The Louisiana Supreme Court created a new species of bad faith conduct for which insurers can be in bad faith for failing to settle when there was never a firm settlement offer. Kelly v. State Farm Ins. Co., 2015 WL 2082540 (La. May 5, 2015).

A driver was involved in an auto accident that injured another driver. The injured driver’s attorney sent the at-fault driver’s insurer a letter stating that he would recommend a release of the at-fault driver for payment of policy limits. The insurer did not respond, nor did it advise its insured of the proposal. It later offered policy limits, which offer was rejected. After that offer was rejected, the insurer warned the at-fault driver, its insured, of an excess verdict potential and recommended that he retain personal counsel. The letter did not mention the earlier letter from the injured driver’s counsel. Suit was filed and the plaintiff was awarded well in excess of policy limits.

The at-fault driver’s insurer paid its policy limits and the insured assigned its rights against his insurer to the plaintiff, who then brought a bad faith suit against the insurer contending a failure to settle prior to suit. The district court granted summary judgment to the insurer on the basis of no offer having been made. The plaintiff appealed, and the U.S. Fifth Circuit Court of Appeals certified the following questions to the Louisiana Supreme Court:

  1. Can an insurer be found liable for a bad faith failure to settle a claim under LA. R.S. §22:1973(A) when the insurer never received a firm settlement offer; and
  2. Can an insurer be found liable under La. R.S. §22:1973(B)(1) for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage?

The Louisiana Supreme Court answered both in the affirmative. The Supreme Court held that an insurer’s duty is an affirmative one which equated to “taking positive action(s) to comply with a legal standard” and that its obligation “is triggered by knowledge of a particular situation” which an insurer has an obligation “to gather in the claims process.” The Supreme Court further concluded that the statutory prohibition against misrepresenting facts or insurance policy provisions relating to any coverages at issue (La. R.S. §22:1973(B)(1)) is not limited to a policy’s coverage positions and can extend to any fact.