BAD FAITH BASICS – MISSOURI BAD FAITH INSURANCE CLAIM DISPUTE LAWYER

By Timothy W. Monsees

e-mail: tmonsees@monseesmayer.com

KANSAS CITY OFFICE
4717 Grand, Suite 820
Kansas City, Missouri 64112
(816) 361-5577
(866) 774-3233

SPRINGFIELD OFFICE
1021 E. Walnut
Springfield, Missouri 65806
(417) 866-8687
(866) 774-3233

LAWYERS HANDLING BAD FAITH BASICS
www.monseesmayer.com/Insurance-Claims/Bad-Faith-Insurance-Claims


I. Introduction

“Bad faith is a state of mind, indicated by acts and circumstances, and is provable by circumstantial as well as direct evidence.” Zumwalt v. Utilities Ins. Co., 228 S.W.2d 750 (Mo. 1950). Bad faith liability comes from the contract principle of good faith and fair dealing. This is an implied covenant, which sets out and governs every duty the insurer has towards the insured. This article examines the basic aspects and elements of first party vexatious refusal claims and third party bad faith claims in Missouri and Kansas. The law of bad faith is one that tests the insurer’s conduct with regard to its insured and is one by which the courts regulate the insurer-insured relationship. This law has evolved from an area of litigation where only damages similar to those for breach of contract were awarded. These types of contract damages were limited to the policy limits. Now, because of the creation of bad faith and other similar statutory claims, insurers are being forced to pay much more than the policy limits. Insurance companies are being forced to watch their every move much more closely and consider with much more attention the interests of their insured.

II. Vexatious Refusal (1 st Party)

First-party bad faith involves only two parties, the insured and the insurer. There is a contractual relationship between the insurer and the insured in which the insurer has a good faith duty not to unreasonably withhold payment due to the insured under the policy. This type of bad faith claim occurs when the insurer refuses to pay a claim the insured has made and that is owed to the insured under the policy. First-party bad faith claims occur because there is a dispute over whether the particular loss is covered by the policy the insured holds. Usually the insured sends in a claim believing it to be covered and the insurance company refuses to pay for the loss because it claims it is not covered by the insurance policy. The claim therefore centers on the correctness and reasonableness of the insurance company’s determination that there is no coverage under the policy. In Missouri, and to a somewhat lesser extent in Kansas, first-party bad faith is governed by statute.

A. Statutes

In Missouri, first-party bad faith is called vexatious refusal to pay. An insured can bring a claim in Missouri under Missouri Revised Statutes Sections 375.296 and 375.420. Not every first-party insurance claim, even those in which the insured prevails, results in an award of vexatious penalties. There are certain elements under the statute that must be proven by the insured bringing the action to win vexatious refusal damages. The burden of proof is on the plaintiff insured. The insured must show that the insurer’s refusal to pay was “willful and without reasonable cause, as the facts would appear to a reasonable and prudent person.” Mears v. Columbia Mut. Ins. Co., 855 S.W.2d 389 (Mo. App. W.D. 1993). In determining if the insurance company acted with vexatiously, the facts that must be examined are those presented to the insurer at the time it was called on to pay. Russel v. Farmers & Merchants Ins. Co., 834 S.W.2d 209 (Mo. Ct. App. 1992). Vexatious refusal, as defined in Gardner v. Queen Ins. Co. of America, 115 S.W.2d 4 (Mo. Ct. App. 1938), is refusal without reasonable or probable cause or excuse.

It should also be noted that direct evidence of vexatious refusal is not required. “The jury may find vexatious delay upon a general survey and a consideration of the whole testimony and all the facts and circumstances in connection with the case.” Dewitt v. American Family Mutual Ins. Co., 667 S.W.2d 700 (Mo. 1984).

