Misrepresenting Coverage Creates Potential Extra-Contractual Exposure
Recent issues of the Bad Faith Update have looked at a carrier’s potential excess exposure in situations other than those involving a third-party action with an excess judgment entered against an insured. This includes the recent 8th Circuit case of Dziadek v. Charter Oaks featured in the September 2017 Bad Faith Update.
Similar to the 8th Circuit, the Indiana Court of Appeals was presented with the situation of whether the failure to disclose an Umbrella Policy in UM litigation could give rise to a Fraud/Bad Faith cause of action.
The Court of Appeals determined that it could.
Underlying Facts and UM Lawsuit
In September 2008, Jerry Earl sustained injuries in a motorcycle wreck involving a hit and run semi. At the time of the incident, Jerry and his wife Kim Earl had a UM policy issued by State Farm with limits of $250,000 (UM Policy) and an Umbrella Policy also issued by State Farm that, unbeknownst to the Earl’s, had UM limits of $2,000,000.
After the Earl’s UM claim was not settled, suit was filed.
During discovery, the Earl’s sent an interrogatory to State Farm requesting that State Farm identify any policy that might apply to the UM claim. State Farm responded by only identifying the UM Policy and its $250,000 limits. Following this, the UM claim was tried and the jury was informed of the existence of the $250,000 UM Policy.
On November 27, 2012, the jury returned a verdict of $250,000. The following day, State Farm directed its counsel to disclose for the first time the existence and amount of the Umbrella Policy.
Following this disclosure, the Earl’s filed a motion to amend the judgment arguing for an increase in damages due to State Farm’s failure to disclose the Umbrella Policy and the jury being incorrectly informed of the total amount of coverage provided by State Farm for the UM claim.
State Farm also requested a new trial based on the disclosure of the policy limits information. The trial court denied State Farm’s motion as did the appellate court.
Prior to State Farm’s appeal, the Earl’s withdrew their motion to amend the judgment and filed a Fraud/Bad Faith case against State Farm.
Fraud/Bad Faith Case
In November 2014, Kimberly Earl filed her Fraud/Bad Faith claim against State Farm alleging fraud, bad faith, and breach of contract and sought damages for emotional distress, attorneys’ fees, and punitive damages.
State Farm argued and filed a motion for summary judgment asserting that the claims were an impermissible attack on the UM judgment and that the Earl could not reasonably rely on State Farm’s representations as to the existence and amount of coverage available for the UM claim. In addition, State Farm argued that the above contentions along with assertions of waiver precluded the Bad Faith and Breach of Contract claims.
The trial court agreed with State Farm finding all claims were impermissible attacks on the UM judgment, that the fraud and bad faith claims must fail as Earl could not reasonably rely on State Farm’s assertions as to the existence and amount of coverage and that there was no other conduct that constituted conscious wrongdoing on the part of State Farm. Further, the Court found that Earl’s breach of contract claim was waived during discovery.
Court of Appeals
On appeal the Court reversed the trial court’s entry of summary judgment. In doing so the Court addressed the three contentions raised by the trial court.
1. Fraud/Bad Faith Claims Were Not an Attack on UM Judgment
In finding that the fraud and bad faith claims were not an impermissible collateral attack on the UM judgment the Court distinguished the nature of the UM claims from the claims involving fraud and bad faith.
In addition, the Court noted that the damages sought in each action were different and arose from different injuries and that Earl was not asking the Court to avoid, defeat, evade or deny the effects of the UM Judgment.
2. Fraud-Reliance on State Farm’s Misrepresentations
The Court also determined that a fact issue existed as to whether Earl could reasonably rely on State Farm’s representations as to the amount and existence of UM coverage available. In doing so the Court acknowledged that in most circumstances in which parties are dealing at arm’s length, a party cannot rely and believe everything they are told by another without exercising reasonable care to protect their own interests. State Farm seemed to argue this was the case here as Earl would have had the opportunity to read and examine the Umbrella Policy and interpret the terms for herself.
However, the Court also took note of the complexity of today’s insurance contracts and noted some initial confusion at State Farm concerning the total UM coverage available.
Because of this, the Court determined questions of fact existed and must be determined by the jury as to whether Earl’s reliance on State Farm’s misrepresentations as to the amount and existence of the UM coverage was reasonable.
3. Bad Faith-Fact Issues Remain
Finally, the Court determined that questions of fact existed as to whether State Farm acted in Bad Faith.
After noting that a carrier must refrain from taking advantage of or deceiving an insured, the Court looked at the facts surrounding State Farm’s failure to disclose the existence of the Umbrella Policy and the actual limits of the UM coverage. In particular, State Farm’s claims notes showed that State Farm discussed the potential applicability of the Umbrella Policy early on and had actually opened a claim under the Umbrella Policy over eight months before failing to identify the Umbrella Policy in response to Earl’s interrogatory and two and a half years before actually disclosing the applicability of the Umbrella Policy.
In the Court’s view, these issues presented a fact question as to whether State Farm was acting in Bad Faith.
Both Dziadek and Earl provide insight into various fact patterns that could give rise to extra-contractual exposure to carriers. Further, both demonstrate that representations concerning coverage should be taken with a grain of salt as carriers are not always good neighbors, not always on your side, and rarely is an injured claimant in good hands.