Last week, the Wisconsin Supreme Court issued a decision in Roehl Transport, Inc. v. Liberty Mutual Insurance Co., 2010 WI 49, that expands the scope of cognizable insurance bad faith claims in the state. The Court rejected the proposition that a judgment in excess of the insurance policy's coverage limit is a necessary prerequisite to a third-party bad faith claim. Instead, in a unanimous decision, the Court held that an insurance company commits bad faith where it engages in inadequate investigation and adjustment of a third-party claim and, as a result, the insured pays more of its deductible in judgment than otherwise would have been necessary to resolve the claim.
Background
Roehl Transport, Inc., a Wisconsin trucking company, purchased successive liability insurance policies from Liberty Mutual from 1989 through 2000. The policies contained property damage and bodily injury limits of $2 million. The policies further included a negotiated endorsement for a deductible of $500,000 per occurrence for automobile and general liability. Liberty Mutual retained control over the claims handling process, including the investigation, defense and settlement of claims, although Roehl Transport negotiated "Special Handling Instructions" that gave Roehl Transport input in the settlement and handling of claims.
On January 20, 2000, a Roehl Transport truck rear-ended Arthur Groth's car. Roehl Transport notified Liberty Mutual of the collision on the day it occurred, and Liberty Mutual assumed the investigation and handling of Groth's claim. No settlement was reached, and a jury awarded an $830,400 verdict against Roehl Transport.
Roehl Transport sued Liberty Mutual for bad faith, alleging that Liberty Mutual's handling of the Groth claim was characterized by inadequate investigation, inexperienced and high-turnover staffing and lack of good faith efforts to settle, which resulted in a failure to settle Groth's claim for less than the full amount of Roehl Transport's $500,000 deductible. At trial, the jury found Liberty Mutual's conduct was in bad faith and awarded Roehl Transport $127,000 in compensatory damages. The trial court entered judgment against Liberty Mutual in that amount and denied Roehl Transport's request for attorney fees and punitive damages.
Liberty Mutual appealed, and Roehl Transport cross-appealed. The Court of Appeals certified the case to the State Supreme Court.
The Court's Unanimous Decision
The Court began by noting that the policy at issue provides the insurer with exclusive power to settle claims and, as a result, the insurer "owes a duty to its insured to settle or compromise a claim made against the insured and to act in good faith in doing so." 2010 WI 49, ¶ 41. According to the Court, this duty is derived from the implied convenant of good faith and fair dealing found in every contract and is designed to protect the insured in situations where the insured's interests are in the hands of the insurer but may come into conflict with the insurer's own interests. Id., ¶¶ 43-44.
Next, the Court noted that, in the traditional third-party bad faith claim, a conflict between the insurer's and the insured's interests may arise when the value of the claim exceeds the policy limits but the tort victim offers to settle within policy limits. The Court explained that, in such circumstances, the insured's interests are best protected by acceptance of the settlement offer, thereby limiting liability to an amount paid by the insurer. Id., ¶ 46. By contrast, the insurer's interests may be better served by pursuing the matter to trial: At trial, the insurer may defeat the claim outright or obtain judgment within policy limits but, even if the insurer loses, its liability is capped by its policy limits and the insurer is "in no worse a position than [the insurer] would have been in had it accepted the settlement offer." Id., ¶ 47. According to the Court, in these traditional third-party bad faith claims, the insurer "is, in effect, gambling with the insured's money." Id., ¶ 48.
Turning to Roehl Transport's claim, the Court noted an analogous risk of divergent interests where the insured's coverage is subject to a "significant" deductible. Specifically, the Court observed that, under such circumstances, there is a risk that the insurer might either offer an unnecessarily high settlement within the deductible to avoid the expense of diligent investigation and adjustment, or expend insufficient effort to investigate a claim until the insurance company's own money is at risk. Id., ¶ 53. The Court concluded that an insured with a high deductible similarly needs the protection of a bad faith cause of action to guard against the risk that an insurer might put its own financial interests before those of its insured. Id., ¶ 54.
Implications
The Court's decision in Roehl Transport is significant because it broadens the scope of bad faith claims in Wisconsin. Before Roehl Transport, Wisconsin courts had recognized three situations in which the risk of bad faith exists: (1) failure to settle a third-party claim within policy limits; (2) unreasonably and in bad faith withholding payment of the insured's first-party claim; and (3) failure to reimburse an insured for a worker's compensation claim. With Roehl Transport, the Court has added the scenario in which the insurer settles within policy limits, but fails to sufficiently protect the insured from exposure for sums within the insured's deductible.
Moreover, the Court has indicated its willingness to treat the tort of bad faith as an evolving area of law. In particular, under Roehl Transport, the implied duty of good faith and fair dealing may extend to any circumstance in which the insurer retains control of settlement, but its financial interests potentially conflict with the financial interests of its insured.