Section 375.296, entitled Additional damages for vexatious refusal to pay, states:

In any action, suit or other proceeding instituted against any insurance company, association or other insurer upon any contract of insurance issued or delivered in this state to a resident of this state, or to a corporation incorporated in any contract of insurance issued or delivered in this state to a resident of this state, or to a corporation incorporated in or authorized to do business in this state, if the insurer has failed or refused for a period of thirty days after due demand therefore prior to the institution of the action, suit or proceeding, to make payment under and in accordance with the terms and provisions of the contract of insurance, and it shall appear from the evidence that the refusal was vexatious and without reasonable cause, the court or jury may, in addition to the amount due under the provisions of the contract of insurance and interest thereon, allow the plaintiff damages for vexatious refusal to pay and attorney’s fees as provided in section 375.420. Failure of an insurer to appear and defend any action, suit or other proceeding shall be deemed prima facie evidence that its failure to make payment was vexatious without reasonable cause.

There are five basic elements that must be proven by the insured under this section:

  1. the claim must be based on an insurance contract “issued or delivered in this state” to a Missouri resident;
  2. due demand was made a minimum of thirty days prior to date the action was filed;
  3. the demand was made “under and in accordance with the terms and provisions of the contract of insurance”;
  4. the insurer fails to or refuses to pay before this thirty day period expires; and
  5. the refusal was “vexatious and without reasonable cause.”

Section 375.420, entitled Vexatious refusal, to pay claim damages for, exception states:

In any action against any insurance company to recover the amount of any loss under a policy of automobile, fire, cyclone, lightning, life, health, accident, employers’ liability, burglary, theft, embezzlement, fidelity, indemnity, marine or other insurance except automobile liability insurance, if it appears from the evidence that such company has refused to pay such loss without reasonable cause or excuse, the court or jury may, in addition to the amount thereof and interest, allow the plaintiff damages not to exceed twenty percent of the first fifteen hundred dollars of the loss, and ten percent of the amount of the loss in excess of fifteen hundred dollars and a reasonable attorney’s fee; and the court shall enter judgment for the aggregate sum found in the verdict.

There are two basic elements that must be proven by the insured under this section:

  1. The claim is based on a loss covered by a “policy of automobile, fire, cyclone, lightning, life, health, accident, employers’ liability, burglary, theft, embezzlement, fidelity, indemnity, marine or other insurance except automobile liability insurance”;
  2. The insurance company refused to pay the loss “without reasonable cause or excuse.”

Examples of situations where vexatious refusal penalties were awarded, detailed in Anthony G. Fussner, Overview of Bad Faith Litigation in Missouri, 62 Mo. L. Rev. 807 (1997), include the following:

  1. Refusal to pay based on a suspicion that is unsupported by substantial facts ;
  2. Persistence in refusal to pay after insurer becomes aware that it has no meritorious defense;
  3. Refusal to pay based on an inadequate investigation and a denial of liability without stating a ground for denial;
  4. Refusal to pay founded not on what appeared to be the facts, but on a possibility that later investigation would develop facts justifying a refusal to pay, even if such investigation did develop such facts.

In Kansas, there is a statute stating that the insurance company has a duty to make a good faith investigation of the facts surrounding the claim, that the insurance company must have a “bona fide reason and reasonable factual ground for contesting the insurance claim”, and if the court finds this is not fulfilled then attorney’s fees may be awarded to the insured based on the idea that there is “failure to pay without just cause”. See Kan. Stat. Ann. §40-256 (19XX). See also Evans v. Provident Life & Accident Ins. Co., 815 P.2d 550 (Kan. 1991).

B. Defenses

There are several types of defenses that the insurance company is likely to use in a given case. Some examples of defenses that have been used in Missouri cases, and more significantly have been successful, are listed below.

