In August 2007, a Wells Trucking employee was operating a flatbed trailer when he was involved in an accident that resulted in the death of another motorist.  The employee was at fault in causing the accident.
 
At the time of the accident, Wells Trucking had primary insurance with United Fire with $1,000,000 policy limits and an excess policy with Scottsdale with a $2,000,000 policy limit. Scottsdale’s coverage was not triggered unless and until the underlying policy with United Fire was exhausted.  The Scottsdale policy also provided that if Wells Trucking had any rights to recover any payment Scottsdale made under the policy, those rights would be transferred to Scottsdale. 

After unsuccessful settlement negotiations with United Fire for its policy limits, a wrongful death lawsuit was filed.  Thereafter, a mediation was held between the plaintiff, United Fire and Scottsdale.  The case settled at mediation for $2,000,000, $1,000,000 from United Fire and $1,000,000 from Scottsdale.  Wells Trucking assigned to Scottsdale its right to pursue a bad faith claim against United Fire and agreed to pursue United Fire for the benefit of Scottsdale. 
 
Thereafter, Wells Trucking and Scottsdale filed suit against United Fire for bad faith refusal to settle.  Five theories were raised in support of the bad faith claim.  

1.      Assignment of Wells Trucking Claim
2.     Conventional Subrogation
3.     Equitable Subrogation
4.     Breach of United Fire’s Direct Duty of Good Faith to Scottsdale
5.     Third-Party Beneficiary of the United Fire Policy [1]

After the trial court sustained United Fire’s Motion for Summary Judgment. [2] An appeal was thereafter filed and ultimately the case was decided by the Missouri Supreme Court.

In reversing the trial court, the Missouri Supreme Court set out new elements for the tort of bad faith refusal to settle.  The court held that a cause of action exists for bad faith refusal to settle when a liability insurer (1) reserves the exclusive right to contest or settle any claims; (2) prohibits the insured from voluntarily assuming any liability or settling any claim without consent; and (3) is guilty of fraud or bad faith in refusing to settle the claim within the limits of the policy.  Notably, in implicitly partially overruling Bonner v. Automobile Club Inter. Insurance Exchange, 899 SW.2d 925 (Mo. App. 1995), the court stated in a footnote that it is not required under Missouri law for an insured to make a demand for the liability insurance company to settle as an element of a bad faith claim.  The court noted, however, that the existence of such a demand is highly relevant in determining “whether an insurer acted in bad faith in refusing to settle.”
 
The court went on to explain that a judgment in excess of the limits is not an element of the tort of bad faith.  The court noted that its prior precedent of Zumwalt v. Utilities Ins. Co., 228 SW.2d 750 (1950) (which first recognized the tort of bad faith in Missouri) stated that an insurer will be liable “for the amount of the judgment recovered against the insured in excess of the policy limits.”  The Scottsdale court held that this statement reflected on the facts of the case in Zumwalt and was not an element of the tort of bad faith under Missouri law.  Accordingly, the fact that there was no judgment against the insured in excess of the policy limits did not negate the bad faith claim as a matter of law.
 
In holding that Scottsdale could pursue a bad faith claim in its name, the court noted for the first time that under Missouri law that the tort of bad faith was assignable. The court found that its holding was in accord with the majority of jurisdictions in the United States.
 
The court also held that Scottsdale had a right to pursue the bad faith claim under theories of conventional subrogation[3] and equitable subrogation.[4]
 
The Scottsdale decision has a occasioned a sea-change in Missouri law regarding bad faith.  The court has held for the first time as follows:

     *     A bad faith claim is assignable
     *     A primary carrier has duties to an excess carrier akin to the duties that it has to the insured
     *     A demand for settlement by the insured is not an element of the tort of bad faith

The effect of this decision on insurance companies writing policies in the State of Missouri is that carriers will be at an increased risk of extra-contractual claims.  The court’s decision makes it much easier to make an extra contractual claim against a primary carrier. Avoiding extra-contractual claims will require carriers to be more alert on claims handling issues when a policy limits settlement demand has been made.   
 
If you have any questions regarding this case, or ECL and insurance coverage matters generally, please do not hesitate to contact me.
 
John L. Mullen
jmullen@fsmlawfirm.com
816-421-7100