Kansas Supreme Court Reverses $3.4M Bad Faith Judgment Against Insurer

January 31, 2023 by

An insurer’s duty to act in good faith and with reasonable care does not necessarily include a requirement to begin settlement negotiations before a claim is filed, the Kansas Supreme Court ruled.

The high court affirmed a panel decision by the Court of Appeals that reversed a trial court decision to award the widow of a vehicle accident $3,353,777.52 in damages, despite a $25,000 limit in the policy that Key Insurance Co. issued to the at-fault driver.

The opinion says there may be some instances where an insurer’s duties require it to settle a third-party claim before an injured party makes a demand for payment, but there must be some evidence to show that the insurer’s actions caused the excess judgment.

The opinion says that was not the case in the lawsuit filed by Nancy Granados against Key Insurance after her husband Francisco was killed by Key policyholder John Wilson. The court said Wyandotte District Court Judge Bill Klapper erred by finding that Key had caused the excess judgment by failing to advise Wilson that he could be liable for damages if the insurer did not settle the claim.

“Neither party presented testimony from Wilson or his personal representative at trial,” the opinion says. “Thus, we simply do not know how Wilson would have responded if Key had advised him of this potential excess judgment liability.”

Wilson notified Key the day after he was involved in the crash that killed Franciso Granados in October 2017, but he did not say that he caused the collision. A passenger in his car testified that he had smoked a joint and shared a pint of brandy with Wilson.

A claims adjuster for the insurer determined that Wilson was at fault and set a loss reserve of $25,000, knowing that damages would be more than that.

Granados hired an attorney and in July 2018 filed a wrongful death lawsuit.Three weeks later, Key offered to pay the $25,000 policy limit, but Granados refused. She testified that she would have accepted a policy limit offer if it had been made before she hired an attorney.

Klapper awarded benefits after a bench trial, finding that Key had breached its duty by failing to communicate to Wilson that he could be held liable for an excess judgment if it did not settle the claim. A panel of the Court of Appeals reversed the judgment, finding that the excess judgment was more the result of Granados’ actions than Key’s. The panel also found that insurers have no legal duty to begin settlement negotiations before the injured party files a claim.

The Supreme Court said the Court of Appeals erred as well, even though it agreed that the District Court judgment must be reversed. The appellate panel erred by holding that an insurer, as a matter of law, never has a duty to initiate settlement negotiations before a third party makes a claim, the opinion says.

The court said insurers have a duty to act reasonably and in good faith, but it is up to the fact finder — the trial court — to determine if that duty had been met. The appellate court erred by recasting a question of fact into a question of law, the opinion says.

Nevertheless, the Supreme Court said it agreed with the result of the appellate panel’s decision. The district court erred by finding that Key had caused the excess judgment by failing to advise Wilson of the risks and consequences of not settling, the court said. No evidence was submitted at trial to who the failure to communicate made any difference.

Kansas City attorney Jared A. Rose, who represented Granados on appeal, said the US 10th Circuit Court of Appeals upheld an excess judgment in similar circumstances. In Moses v. Halstead, the court in 2009 “held that the insurer’s duty of good faith was triggered when the insured put the insurer on notice of the accident (rather than by a formal claim being asserted by the injured party).”

“Thus, the duty of good faith (from which the duty to settle arises) is not triggered by the actions of the third party,” Rose said. “It is triggered once the insurer knows about the accident (however it comes about that knowledge.)”

Of course, federal courts do not have final say on the meaning of state laws. In its opinion, the Kansas high court said a panel of the 10th Circuit erred in another case by interpreting the broad duty of insurers to act in good faith to include a narrower duty to settle.

“But that holding, like the holding of the panel here, is founded on the erroneous premise that Kansas law recognizes and incorporates more narrow, discrete, and fact-specific legal duties under the umbrella of good faith and reasonable care,” the opinion says.