The insurance company had a reasonable excuse for refusing to pay. If the insurer had a legitimate issue of whether there was coverage and reasonably refused, this is a valid defense. But it should be noted that the existence of a litigable issue regarding coverage would not insulate the insurer from penalty for refusal to pay the loss if there is other relevant evidence that the insurer’s conduct was vexatious and obstinate. See State of Mo. ex rel Pemiscot County, Mo. v. Western Sur. Co., 51 F.3d 170 (8 th Cir. 1995). Also, even if the insurer, in good faith, originally contests an issue of fact or law, a continuing refusal may be vexatious if it later becomes apparent there is no meritorious defense to an action on the policy. Ireland v. Manufacturers & Merchants Indem. Co., 298 S.W.2d 529 (Mo. Ct. App. 1957).

2. If the insured seeks more than what he was entitled to under the policy, then the insurer will not be subject to a penalty for vexatious refusal if the insurer only pays what is due under the policy instead of the amount demanded by the insured. See Cross v. Peerless Ins. Co., 351 S.W.2d 826 (Mo. Ct. App. 1961).

3. Statute of limitations. If the applicable statute of limitation for bringing this cause has run out then the insurer has a valid defense.

4. Defenses under contract law. The insurance company may try to argue that the terms and language of the contract is plain and unambiguous as to coverage. The insurance company can attempt to prove this by evidence of the parties’ actions and declarations. When, however, it is determined that language in a contract is unclear and ambiguous, the courts construe any ambiguities against the insurer and in favor of the insured. See Restatement (Second) of Contracts §201 (1981). If the insurer can prove the insured understood the terms of the contract then this defense is strong.

Also, if the insurer can prove that a material misrepresentation was made by the insured in the application for the insurance policy then the policy would be considered void and no coverage would exist. If there is a provision in the policy that states the policy is valid only if all representations are valid and the insured makes a misrepresentation in the application, knowingly or unknowingly, then the policy is void. If there is no provision in the policy and the insured knowingly makes a misrepresentation then the policy is void. If the insurer can prove that the policy is void or has a good reason to believe a misrepresentation has been made, there is no basis for a vexatious refusal claim. State ex rel. John Hancock Mut. Life Ins. Co. v. Hughes, 152 S.W.2d 132 (Mo. 1941).

It is important to note a few special points. First, if the insurance agent had knowledge of the misrepresentation at the time of the application, the insurer is bound to the contract and a vexatious refusal claim will stand if the insurance company refuses to pay a claim under the policy. Id. at 134. Also, the insurance company is not bound if the agent and the insured fraudulently entered into the contract together. Id.

5. ERISA (Employment Retirement Income Security Act of 1974) defense. In Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987), the Supreme Court held that ERISA preempts certain state common law tort and contract claims when an insured employee benefit plan is involved. Therefore, if the insured is suing for vexatious refusal under a policy the insured has through an employee benefit plan the cause of action fails because ERISA provides no remedy for bad faith (vexatious refusal.) See Kelly v. Pan-American Life Insurance Co., 765 F.Supp. 1406 (W.D.Mo. 1991).

6. If the insurance company has “abundant evidence” that the policy has lapsed, as a matter of law it will not be liable for vexatious refusal. Medling v. Abraham Lincoln Life Ins. Co., 41 S.W.2d 6 (Mo. Ct. App. 1931).

C. Damages

When there is a finding of vexatious refusal, additional damages authorized by the statutes may be awarded.

1. Penalties. The amount permitted for vexatious refusal damages is set out in §375.420. The plaintiff is allowed damages “not to exceed twenty percent of the first fifteen hundred dollars of the loss, and ten percent of the amount of the loss in excess of fifteen hundred dollars…” Mo. Rev. Stat. §375.420 (1994).

