In Kelly v. State Farm Fire & Casualty Co., the Supreme Court of Louisiana recently held that an insurer can be liable for bad faith failure to settle a claim even if it has not received a firm offer to settle the claim. The court also held that the insurer could be liable for misrepresenting any pertinent facts, not only facts relating to coverage. Together, these holdings may cause carriers issuing policies under Louisiana law to consider carefully their claim handling practices.

Danny Kelly was injured on November 21, 2005 in an automobile accident with Henry Thomas, who had liability insurance with State Farm. He incurred medical bills totaling $26,803.17. On January 6, 2006, Kelly’s attorney mailed State Farm a copy of his hospital records and bills, concluding “I will recommend release of State Farm Insurance Company and your insured, Henry Thomas, Jr., for payment of your policy limits.” State Farm did not reply to the letter, but Kelly’s attorney conversed with State Farm representatives twice in March 2006. During the second conversation, and in a subsequent letter, State Farm offered to settle for $25,000, the policy limit. Kelly’s attorney rejected the offer and filed suit against Thomas. State Farm then sent Thomas a letter informing him of possible personal liability and suggesting that he retain independent counsel, but not informing him of the January 2006 letter from Kelly’s attorney, State Farm’s offer to Kelly, or the amount of Kelly’s medical bills. At trial, Thomas was found liable for the accident, and a judgment for $176,464.07, plus interest, was entered. State Farm paid Kelly the policy limit of $25,000. Thomas then assigned his right to pursue a bad faith claim against State Farm to Kelly in exchange for a promise not to enforce the judgment against his personal assets.

Kelly then sued State Farm for bad faith practices, and the matter was removed to federal court. The district court granted State Farm partial summary judgment, holding that State Farm did not have a duty to notify Thomas of the January 2006 letter, but could be liable for failing to accept the offer it contained. On reargument, the district court accepted State Farm’s argument that the January 2006 letter was not an offer, so State Farm could not be liable for failing to accept it, and hence was entitled to summary judgment on both claims. On appeal, the Fifth Circuit affirmed the dismissal of the duty to settle claim, but reversed on the duty to inform claim. After the parties filed petitions for reargument, the Fifth Circuit certified the issues for review by the Louisiana Supreme Court.

The applicable Louisiana statute provides that an insurer owes its insured “a duty of good faith and fair dealing,” including an obligation to “make a reasonable effort to settle claims,” and can be liable for damages as a result of breaching those duties. After explaining that those duties ran to Kelly as the assignee of the rights of Thomas, the insured, the court observed that an insurer owes fiduciary duties to its insured under the statute, and can be liable for bad faith failure to settle under it. Turning to the specific question of whether an insurer must receive a firm settlement offer as a condition for an insured to recover for its bad faith failure to settle, the court rejected such a condition. Noting that the statute places an “affirmative duty” to adjust claims fairly on the insurer, and finding no statutory basis for a “firm offer” requirement, the court had no difficulty distinguishing the case on which the insurer relied for the requirement, which antedated the statute and, in any event, required a fact-specific inquiry and did not speak of a “firm offer” requirement.

Addressing the further certified question of whether an insurer can be found liable under the statute for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage, the court again built its analysis on the statutory language, which prohibits “[m]isrepresenting pertinent facts or insurance policy provisions relating to any coverages at issue.” Based on Louisiana statutory law, the court construed “or” as disjunctive, so that any misrepresentation of pertinent facts is a basis for liability (as well as any misrepresentation of insurance policy provisions relating to coverage). So construed, the statute clearly applies to State Farm’s failure to disclose to Thomas the facts about Kelly’s offer.

Kelly is instructive as an exercise in statutory interpretation. More importantly, it is a reminder that a carrier’s duties to its policyholder may not be limited to those arising strictly out of the policy language. Numerous states have passed statutes codifying certain obligations insurers owe their policyholders. So while the policy may be the place to start for an insured when trying to determine whether its carrier has fully met its obligations, it is not the only source of those obligations.