly were driving in opposite directions when Thomas turned left and struck Kelly’s vehicle. Kelly and a witness reported to the police that Thomas failed to yield to oncoming traffic, but Thomas maintained that he was free from fault. Kelly suffered a fractured femur, was hospitalized for six days and incurred medical bills totaling $26,803.17. Kelly, p. 3.

            On January 6, 2006, Kelly’s attorney mailed a letter to State Farm that included copies of Kelly’s hospital records and bills, and stated that he “will recommend release of State Farm Insurance Company and your insured, Henry Thomas, Jr., for payment of your policy limits”. Kelly’s attorney requested that State Farm call him within ten days to discuss the matter. State Farm did not respond to the letter. However, Kelly’s attorney did speak with State Farm representatives on March 8 and March 22, 2006. During the March 22, 2006 phone call, State Farm offered to settle the case for $25,000.00 (policy limits) and sent a letter confirming the offer. Kelly’s attorney rejected the offer and later filed suit. When State Farm received word that the $25,000.00 offer was rejected, it wrote to Thomas informing him of the potential for excess uninsured liability and suggested that Thomas retain independent counsel. State Farm’s letter to Thomas did not mention the January 2006 letter from Kelly’s attorney, State Farm’s offer to Kelly to pay policy limits or the total amount of Kelly’s medical bills that exceeded the policy limits. Kelly, p. 3-4.

            Kelly’s suit against Thomas proceeded to trial. Thomas was held liable for the accident and a judgment of $176,464.07, plus judicial interest, was entered against Thomas. State Farm paid its policy limits of $25,000.000. Thomas entered into an agreement with Kelly, assigning his right to pursue a bad faith action against State Farm to Kelly in exchange for Kelly’s agreement not to enforce the judgment against Thomas’ personal assets. Kelly filed suit against State Farm under the “bad faith” statutes making a claim on the basis of State Farm (1) failing to notify Thomas of Kelly’s January 2006 letter and (2) failing to accept Kelly’s 2006 settlement offer. Kelly maintained that State Farm’s acts and omissions rose to the level of a breach of State Farm’s duties under the law and policy contract. Keep in mind that Kelly was assigned Thomas’ rights against State Farm so that Kelly stood in the shoes of Thomas and had the same rights as the insured.

            When the United States Court of Appeals for the Fifth Circuit certified the two questions to the Louisiana Supreme Court, it recognized the absence of instructive case law on some points and the conflict of case law on other points, casting “serious doubt” on the federal appellate court’s prior jurisprudence on certain issues relevant to the certified questions. Kelly, p. 8-9.

 The Louisiana Supreme Court answered the certified questions as follows (See Kelly opinion at p. 2):

(1) A firm settlement offer is unnecessary for an insured to sustain a cause of action against an insurer for a bad-faith failure-to-settle claim, because the insurer’s duties to the insured can be triggered by information other than the mere fact that a third party has made a settlement offer.

            The Court considered the wording of LSA-R.S. 22:1973(A) together with the existing case law, and determined that the Louisiana legislature codified within R.S. 22:1973(A) a jurisprudentially-recognized cause of action in favor of insureds for an insurer’s bad faith failure to settle a claim. Kelly, p. 13. The availability of a cause of action for an insured to recover from a judgment in excess of policy limits is well-established in Louisiana. Kelly p. 14. An insurer is obligated to deal in good faith with a claim against its insured. Insurers have been held liable by both state and federal courts for an excess judgment when the insurer failed to deal in good faith with a claim against its insured. Id.

            In the Kelly/Thomas matter, State Farm took the position that it had not received a firm settlement offer because the January 2006 letter only stated that Kelly’s attorney would recommend a settlement. The Supreme Court looked to LSA-R.S. 22:1973(A) and noted the broad duty of the insured, “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.” Kelly, p. 17. The Court noted that an “affirmative duty” required the taking of positive actions to comply with the legal standard. Id. The Court determined that the statute does not require a “firm settlement offer” as was suggested by State Farm. The Court narrowed the certified question to consider “whether an insurer’s affirmative duty to make a reasonable effort to settle claims is triggered only by receipt of a firm settlement offer”. Kelly, p. 20. The Court found that the clearest indicator of the answer to the query was the absence of language in the statute requiring “a firm settlement offer”. Id. Further, neither the insurer nor the insured has control over whether a settlement offer will be submitted, but the insurer has undertaken the obligation to protect its insured. The insurer is held to a high fiduciary duty to discharge its policy obligations in good faith and must consider the interests of the insured in every settlement. Id. The insurer’s obligation to act in good faith is triggered by the insurer’s knowledge of the particular situation; the insurer has an affirmative duty to gather information about the particular situation of each claim during the claims process by conducting a thorough investigation and considering the evidence developed when determining whether to litigate or settle. Kelly, p. 21.