2. Attorney’s fees. Under §375.420 a plaintiff can recover reasonable attorney’s fees. This is not mandatory and the judge and jury have complete discretion in deciding whether to award them. Dewitt v. American Family Mutual Ins. Co., 667 S.W.2d 700 (Mo. 1984). An insurance company is liable for attorney fees and expenses where it refuses to defend an insured whom is in fact covered; this is true even though the company acts in good faith and has a reasonable ground to believe there is no coverage under the policy. Wood v. Safeco Ins. Co. of America, 980 S.W.2d 43 (Mo. Ct. App. 1998). In order for the court to even consider whether to grant attorney’s fees, the reasonable value of the attorney’s services must be shown by evidence in the record and supported by appropriate pleadings. Russell v. Farmers & Merchants Ins. Co., 834 S.W.2d 209 (Mo. Ct. App. 1992). See also, Kan. Stat. Ann. §40-256; Evans v. Provident Life & Accident Ins. Co., 815 P.2d 550 (Kan. 1991).

3. Punitive damages. Punitive damages are not to be awarded unless some other nominal or compensatory damages are also awarded. In Missouri, the vexatious refusal statutes are considered punitive in nature and therefore the damages are limited to what is awarded under these statutes. Baker v. State Farm Mut. Auto. Ins. Co., 846 F.2d 495 (8 th Cir. 1998).

4. Interest. Section 375.420 authorizes an award of damages for interest on the amount owed by the insurance company. Mo. Rev. Stat. §375.420 (1994). The reasoning behind allowing an award for interest is the general idea of compensating for the loss of use of money. Generally, interest will be assessed on the amount owed from the time the proof of claim is made and insurer neglected or refused to pay the policy. Sherifrim v. Hawkeye Cas. Co., 85 F.Supp. 84 (W.D.Mo. 1949). This interest award is not contingent on the award of vexatious damages. This interest is calculated as pre-judgment interest. Catron v. Columbia Mut. Ins. Co., 723 S.W.2d 5 (Mo. 1987).

III. Third Party Bad Faith

Third party bad faith essentially involves three parties; the injured party, the insured and the insurer. Third party bad faith deals with liability insurance. A bad faith claim is made when the insurer either wrongfully refuses to defend a lawsuit against the insured or when the insurer defends the insured in the lawsuit but fails to handle the suit with the insured’s interest in mind and a settlement, judgment or verdict is made in excess of the policy limits. The most common bad faith claim arises when the insurer fails to settle a claim against an insured within the applicable policy limits resulting in a judgment or verdict against the insured for punitive damages or for an amount in excess of the policy limits. The insurance company has a fiduciary duty under the insurance contract to defend and indemnify its insured when a claim is made. By the terms of the policy the insurer takes control of the claim against the insured and holds the exclusive right to settle the claim. Under the contract and the law the insurer has a duty to give at least equal consideration to the insured’s interests as the insurer does to it’s own interests. The insurer must evaluate the claim as if there were no policy limit.Bolinger v. Nuss, 202 Kan. 326 (1969). A claim will be successful against an insurer if the insurer intentionally disregards the interests of the insured and puts its own interests above the insured. The insurance company, if found to be guilty of bad faith, may be liable for the amount in excess of the policy limits. Dyer v. General American Life Insurance Company, 541 S.W.2d 702 (Mo. Ct. App. 1976). The insured or the insured’s assignee must bring the bad faith claim. In Missouri, a third-party claimant has no direct right to sue the insurer for bad faith because this right belongs to the insured. Linder v. Hawkeye Security Ins. Co., 472S.W.2d 412 (Mo. 1971).

In Kansas, the insurer’s duty to its insured is broader than in Missouri. The courts in Kansas have stated that not only do the insurers have a duty of good faith but they also have a duty to act without negligence. See Bollinger v. Nuss, 449 P.2d 502 (Kan. 1969) (a liability insurer…may become liable in excess of its undertaking under the policy provisions if it fails to exercise good faith….); Anderson v. Surety Co., 191 P. 583 (Kan. 1920) (the insurer will be liable for damages which are shown to result from negligence of the insurer.) The insurer has a duty, in Kansas, to consider the interests of the insured and the insurer’s own interests equally. The insurer cannot put its own interests above the insured. The court states in Levier v. Koppenheffer, 879 P.2d 40 (Kan. App. 1994) (quoting Bollinger), that “the insurer must evaluate the claim without looking at the policy limits and as though it alone would be responsible for the entire amount of any judgment rendered on the claim.” See also Rector v. Husted, 519 P.2d 634 (Kan. 1974).

