The Duty to Follow-up Part II: When The Underlying Litigation Changes

In many states, an insurer not only has a duty to timely communicate with its insured and respond to demands for settlement by a claimant asserting a claim regarding the adjustment of a loss, that duty may also include the duty to follow-up on those communications.  Recent case law further emphasizes the importance of follow-up in the context of an offer to settle made by a tort claimant, as well as when the insurer is apprised of changes to the status of claims and defenses in the underlying tort case. 

Neglecting the duty to follow-up can cost an insurer – converting a $25,000 claim to a $7 million loss.  As a recent case decided by the United States District Court for the Northern District of Illinois shows, the costs of not doing so, even on a relatively small claim under a low limit policy, can be catastrophic.

Horace Mann Insurance Company provided automotive insurance limits of $25,000.  Less than 45 days after a motor vehicle accident involving its insured near Tampa, Florida in which the insured’s SUV collided with a motorcycle, Horace Mann was presented with a letter from an attorney for the motorcycle driver offering to settle his claim for the $25,000 limits of the policy.  The letter noted that medical records were not yet available, but included photos of the claimant’s injuries and an exchange of information form filled out at the scene of the accident.  The attorney letter offered to settle the claim if Horace Mann tendered a check for its $25,000 policy limits within 20 days.

The insurer responded before the 20-day period elapsed, acknowledging that it was willing to settle the case for its policy limit, but needed to receive the claimant’s hospital records before settling.  Because the records were not received in that timeframe, the insurer did not tender its settlement check within the time set forth in the demand.

Forty-five days later, suit was filed against the insured.  The case was tried three years later resulting in a $17 million verdict, which was later settled for $7 million while post-trial motions were pending.

Horace Mann was insured for its own E&O by Lexington Insurance Company.  Lexington denied the claim for extracontractual benefits paid by Horace Mann to the claimant on the basis that no claim had been made directly against Horace Mann triggering the E&O coverage afforded by the Lexington policy.  Horace Mann, while never having been named in a claim, did at a point during the post-trial proceedings and before settlement of the underlying litigation, receive an email in which the threat of “bad faith” was made, but it was never conveyed to Lexington.

In a May 13, 2016 ruling, District Judge Charles Norgle held in Lexington Ins. Co. v. Horace Mann Ins. Co., No. 1:11-cv-02352 (N.D. Ill., May 13, 2016), that Horace Mann’s failure to meet the 20-day deadline of the underlying demand in the injury case, coupled with its failure to communicate with its own E&O insurer regarding its settlement of the underlying claim, meant Horace Mann was not only obligated to pay the $7 million settlement, but forfeited its own professional liability coverage for that settlement.

Horace Mann was also left without recourse against its broker, AON, for failing to timely report Horace Mann’s E&O claim to Lexington.  The Court concluded that AON followed the directions given to it by Horace Mann to report only a potential circumstance and that Horace Mann did not ask AON to take any further action after the reporting of those circumstances.  This resulted in no report of an actual claim to Lexington, which was the basis for Lexington’s denial.

This case highlights the importance of thoughtful and strategic follow-up at every stage of the claim process.  Otherwise, as with this case, a $25,000 loss can turn into a $7 million loss.  The insurer’s lack of follow-up in response to the underlying settlement offer and in its own E&O insurance claim resulted in the inability to obtain insurance coverage for the insurer’s failure to settle the underlying claim.

Demands within limits are fraught with potential traps.  This case illustrates the importance of not only making a proper record of the claim investigation and adjustment, but also that lack of follow-up can turn even a small claim into a horrendous loss.

The Duty to Follow-Up When the Underling Litigation Changes.  Bamford, Inc. v. Regent Ins. Co, et al., No. 15-1968, — F.3d —, 2016 WL 2772585 (8th Cir. May 13, 2016), recently decided by the United States Court of Appeals for the Eighth Circuit, applying Nebraska law, was an otherwise typical bad faith failure to settle case where a demand to settle was made in an automobile accident case within the insurer’s limit which was not accepted by the insurer.  The tort case went to trial resulting in a substantial excess verdict.

Bamford’s commercial automobile liability policy limit was $6 million.  The underlying case arose when a Bamford employee, Michael Packer, was operating a Bamford vehicle and collided with another vehicle driven by Bobby Davis (“Bobby”), with his brother, Geoffrey Davis (“Geoffrey”), as a passenger.  A steel pipe on the roof of the Bamford vehicle dislodged during the collision and pierced Davis’ left thigh, traveled through his abdomen and pelvis, and out of his right buttock, pinning him in his vehicle.  Bobby was trapped in this position for 30-60 minutes before paramedics were able to free him.  Geoffrey, his brother, suffered minor injuries, and settled his claim against Bamford.  Packer, the Bamford employee, burned to death inside his vehicle.

