Wisconsin Supreme Court Finds Bad Faith For Gambling With Insured’s Deductible
April, 2011
In Roehl Transport v. Liberty Mut. Ins. Co., 784 N.W.2d 542 (Wis.), the Wisconsin Supreme Court held that a liability insurer was liable for its bad faith refusal to settle a claim, despite the fact that the judgment was within the policy coverage limits. The court held that even though the award did not exceed the amount of insurance coverage, the insurer showed bad faith in failing to settle for less than the full deductible.
Facts
The underlying action arose when one of Roehl Transport's trucks rear-ended a car driven by the plaintiff, Arthur Groth. Roehl's liability policy with Liberty Mutual Insurance had a $2 million limit, but a $500,000 deductible. Liberty exercised control over pre-trial settlement discussions, but stated that they were unable to settle the claim prior to trial. At trial, the jury awarded Groth $830,400 in damages, an amount in excess of Roehl's $500,000 deductible, but well within the coverage limit. Subsequently, Roehl sued Liberty Mutual for bad faith, claiming that it should have settled for $100,000. Roehl asked the jury for $400,000 in damages, stating that the case could have been settled for only $100,000 of the $500,000 deductible. The jury awarded Roehl $127,000, finding that "Liberty Mutual breached duties owed to Roehl Transport in the handling of the Groth claim; and that Liberty Mutual's failure to perform its duty to Roehl Transport demonstrated a significant disregard of Roehl Transport's interest such that Liberty Mutual's failure to settle Groth's claim was done in bad faith." Liberty Mutual appealed the jury's verdict, arguing that Wisconsin law did not allow for Roehl's bad faith claim, because Roehl was not responsible for damages in excess of the coverage limit.
Analysis
The Wisconsin Court of Appeals certified the case for review by the Wisconsin Supreme Court. The Wisconsin Supreme Court acknowledged that it had not previously addressed a bad faith claim when the judgment against the insured was within the policy limits, and also that the facts of the case did not fit within the types of claims generally recognized as bad faith claims in Wisconsin. Accordingly, the court framed the case as one of first impression, determining whether a third-party insurer can fail to settle in bad faith when the insured is not exposed to a judgment in excess of its policy limit. Ultimately, the court held that a judgment in excess of policy limits is not a prerequisite to a bad faith claim. It stated that an insurer "may be liable for the tort of bad faith when [it] fails to act in good faith and exposes the insured to liability for sums within the deductible amount."
Chief Justice Shirley Abrahamson authored a lengthy opinion in which she expressly declined to treat the generally recognized categories of bad faith as exclusive. She opined that insurance bad faith is an ever-evolving tort, characterized by principles that apply whenever an insurer retains control over a settlement while its interests conflict with those of the insured. In instances where the insured has a significant deductible, like the case at hand, the potential for bad faith looms. "The insurance company might offer an unnecessarily high settlement within the deductible to avoid the expense of diligent investigation and adjustment. Or it might expend insufficient effort to investigate a claim unless or until the insurance company's own money is at risk when the value of the claim approaches or exceeds the deductible." In this case, the court found that Liberty Mutual was not concerned with settling the claim for as little as possible, but instead was only interested in minimizing its costs for investigating and adjusting the claim.
Notably, Judge Abrahamson forecast that these types of bad faith claims may arise more frequently. In the past, an insurer's decision to settle within policy limits usually cost an insured little because the deductible was modest. Accordingly, courts would only find bad faith when the insured was exposed to liability in excess of policy limits. However, with the "increasing prevalence of high-deductible policies, cases such as the present one may become more common."
Learning Point
Roehl Transport represents a clear departure from generally recognized types of bad faith claims, and provides a caution for attorneys retained by insurance companies on behalf of an insured. Legal experts have opined that this case has the potential to strongly influence other jurisdictions, and could potentially lead to legal malpractice actions against attorneys retained by "bad faith" insurers.
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