The Kansas courts repeatedly state that the determination of bad faith or negligence of the insurer in relation to its insured must be looked at on a case by case basis, but the Kansas Supreme Court sets out eight factors for the courts to look at when making this determination. Bollinger at 512. They are:

  1. the strength of the injured claimant’s case on the issues of liability and damages;
  2. attempts by the insurer to induce the insured to contribute to a settlement;
  3. failure of the insurer to properly investigate the circumstances so as to ascertain the evidence against the insured;
  4. the insurer’s rejection of advice of its own attorney or agent;
  5. failure of the insurer to inform the insured of a compromise offer;
  6. the amount of financial risk to which each party is exposed in the event of a refusal to settle;
  7. the fault of the insured in inducing the insurer’s rejection of the compromise offer by misleading it as to the facts; and
  8. any other factors tending to establish or negate bad faith on the part of the insurer.

A. Duty to Defend

A claim against an insurer for failure to defend a claim against the insured is an action based both in tort and contract. To determine whether the insurer has a duty to defend, the policy language and the allegations of the petition in an action brought by a person injured must be compared. “If the complaint alleges facts which state a claim potentially or arguably within policy coverage, there is a duty to defend.” Bonner v. Automobile Club Inter-insurance Exch., 899 S.W.2d 925 (Mo. Ct. App. 1995). The failure to defend is a breach of the contract between the insurer and insured. “For such breach of contract the company is liable to its insured to pay any judgment recovered against him up to the limits of the policy plus attorney fees, costs, interest and any other expenses incurred by the insured in conducting the defense of the suit which it was the obligation of the company to perform under its contract.” Landie v. Century Indemnity Co., 390 S.W.2d 558 (Mo. Ct. App. 1965).

If the insurer acts in good faith in refusing to defend a suit brought against the insured, then the only liability it will have is for breach of contract. If the insurer does not act in good faith in refusing to defend then there is a possible claim for breach of contract and for bad faith if it is later decided that under the insurance contract that there was coverage. Under the contract there is a duty of good faith and fair dealing. The court in Landiestated; “where the company breaches its contract and refuses to defend, the insured can only be put in as good a position as he would have been in had not the contract been breached, if the company is required to give good faith consideration to offers of settlement within the limits of the policy, and the insured is given the right to recover judgment in excess of the policy limit when settlement within these limits is refused in bad faith by the company.”Landie at 564. The reasoning behind the court’s decision is that an insurer should not be put in a better position for refusing to defend, where there would only be a breach of contract claim (subjecting the insurer only to the limits of the policy), than it would be in for defending the suit and refusing to settle.

B. Duty to Settle

A claim against an insurer for the failure to settle is an action based generally in tort for the wrong committed by the insurer in deciding not to accept the offer to settle the claim against its insured within the limits of its policy. SeeZumwalt v. Utilities Ins. Co., 228 S.W.2d 750 (Mo. 1950). The court stated:

Where the insurer in a liability policy reserves the exclusive right to contest or settle any claim brought against the insured, and prohibits him from voluntarily assuming any liability or settling any claims without the insurer’s consent, except at his own costs, and the provisions of the policy provide that the insurer may compromise or settle such a claim within the policy limits, no action will lie against the insurer for the amount of the judgment recovered against the insured in excess of the policy limits, unless the insurer is guilty of fraud or bad faith in refusing to settle a claim within the limits of the policy.

