Kelly v. State Farm – Establishing Bad Faith by Auto Insurance Firm

Auto insurance companies have a responsibility to deal fairly and in good faith with both insureds and claimants, and to make reasonable efforts to settle claims. A breach of these duties by the insurer will result in the company being responsible for damages sustained as a result – and in some cases, it could mean treble (triple) damages.

While insurance companies are notorious for cutting corners to reduce the possibility of a payout, even in legitimate cases, claims asserting bad faith by an insurer can be difficult to prove.

Alabama has recognized “bad faith” as a tort claim since the 1981 state supreme court decision in Chavers v. Nat. Sec. Fire & Casualty Co. Essentially, the court found there are two ways an insurer can be found to have acted in bad faith.

  • Refusal to settle when there is no lawful basis for the refusal, along with actual knowledge of that fact.
  • Intentional failure to determine whether there was any lawful basis for such refusal.

If you have been involved in a Montgomery traffic accident, refusal of reasonable offers by an insurance company could amount to bad faith. This is part of the reason you want to hire an injury lawyer right away. Having a legal advocate who understands the process can help ensure your claim is properly preserved if the insurer is dealing unfairly with you.

In the recent Louisiana Supreme Court case Kelly v. State Farm Fire & Casualty Co., an issue of bad faith arose following a 2005 crash that resulted in the victim suffering a broken femur and a six-day hospital stay. In all, he racked up nearly $27,000 in medical bills.

According to court records, the crash happened in November 2005 when two men were driving on the same road in opposite directions. The insured/at-fault driver made a left turn, resulting in the collision. The insured insisted he was not at fault, but plaintiff and an independent witness disputed this assertion.

In January 2006, plaintiff’s attorney sent a letter to insured’s auto insurance company, attaching copies of plaintiff’s medical bills. The letter indicated the attorney would advise his client to release insurance company and insured from liability for payment of the policy limits, which was $25,000. This was $2,000 shy of the total losses suffered by plaintiff. (Plaintiff attorney would later say there was a misunderstanding, as he believed the policy limit to be $50,000.)

Insurance company didn’t respond to this letter. However, plaintiff’s attorney did converse with company representatives twice. In the second conversation, a representative offered to settle for $25,000 and sent a letter memorializing that offer. Plaintiff attorney rejected the offer and later filed a lawsuit against insured.

The day insurer received word the offer was rejected, it sent its client/at-fault driver notice of possible personal liability and recommended he hire an independent lawyer. The insurer did not disclose the January 2006 letter from plaintiff, the insurance company’s subsequent offer or the amount of plaintiff’s medical bills.

Lawsuit proceeded to trial, and jurors found defendant driver liable for $176,500 in damages, plus interest. The insurance company paid just $25,000.

Defendant then entered an agreement with plaintiff. He would assign his right to pursue a bad faith claim against the insurance company in exchange for plaintiff’s promise not to enforce judgment against his personal assets.

Plaintiff then filed a lawsuit against the insurance company, alleging the firm acted in bad faith for failing to notify its insured of the January 2006 letter and for failing to accept that settlement offer.

Insurer sought dismissal of both claims, alleging the letter from plaintiff didn’t constitute a firm offer of settlement, and it couldn’t be liable for bad faith if it never received an actual offer. Further, it argued there was no duty to notify insured of the offer.

Ultimately, after ping-ponging through the federal appellate courts, two questions were certified to the Louisiana Supreme Court:

  • Could an insurance company be held in bad faith for refusing to settle if there hadn’t been a firm offer from claimant?
  • Could insurance company be held liable for failing to disclose pertinent information to its insured, even if it wasn’t directly related to the policy?

After carefully weighing these, the state supreme court answered them both in the affirmative. That means plaintiff can continue with his claim, having established a valid cause of action.

Call Allred & Allred P.C. at 334.396.9200 to speak with a Montgomery personal injury lawyer.

Additional Resources:
Kelly v. State Farm Fire & Casualty Co., May 5, 2015, Louisiana Supreme Court
More Blog Entries:
Cline v. Homuth – Accident Settlement Language Must be Carefully Examined, April 30, 2015, Montgomery Injury Lawyer Blog

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