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Did insurer act in bad faith

Did insurer act in bad faith

Did insurer act in bad faith
December 01
14:52 2021

INSURANCE-RELATED COURT CASES

Digested from case reports published online

COURT DECISIONS

 

Did insurer act in bad faith?

On July 2, 2011, Trevor Olson was driving northbound in a 2005 Hyundai Tiburon on Highway 93 in Lake County, Montana, with his cousin, Tanner Olson, as a passenger. The Olson vehicle crossed over into the southbound lane and collided with an oncoming 2002 Pontiac Grand Am driven by Vincent Shepard. Vincent’s wife, Stephanie Parker, and their children, Vinney Shepard Jr., and Leeland Shepard, were passengers in the Shepard car. Stephanie, Trevor, and Tanner died in the collision. Vincent and the Shepard children were seriously injured.

Trevor’s parents, David C. Olson and Jeanine K. Olson, owned the Hyundai and insured the vehicle with State Farm Fire & Casualty Company. The policy provided liability coverage of up to $100,000 per person, up to $300,000 per accident for bodily injury, and up to $100,000 for property damage for covered claims subject to the terms and conditions of the insurance contract.

Tanner’s father, Jay Olson, had a policy with Farmers Insurance Exchange that provided $60,000 in underinsured motorist (UIM) coverage. Tanner’s mother, Kathy Gratton, had a Farmers policy that provided $500,000 in UIM coverage. Both UIM policies provided: “We will pay all sums which an insured person is legally entitled to recover as damages from the owner or operator of an uninsured [including underinsured] motor vehicle because of the bodily injury sustained by the insured person.”

On October 24, 2011, Vincent Shepard, on his own behalf, as the parent and guardian of the Shepard children, and on behalf of Stephanie’s estate, filed a personal injury action against Trevor’s and Tanner’s estates. State Farm defended both estates. Trevor’s and Tanner’s estates then filed personal injury and wrongful death actions against Hyundai Motor Company and Hyundai Motor America, alleging that the accident was caused by a mechanical defect with the Olsons’ Hyundai Tiburon, and joining Hyundai as third-party defendants to the litigation.

On December 16, 2011, State Farm filed a complaint for interpleader and declaratory relief. State Farm initiated the action because of the Shepards’ demands that State Farm tender the $300,000 limits of the bodily injury portion of the policy as an advance and their assertions that State Farm’s failure to do so constituted improper claims handling. Prior to filing the interpleader action, State Farm tendered a $25,000 general advance payment to the Shepards and offered to pay the remaining $275,000 in exchange for a release of all claims against insured parties.

Notwithstanding this offer, State Farm maintained that it was not obligated to make advance payments because the accident investigation was still ongoing and its insureds’ liability had not been determined to be reasonably clear. The Shepards continued to demand payment of the bodily injury policy limits without a release and continued to maintain that State Farm was handling the claims improperly.

In October 2013, the Shepards settled their claims against both Trevor’s and Tanner’s estates.

In May 2014, Trevor’s and Tanner’s estates’ personal injury and wrongful death actions against Hyundai proceeded to a jury trial. The jury found Hyundai liable for the collision.

On November 2, 2015, the Shepards filed a complaint against State Farm and Farmers alleging, among other claims, common law bad faith and violation of the unfair trade practices

act. The complaint did not properly name the insurance companies, so the Shepards filed an amended complaint that properly named the insurance companies. State Farm and Farmers moved to dismiss the amended complaint. The Shepards filed a second amended complaint, and State Farm and Farmers moved to dismiss the complaint.

On February 1, 2019, the district court held a hearing on the motions to dismiss. At the hearing, the parties stipulated to the court’s consideration of documents included with the briefing without converting the motions into motions for summary judgment.

The district court granted the insurers’ motions to dismiss in two separate orders, issued on February 13, 2019, and March 28, 2019. The Shepards appealed.

On appeal, the Shepards asserted that the district court erred by “incorrectly afford[ing] preclusive effect to an interlocutory order in the original litigation.” The Shepards based this assertion on the court’s statement in its February 14, 2019, order that  “[t]he previous district court finding that the liability of the defendants’ insureds was ‘not reasonably clear’ is fatal to both of these insurance claim handling counts.”

The Shepards noted that, in the interpleader action, the district court held only that “reasonably clear liability … has yet to be established by the parties.” Emphasizing the “yet to be established” language, the Shepards argued that, although reasonably clear liability had not been conclusively established in the interpleader action, neither had it been conclusively disproved. Yet, the Shepards argued, the district court seized on this holding and erroneously applied the doctrine of issue preclusion to bar their bad faith claims.

The state supreme court pointed out that the Shepards failed to acknowledge, much less address, the district court’s conclusions that they had failed to demonstrate that State Farm’s and Farmers’ insureds’ liability was ever reasonably clear. Rather, they focused their argument exclusively on a single statement from the district court’s order and its ostensible preclusive effect on their bad faith action.

But the district court’s analysis went far beyond that single statement. “Even if we were to completely excise any reference to the interpleader litigation in the district court’s orders, the Shepards still failed to demonstrate that State Farm’s and Farmers’ insureds’ liability was ever reasonably clear. The court did not err by dismissing their claims.”

The judgment of the district court was affirmed.

Shepard v. State Farm Fire & Casualty Company and Farmers Insurance Exchange—Supreme Court of Montana—December 22, 2020—No. DA 19-0265.

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