One of the main elements of bad faith failure to settle is that the claimant must make a demand that the insurer accept the offer to settle. If there is no demand by the insured, generally, thee can be no claim for bad faith. But there is an exception pointed out in Ganaway v. Shelter Mutual Ins. Co., 795 S.W.2d 554 (Mo. Ct. App. 1990). The court maintained that if the insured were not advised of the offers of settlement, then there was no opportunity to demand acceptance of the offer and a claim for bad faith can still be made. A fiduciary relationship exists between the insured and insurer. The insurer has a duty of utmost good faith to consider any reasonable settlement offers. The insurer has a duty to use good judgment when evaluating any settlement offers, putting the insured’s interests before it’s own, and if this is not done in good faith then the insurer can be responsible to pay the full amount of judgment that is ultimately given.

1. Elements/Factors

One of the most common reasons for bringing a bad faith claim against an insurer arises when the insurer has an opportunity to settle a claim against the insured and fails to do so. The four main elements that must be proven in a bad faith claim against an insurer were detailed in Dyer v. General American Life Insurance Co., 541 S.W.2d 702 (Mo. Ct. App. 1976).

  1. The insurance company assumes control of negotiation, settlement and defense of the action brought against the insured;
  2. The insured has demanded that the insurer settle the claim brought against the insured;
  3. The insurance company refuses to settle the claim within liability limits of the policy; and
  4. The insurance company act in bad faith, rather than negligence, in refusing such settlement.

In Missouri, if the insurer is found to be negligent in the handling of the insured’s case this is not enough to show bad faith. Landie v. Century Indemnity Co., 390 S.W.2d 558 (Mo. Ct. App. 1965).

Some factors to consider which may indicate bad faith are listed below:

  1. Refusal to defend a claim which is covered under the policy.
  2. Refusal to settle within the policy limits.
  3. Failure to use the “no policy limits” standard when considering a settlement.
  4. Intentional disregard of the financial interests of the insured.
  5. Demanding the insured contribute money to a settlement within the policy limits.
  6. Following “hard line” settlement policies
  7. Failure to properly investigate.
  8. Failure to negotiate.
  9. Failure to disclose policy limits to the claimant.
  10. Failure to disclose settlement opportunity to the insured.
  11. Failure to advise insured about the extent of the policy coverage.
  12. Failure to advise insured about the potential for an excess verdict.
  13. Failure to foresee a probable excess verdict.
  14. Investigating or evaluating the claim poorly or improperly.
  15. Following advice not to settle or ignoring settlement advise./ Failing to seek advice of qualified persons.
  16. Misinterpretation of the duty to defend.

C. The process

One has to begin preparing a bad faith lawsuit before the underlying claim or lawsuit has concluded. Often times this can be achieved with the cooperation of the defendant in the underlying liability claim. This is assisted in instances when the defendant is represented by personal counsel, as conflicts of interest are inherent in the relationship of insurance defense counsel and insured defendants.

In Missouri, insureds and opposing plaintiffs are assisted in resolving underlying conflicts through the vehicle of R.S.Mo. Section 537.065. This statute permits opposing parties to settle their dispute by agreeing to restrict collection of judgments to specified assets of the defendant, usually a liability insurance policy. Since insureds are not obligated to accept defenses of their insurers under reservation, discharge of defense counsel with an corresponding agreement to restrict collection of a judgment under Section 537.065 can be a powerful vehicle in setting up a bad faith claim.

The process usually begins with a demand for settlement within the insured’s policy limits. Assuming the offer is properly communicated to the insured, and further assuming the insured is motivated solely by preservation of his/her personal assets, a corresponding demand by the insured that the case be settled within the applicable limits results should follow. If the case is not settled, and a judgment is obtained for more than the insured’s limits, or for damages not covered by the policy, e.g. punitive damages, post-judgment negotiations to assign rights against the insurer are the next order of business. An example of a post-judgment agreement under the statute and assignment will be distributed at the presentation of these materials.

