DOING NOTHING IS NO DEFENSE TO BAD-FAITH SETTLEMENT CONDUCT.

For years, some defense lawyers have counselled their insurance company clients that an insurance company has no legal duty to do anything in settlement negotiations.  This insistence on the theoretical obscures the reality of bad-faith claims decided by judges and juries.  If a carrier follows such advice, the consequences can include exposure to extracontractual liability and the policy limits will be irrelevant in such a case.

 

SETTLEMENT DUTIES OF INSURANCE CARRIERS:  THE THEORETICAL UNIVERSE vs. THE PRACTICAL, THE REAL, THE ACTUAL WORLD.

 

          In Nichols v. Zurich Am. Ins. Co., ___ S.W.3d ___, No. 2020-SC-0284-DG, 2021 WL 4487529 (Ky. September 30, 2021)(stated not final and not yet to be cited as authority in Kentucky courts), the Kentucky Supreme Court confronted just such a case, i.e., a case in which the record showed that the carrier did little to nothing to settle an Uninsured Motorist (UIM) claim.

          The carrier's settlement conduct was bound up in its belief that there should not have been any UIM coverage under the policy at bar.  On a previous appearance of this case in the Kentucky Supreme Court, the Court disagreed.  The Court held that the policy at issue provided UIM coverage at all material times, in effect.  The case presented many issues the first time around, but the one we are concerned with here relates to the Supreme Court's treatment of the carrier's conduct concerning settlement negotiations.

 

RECORD EVIDENCE OF DOING SOMETHING TO INITIATE SETTLEMENT NEGOTIATIONS IN GOOD FAITH.

 

          Putting evidence into the record can go a long way toward proving the carrier's settlement conduct in good faith; having no evidence in the record can be bad.   See generally 1 Dennis J. Wall, Litigation and Prevention of Insurer Bad Faith, § 3:16, Duty to initiate settlement negotiations.

          "When insurance companies investigate the applicability of policy provisions to individual claims, their conduct is governed by the UCSPA [Unfair Claims Settlement Practices Act] as well as common law principles of good faith and fair dealing."  Nichols, 2021 WL 4487529, at *4.

          The Uniform Claims Settlement Practices Act has been enacted in much the same form across the country.  See generally 1 Dennis J. Wall, supra, § 3:28 Legal bases of liability in settlement--Statutory (third-party or liability insurance bad-faith claims); 2 id., §§ 9:14 & 9:15 (Express and Implied statutory causes of action in first-party bad-faith claims). 

          As the Nichols Court pointed out, the UCSPA incorporates a duty of good faith to attempt to effectuate "prompt, fair and equitable settlements of claims in which [the insured's] liability has become reasonably clear."   Kentucky's version of this duty is embodied in Ky. Rev. Stat. Ann. § 304.12-230(6):

    It is an unfair claims settlement practice for any person to commit or perform any of the following acts or omissions:

* * *

    (6) Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear[.]

The Kentucky Supreme Court applied this statutory standard in Nichols.

 

EVIDENCE OF POST-LITIGATION SETTLEMENT CONDUCT

 

          There was one crucial addition in this case that applies in most States, not just in Kentucky:   The Kentucky Supreme Court's case law is predicated "on the understanding that the insurer's duty of good faith to the insured does not end until the claim has been settled."  Nichols, 2021 WL 4487529, at *6.

          That observation led the Court in Nichols to consider the discovery of post-litigation materials, meaning discovery of materials generated by the insurance carrier after the bad-faith lawsuit was filed.  The Court made it clear in Nichols that "even evidence of settlement behavior is not automatically admissible."  Nichols, 2021 WL 4487529, at *6.  In fact, in this case, the Court expressly ruled that "Nichols is entitled to the internal Zurich documents relating to the insurer's initial denial of his claim."  Nichols, 2021 WL 4487529, at *7.

          The Supreme Court further cautioned "that in all circumstances trial courts must remain vigilant and cautious prior to admitting any post-litigation evidence."  Earlier in its opinion, the Kentucky Court noted that "[t]he trial court granted Nichols' discovery requests in part, limiting it specifically to Zurich's settlement conduct." Nichols, 2021 WL 4487529, at *4.

          Later in its opinion, the Kentucky Supreme Court added this observation regarding evidence of the carrier's post-litigation settlement conduct in this case:

However, since Zurich simply opted out of engaging in the settlement process entirely, Nichols has no other remedy under our procedural rules.

Nichols, 2021 WL 4487529, at *7 (emphasis added).

 

CONCLUSION

 

          In the end, doing nothing is no defense.  Simply opting out of engaging in the settlement process entirely is not a good option, even in those few jurisdictions which do not require insurance carriers to do something to initiate settlement negotiations.

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