Tenth Circuit Holds That Inadequate Investigation By Insurer Is Insufficient To Support Finding Of Bad Faith Unless A Proper Investigation Would Have Revealed The Claim Should Have Been Paid

In Bannister v. State Farm Auto. Ins. Co., 692 F.3d 1117 (10th Cir. 2012), the Tenth Circuit Court of Appeals held that an insurer was not liable for bad faith for failure to investigate (or for an improper investigation) unless the insured establishes that a proper investigation would have revealed that the claim should have been paid by the insurer.

In Bannister, the insured was riding his motorcycle when a vehicle pulled out in front of the vehicle he was following. In an effort to avoid rear-ending the vehicle in front of him, Mr. Bannister laid his motorcycle down. The insured’s wife reported the accident to State Farm, noting that he was traveling 5 to 10 miles per hour over the speed limit. The insured asserted a “phantom vehicle” UM claim based on the negligence of the vehicle that had cut in front of the vehicle ahead of him. An adjuster for the insurer heard the above facts from the insured and, without taking a statement, took three minutes to determine the insured was mostly at fault for the wreck, thus denying any UM coverage. A second adjuster spoke with Bannister about his collision coverage. The file was reviewed a second (and third) time, with the final adjuster taking only eleven minutes to determine that the wreck was the insured’s fault, thus denying UM coverage.

Bannister sued on the contract and for bad faith in state court. The insurer removed the case to federal court. During the proceedings, Bannister’s lawyers abandoned the breach of contract claim and elected to proceed solely on the bad faith claim.

The jury returned a verdict in favor of the insured on the bad faith claim, awarding the insured actual and punitive damages. The district court then granted a renewed motion for judgment as a matter of law in favor of the insurer, finding that State Farm had a reasonable basis for the denial, as a matter of law. The district court explained:

Even though State Farm had a reasonable, actually-relied-upon basis for denying Bannister’s claim, the bad faith issue could still be sent to the jury to the extent that Bannister’s theory is “premised on inadequate investigation.” Timberlake, 71 F.3d at 345. However, to resist JMOL based on a theory of inadequate investigation, Bannister “must [have] ma[d]e a showing that material facts were overlooked or that a more thorough investigation would have produced relevant information.” Id.

Id. at 1131 (citing Timberlake Constr. Co. v. U.S. Fidelity & Guar. Co., 71 F3d 335, 343 (10th Cir. 1995)). Although the jury found the investigation to be inadequate, the district court held that the insured bore the burden of proving that an adequate investigation would have revealed facts which would have resulted in coverage for the insured. The 10th Circuit affirmed, noting that a more thorough investigation would have revealed that the insured (1) was speeding, and (2) had a BAC of .09, above the legal limit. Unless the insured could point to material facts which would support approval of the claim, there was no bad faith by State Farm.

Interestingly, the jury found that the insured was entitled to coverage under the policy, thus they awarded Bannister actual damages. However, Bannister recovered nothing after the district court granted the motion for judgment as a matter of law, because his breach of contract claim was abandoned by his attorneys earlier in the action.