As discussed herein below, the assignability of bad faith actions is in question. Arguably, the insured who experiences an excess verdict has greater damages than simply repayment of a verdict which exceeds the limits of the policy. Consequential damage to creditworthiness, perhaps the need for bankruptcy, emotional distress and the like, may yield greater claims for damages than the difference between the applicable limits and the judgment. Hence, the continuing cooperation of the former opponent, is helpful. At the very least, a joint undertaking of the bad faith lawsuit is essential, but a judgment should be made as to whether it is prudent for the defendant/insured to undertake in his/her own name the bad faith claim.

This type of claim presents one of the few opportunities for the plaintiff’s lawyer to create evidence. Letters of compromise, written evaluations of the risk of the insured’s assets, for instance, make great exhibits in the subsequent bad faith action. You must be prepared to try the entire case in order to bring a bad faith claim later, although a Section 537.065 agreement and a “mini-trial” wherein the defendant enters no or only a token defense, is an alternative. If there is an excess verdict, a bad faith claim becomes a potential.

D. Defenses

Many of the defenses used in a claim under vexatious refusal can be used for bad faith as well. In addition, if the insurer “in good faith” believes there is a valid defense to the claim by the injured third party, even if the insurer proves to be wrong, then no bad faith liability will result. The insurance company will not be liable where they acted in “good faith.”

The statute of limitations for a bad faith failure to settle claim is five years in Missouri. This is because the claim is based in tort and the statute of limitations for a tort is five years. The period does not begin to run until a final judgment is rendered in the underlying case.

If the insured in some way breaches the insurance contract or fails to cooperate with the insurer during the litigation process, this can nullify the insurance contract and get the insurer off the hook. If the insured misleads the insurer during the process this can be a valid defense to a bad faith claim.

The insurer can also have a strong defense if they relied on the advice of competent counsel and the reliance was reasonable. The insurer must have reasonably believed that this advice was correct in order to use the defense. The defense will not work if a reasonable insurer would have known that the advice was not correct. See Anthony G. Fussner, Overview of Bad Faith Litigation in Missouri, 62 Mo. L. Rev. 807, 827 (1997).

The insurer can limit the duty to defend by arguing that the claim fell into one of the policy’s exclusions. If the insurer can successfully show that the claim is in fact covered by one of the policy exclusions then this can be a strong defense. This will get into other insurance contract issues dealing with contract interpretation such as reasonable expectations of the insured.

E. Damages

In a bad faith failure to settle action the insured can recover from the insurer the amount of money the insured is required to pay because the insurer failed to settle. This will be any amount above the policy limits.

In a failure to defend action, the insured can recover “all damages reasonably flowing from such a breach so as to put the insured in as good a position as he would have been in if the company had performed its contract.” Landie at 562. This means the insurer will be liable for attorney’s fees, interest and any other costs the insured incurred in defending the action. This does not include an amount in excess of the policy limits unless the insurance company is found to have failed to defend in bad faith. Then, just as in a failure to settle claim, the insurer will be liable for the amount of the judgment in excess of the policy limits as well. It is important to note that the only attorney’s fees available are the ones incurred to defend the third party suit, not the ones to bring the bad faith action. See Fuller v. United States Fidelity & Guar. Co., 714 S.W.2d 698, 702 (Mo. Ct. App. 1986).

IV. Related Areas

A. Legislation regarding unfair or deceptive practices

Sections 375.930 through 375.948 deal with unfair practices and fraud applicable to insurance companies. This section regulates “trade practices in the business of insurance in accordance with the Act of Congress of March 9, 1945, by defining, or providing for the determination of, all such practices in this state which constitute unfair methods of competition or unfair or deceptive acts or practices.” Mo. Rev. Stat. §375.930 (1998). This statute does not allow a private right of action and the insurers are regulated by the director, as according to section 375.940. The insurer violates the act by either a conscious disregard or by committing one of the proscribed acts with such frequency that it indicates a general business practice. Unfair practice in the business of insurance is defined by several examples, which are listed in §375.936.

