Last month, we discussed the duty to follow-up in the context of an offer to settle made by a tort claimant and how neglect of that duty cost an insurer dearly by converting a claim that could have been settled for $25,000 into a $7 million loss. Today, in Part II of “The Duty to Follow-up,” we discuss the insurer’s duty to follow-up when apprised of changes to the status of claims and defenses in an underlying tort case.
Bamford Ins. v. Regent Insurance Company, No. 15-1968 (8th Cir. May 13, 2016), recently decided by the United States Court of Appeals for the Eighth Circuit, 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 involved very serious injuries to the plaintiff, Michael Packer, when a pipe on the roof of one of Bamford’s vehicles became dislodged during a collision with Packer’s vehicle and pierced his left thigh, traveled through his abdomen and pelvis, and out of his right buttock, pinning him in his vehicle. Packer was trapped in this position for 30-60 minutes before paramedics were able to free him.
In demanding payment of the limits of Bamford’s policy, Packer’s 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 defense counsel’s dollar exposure analysis, in a later report, defense counsel advised of a new theory of defense which could apply to diminish liability based on an alleged unforeseeable medical event resulting in a loss of consciousness by Bamford’s driver. Defense counsel nevertheless increased his dollar exposure analysis to between $1.5 and $1.75 million. In refusing to settle, Regent relied on both the dollar exposure analysis and the new defense theory. Defense counsel opined that the new loss of consciousness defense had a 25% chance of success.
While the underlying case moved through pre-trial proceedings, the trial court issued a ruling striking the loss of consciousness defense and also found Bamford liable as a matter of law for causing Packer’s injuries, meaning 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 Packer of $10.6 million.
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’ request to strike 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 mediation. 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.