Kansas Court: Insurer had No Duty to Pay Policy Limit Before Demand Was Made

A claims adjuster’s sub-standard investigation of a potential fatal accident claim does not warrant a multi-million award of damages against an insurer that issued a policy with a $25,000 limit, the Kansas Court of Appeals ruled.

An appellate panel on Friday reversed a trial court decision to garnish Key Insurance Co. for $3,353,777.52 in damages owed to Nancy Granados after her husband died in a motor vehicle crash. The court said an insurer cannot be held liable for damages in excess of the policy limit unless its actions caused the excess judgment.

“Although an insurer must exercise diligence and good faith in its efforts to settle claims within the policy limits, we hold an insurer owes no affirmative duty to initiate settlement negotiations with a third party before the third party makes a claim for damages,” the opinion says.

Mrs. Granados’ husband, Francisco Granados, was killed in an October 2017 crash in Kansas City, Kansas that was caused by John Wilson, who’s vehicle was insured by Key. Wilson was under the influence of drugs and alcohol when he ran a red light and crashed into Granados’ car. A passenger in Wilson’s car testified that he and Wilson had smoked a marijuana joint and shared a pint of brandy before the accident.

Wilson reported the crash to Key the next day, but denied causing it. Claims adjuster Alexandra Soto requested a copy of the police report, which listed 12 witnesses to the crash and Granados’ insurance carrier, State Farm Automobile Insurance Co. Soto completed a claim evaluation on Dec. 17, 2017 that determined Wilson was at fault, but she did not contact Mrs. Granados and didn’t interview any of the witnesses. She later set a loss reserve of $25,000, knowing that the damages would be more than that.

In the meantime, Nancy Granados hired an attorney. Key learned for the first time that there was a claim against Wilson’s policy on July 2, 2018, when it received notice of a wrongful death lawsuit filed in Wyandotte District Court. The insurer offered to settle the lawsuit for the $25,000 limit three weeks later.

Granados rejected the settlement offer. Her attorney said in a letter that Key should have offered the policy limit “a long time ago” and demanded $2,973,434 to settle the claim.

After a bench trail, District Court Judge Bill Klapper ruled in October 2019 that Mrs. Granados’ damages amounted to $4,603,777.52. The parties negotiated and stipulated later that damages were $3,353,777.52.

In December 2019, Nancy Granados filed a request for garnishment against Key for the damages. During a bench trial, Key claims manager Leonard Gragson testified that Soto had not complied with the carrier’s claims handling standards. She did not interview witnesses, contact Granados’ insurance carrier or notify Wilson of the potential severity of the claim against him.

Judge Klapper cited Gragson’s testimony in “meandering findings” that led to a ruling that Key was liable for the excess damages, the panel opinion states. The judge said Soto had not been forthcoming and had breached her duty to Wilson by failing to advise him of the potential claim.

The appellate panel said the judge imposed a greater duty on the insurer than was actually owed. While Soto’s investigation did not meet industry standards, there is no legal precedent in Kansas that requires an insurer to offer a settlement before receiving any official notice of a claim.

“Instead, the authorities state that an insurer has a duty to defend when a claim—meaning some demand for damages or lawsuit—is made,” the opinion says.