Subsequently, Bobby, Geoffrey and Bobby’s wife, Brenda Davis, retained counsel.  In demanding payment of the $6 million policy limits of Bamford’s policy, the Davises’ counsel of course maintained that his client’s case was worth well over the $6 million policy limit.  Regent disagreed, relying on its appointed defense counsel’s assessment of a verdict potential of no more than $1 million.

So far, nothing unusual about the background of the case, but here is where the duty to follow-up is implicated and where things went wrong for Regent.  In addition to Regent’s defense counsel’s dollar exposure analysis, in a later report, defense counsel advised of a new theory of defense that could apply to diminish liability – namely, that Packer, Bamford’s driver, lost consciousness before causing the accident.Defense counsel nevertheless increased his dollar exposure analysis to between $1.5 and $1.75 million, once defense counsel’s further investigation into the loss-of-consciousness defense revealed that Packer had a history of seizures, which Packer had to control through medication.  Even before defense counsel completed his investigation into the new defense, defense counsel opined that the new loss of consciousness defense only had a 25% chance of success. In refusing to settle, Regent relied on both the dollar exposure analysis and the new defense theory.

The parties participated in two mediations – one pre-suit mediation; and a second mediation after the Davises filed suit against Bamford and Packer’s estate, alleging several theories of Bamford’s liability for their injuries.  The Davises filed a motion for partial summary judgment, requesting that the lower court strike Bamford’s loss-of-consciousness defense.  The court granted the Davises’ partial summary judgment motion, and also found that Bamford was liable as a matter of law.  Thus, the case would proceed to trial solely on the issue of damages.  The settlement history recounted in the Court’s decision indicates that the last demand prior to trial was $3.9 million from plaintiff and an offer of $2.05 million from Regent.  The case went to trial resulting in a jury verdict for the Davises of $10.6 million.  Bamford appealed, and, during the appeal, the parties settled the case for approximately $8 million, for which Bamford was responsible for the amount in excess of the policy limits.

Subsequent to the settlement of the underlying case, Bamford filed this action against Regent, alleging that Regent breached its fiduciary duty and acted in bad faith in refusing to settle the Davises’ claims.  Bamford sought damages in the amount it contributed to the settlement, as well as the fees it paid to its counsel.  The jury returned a verdict in Bamford’s favor, awarding the requested damages of $2,037,754.33, and Regent then filed a renewed motion for judgment as a matter of law, challenging the sufficiency of the evidence and the jury instructions, which the district court denied.

Affirming the United States District Court for the District of Nebraska which presided over the bad failure to settle trial against Regent, the Eighth Circuit made special note of Regent’s failure to follow up on the change in status of the parties’ respective positions in the underlying litigation heading into trial:  Here, the jury could have concluded that Regent — by relying on valuations received from mediators, counsel, and internal adjusters – reasonably embraced a low value for the Davises’ claims early in the case, but 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.  Regent’s failure to adjust its valuation following the district court’s grant of partial summary judgment strongly supports such a conclusion.

Again, the district court did not merely grant the Davises’ partial summary judgment motion that resulted in the Court striking the loss-of-consciousness defense.  The court went much further and found Bamford liable as a matter of law.  For nearly two years, Nolan [defense counsel] and Robin [Regent adjuster] had counted on a tempering of damages when the jury heard the purportedly sympathetic facts that would be introduced to support this defense, such as Packer’s history of seizures and use of seizure medication.  They had also believed that the loss-of-consciousness defense, which would have provided Bamford a complete bar to liability, had a slight chance of success.  In the wake of the district court’s ruling, the jury would hear neither the purportedly sympathetic facts supporting a medical emergency nor other evidence that could moderate its view of Bamford’s culpability.

The lesson from Bamford is clear:  litigation is very fluid and any material change in litigation must be considered and evaluated by an insurer faced with potential liability for a verdict in excess of policy limits.  Remember also that reliance upon defense counsel’s assessment of risk is only as good as that counsel’s last report.

Finally, if developments in the litigation are not being factored into defense counsel’s risk assessment or that risk assessment is unclear, insurers who guess wrong on settlement will not be able to later effectively rely on defense counsel’s unclear or inadequate risk assessment as a defense to liability for a verdict in excess of policy limits.

About The Author

Steven Pearson's practice emphasizes the areas of insurance coverage, bad faith, reinsurance, professional liability and complex general commercial litigation. He has represented insurers at every stage of the process, from claims handling through trial and appeal in state and federal courts across the country.