B. Unfair Claims Settlement Practices Act

Sections 375.1000 through 375.1018 set out the regulations for unfair claims settlement practices applicable to insurance companies. This section “set[s] forth standards for the investigation and disposition of claims arising under contracts or certificates of insurance.” Mo. Rev. Stat. §375.1000 (1998). In order for an insurer to violate this act it must be shown that the insurer was either in conscious disregard in committing one of the acts of the provisions or one of the acts in the provisions was done with such frequency that it indicated a general business practice. Section 375.1007 sets out a list of all of the acts that are considered “improper claims practices.” The director of the department of insurance may investigate any insurer to determine whether the insurer is engaged in any improper claims practice prohibited by sections 375.1005 and 375.1007. There is no private right of action under the statutes in this section, which means that in bad faith litigation cases; statutory breaches normally are not an issue.

C. Consumer Protection Act

The Missouri legislature has created §376.700 through 376.714 as a form of consumer protection for life insurance buyers. These sections “require insurers to deliver to purchasers of life insurance, information which will improve the buyer’s ability to select the most appropriate plan of life insurance for his needs, improve the buyer’s understanding of the basic features of the policy which has been purchased or which is under consideration, and improve the ability of the buyer to evaluate the relative costs of similar plans of life insurance.” Mo. Rev. Stat. §376.700 (19xx). These sections are called a “buyers guide” to life insurance. Under §376.710, if an insurer fails to provide a potential buyer with a “buyer’s guide” he may be subject to revocation or suspension of his license.

D. Judicial Decisions Affecting Bad Faith – Assignment

In recent years the issue of whether or not the insured could assign his bad faith claim has been unclear. According to the most recent cases, the general rule is that a personal injury action, which sounds in tort, is not assignable.Quick v. National Auto Credit, 65 F.3d 741 (8 th Cir. 1995). Since bad faith claims sound in tort, they are not assignable.

There is a way to make this cause of action assignable to the third party. The court in Ganaway explains the exception to the rule. The third party, the plaintiff in the personal injury action, must first obtain a judgment against the insured in excess of the policy limits. An exception to non-assignability of personal injury actions is statutory authorization. The third party must then force the insured into involuntary bankruptcy, and then the trustee can assign the bad faith claim under the statutory Bankruptcy Act. 11 U.S.C.A. §541(a)(1) (West 1979). “The general law, as we understand it, is that a cause for bad faith refusal to settle may be assigned to a judgment creditor either by the insured or his trustee in bankruptcy.” Ganaway v. Shelter Mut. Ins. Co., 795 S.W.2d 554, 565 (Mo. Ct. App. 1990). Thus, the rule is there is no assignability of bad faith claims unless a statutory exception, such as the Bankruptcy Act.

V. Conclusion

Bad faith claims and first-party actions against insurers represent the only instances when a plaintiff can directly litigate the insurer’s handling of a claim. Insurers are target defendants, and almost everyone has some bad experience in claims handling. Assuming circumstances warrant the potential of an excess verdict, such claims also offer one of the few opportunities to partially script the evidence and testimony. In short, bad faith claims and related first-party claims are on the rise, and more and more vehicles are arising to examine the claims handling procedures and decisions of insurance companies.


Allen v. State Farm Mut. Auto. Ins. Co., 753 S.W.2d 616, 620 (Mo. Ct. App. 1988).

Ireland v. Manufacturers & Merchants Indem. Co., 298 S.W.2d 529, 534 (Mo. Ct. App. 1957).

Allen, 753 S.W. 2d at 620.

Buffalo Ins. Co. v. Bommarity, 42 F.2d 53, 57 (8 th Cir. 1930).

If you recently filed a claim and your insurer refused to pay, contact the Kansas City bad faith insurance claim lawyers of Monsees & Mayer P.C today.