A recent decision of the US Court of Appeals for the Eighth Circuit taught an insurer a costly lesson about trying to avoid extra-contractual liability: Insurers must constantly reevaluate their settlement position throughout the claims process, especially when any of the following events occur: (1) a significant court ruling; (2) a request from the insured’s counsel; and (3) new advice provided by the insurer's retained counsel. In Bamford, Inc. v. Regent Ins. Co., No. 15-1968, 2016WL2772585 (8th Cir. May 13, 2016), an insurer had to pay approximately $2 million over its $6 million limit for its failure to settle a claim for severe injuries resulting from an automobile collision, after its insured’s defense was stricken and the insured was found liable as a matter of law.

In May 2009, Michael Packer (Packer), an employee of Bamford Inc. (Bamford), the insured, was involved in a two-vehicle collision with a vehicle driven by Bobby Davis (Davis). Davis suffered gruesome injuries. Packer burned to death inside his vehicle.

On August 5, 2010, Davis's counsel sent a settlement demand letter to Regent Insurance Co. (Regent) offering to settle the claim for Bamford's $6 million policy limit. The demand letter provided that if the offer was not accepted by September 13, the settlement amount would increase to $10.6 million. Bamford, through its independent counsel, sent a letter to Regent asserting that the claim presented an exposure above the $6 million policy limit and demanded that Regent settle the claim within the policy limit.

However, defense counsel hired by Regent valued the claim at less than $1 million and advised Regent that he was pursuing a loss-of-consciousness defense that would be a complete bar to Bamford’s liability. After learning that Packer had a history of seizures that were controlled with medication, Regent's counsel advised that the loss-of-consciousness defense had a 25% chance of success, and later lowered the odds of success to only 10%.

Davis's counsel filed a motion for partial summary judgment on the loss-of-consciousness defense. The court granted the motion and found Bamford liable as a matter of law. The only issue at trial would be the amount of damages. After the motion was granted, Regent's defense lawyer, who also represented the claim adjuster, requested authorization to make a $3 million settlement offer, but Regent did not approve the request. Leading up to trial, Davis indicated that the case could settle in the $3 million range but would never settle in the $2 million range. Regent’s highest counteroffer was $2.05 million. The trial resulted in a verdict of approximately $10.6 million. Bamford appealed, and the parties settled during the pendency of the appeal for $8 million, with Bamford responsible for the amount in excess of the policy limits.

Bamford then filed suit against Regent, alleging breach of fiduciary duty and bad faith refusal to settle the Davis claim. The jury returned a verdict in favor of Bamford in the amount of $2,037,754.33.

The circuit court explained that “Regent’s failure to adjust its valuation following the district court’s grant of a partial summary judgment strongly supports [] a conclusion” that Regent “ultimately acted in bad faith in failing to reassess the value of the claims in light of case developments and advice from its own players that the low value was inaccurate.” Id. at *9. The court explained that not only did Regent deny requests from its defense counsel and its own claims adjuster to increase the settlement authority to $3 million, but it also "failed to increase its reserve even one penny from the previously-set amount of $2.25 million. A reasonable jury could view Regent’s stark inaction … as a complete and total refusal to consider the fiduciary duty it owed to Bamford.” Id.

The lessons to be learned from this case are that: an insurer should continually evaluate its settlement position especially after key court rulings; it should seriously consider the advice provided by lawyers and claims adjusters when an increase in settlement authority is requested; and sticking to pre-established numbers rather than intelligently evaluating a claim throughout its stages can land an insurer in a bad faith failure to settle lawsuit.

The impact of this case is addressed in Tip No. 8 in our "Ten Tips for Stopping the Setup." See also WILLIAM T. BARKER & RONALD D. KENT, NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION, § 2.03[5].