            In each case, the factors to consider when evaluating a settlement opportunity include:

The determination of good or bad faith in an insurer’s deciding to proceed to trial involves the weighing of such factors, among others, as 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.

Kelly, p. 19, citing Smith v. Audubon Ins. Co., 95-2057 at 9-10 (La. 09/05/96), 679 So.2d 372, 377. Consideration of these factors will assist insurers in the determination as to whether the insurer has made a “reasonable effort to settle claims” as mandated by R.S. 22:1973(A) so as to protect the insured from excess liability.

(2) An insurer can be found liable under LSA-R.S. 22:1973(B)(1) for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage because the statute prohibits the misrepresentation of “pertinent facts” without restriction to facts “relating to any coverages.”

            Prior to the certification of the question to the Supreme Court “whether an insurer can be found liable under LSA-R.S. 22:1973(B)(1) for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage”, differing answers to this question could be found in the appellate opinions of the Louisina state courts. To resolve the dispute, the Louisiana Supreme Court looked to the wording of the statute, particularly the use of the word “or” and took guidance from LSA-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’.” The Court intepreted the wording of the statute and the use of the word “or” in LSA-R.S. 22:1973(B)(1) to mean that an insurer can be liable for misrepresenting either (1) “pertinent facts” or (2) insurance policy provisions relating to any coverages at issue. The Court expressly overruled prior appellate decisions that held that a misrepresentation of “pertinent facts” must also relate to “any coverages at issue” to be actionable.

            The interpretation and application of the wording of LSA-R.S. 22:1973(B)(1) not only opens the door for allegations of “bad faith” for misrepresenting policy provisions, but also allows a cause of action for “misrepresenting pertinent facts” not relating to coverage. In the Kelly case, the “misrepresentation” was actually a failure to advise the insured of the facts and circumstances related to the opportunity to settle the claim within the policy limits. An insurer can have liability for “a communication from the insurer that either states an untruth or fails to state the truth.”


            Given the answers of the Louisiana Supreme Court to the two certified questions, above, there is cause for reflection upon the duties of an insurer to its insured, particularly when the value of the case, in comparison to the available policy limits, leaves the insured potentially open to an uninsured excess exposure in judgment. The Kelly opinion from the Louisiana Supreme Court is likely to be used by insureds and counsel for third party plaintiffs to encourage payment in settlement. I expect that insurers may see an increase in the assignment of the insured’s “bad faith” rights against an insurer.

            It seems that the Court recognized the potential effect of its opinion, and in footnote 34, noted that “tight reins” must be kept on a cause of action against an insurer for its settlement practices, and that LSA-R.S. 22:1973 should be strictly construed. The Court also noted that:

A strict application of the statute does not contemplate gamesmanship, such as having “unrealistic offers….presented through ‘carefully ambiguous demands coupled with sudden-death timetables ‘” in order to “set up” the insurer for an excess liability judgment.

Kelly, p. 26, fn 34, citing Parich v. State Farm Mut. Auto. Ins. Co., 919 F.2d 906, 912 (5th Cir. 1990).

            In my opinion, the Louisiana Supreme Court’s statements in Kelly will be viewed by many as fuel for the fire of “bad faith” threats against insurers. Insurers should conduct a thorough investigation of every claim and document the claim file to reflect the investigation and the consideration given to whether to litigate or settle a claim. Further, it is imperative that the insured is advised, in writing, of any offers or opportunities to settle a claim, as well as all other events and developments in the handling of the claim.

            Should you have any questions regarding how the Kelly opinion affects your work, in general, or as relates to any particular claim, please do not hesitate to contact me.

 Shannon Howard-Eldridge
May 8, 2015