Insurer has duty not to misrepresent scope of coverage or policy limits to third-party claimant.
Tina Railsback was a passenger in a car driven by Tom Hauglin. After the accident, Railsback made a claim against Hauglin, alleging negligence and seeking compensation for neck and back injuries. Hauglin was represented by his insurance company, Mid-Century, which had issued a policy to Hauglin with policy limits of $50,000 per person and $100,000 per accident. Acting without benefit of legal counsel and without commencing a formal lawsuit, Railsback negotiated a settlement of $25,000 with Mid-Century.
What otherwise would seem an uneventful case became considerably more significant when Railsback claimed she was misled by Mid-Century adjusters into believing that the Hauglin policy limits were $25,000 per person injured, half of the actual limits. Railsback alleged that had she known the true policy limits, she would not have settled for $25,000 but did so only because she thought this was the Mid-Century policy limit and the most that could reasonably be obtained. (Presumably, Haughlin had few assets of his own for satisfying any uninsured judgment.) Armed with a lawyer for round two of this drama, Railsback sued Mid-Century for defrauding her by misstating the policy limits. The trial court found in favor of the insurer and dismissed the claim, holding (1) that a liability insurer has no duty to speak truthfully to an injured third-party claimant and (2) that Railsback's claim was the equivalent of a direct action against the insurer by a person injured by the policyholder, something forbidden under South Dakota law as it is the case in most states.
The South Dakota Supreme Court unanimously reversed the trial court and remanded for further proceedings. This does not mean Railsback will inevitably win on remand. Railsback and Mid-Century put forth different versions of the facts surrounding the negotiations and settlement. Railsback claims the true facts show she was improperly misled by Mid-Century while the insurer argues that the actual facts at most show only that Railsback misinterpreted the information she received from the insurer. The state Supreme Court opinion is based to a large degree on the civil procedure principle that disputed facts must be viewed most favorably in light of the party seeking trial. Unless it can be show that there can as a matter of law be only one resolution of the facts, plaintiffs like Railsback are presumably entitled to have the jury or judge hear the evidence at trial. However, the Court's opinion not only establishes some clear "do nots" for insurance companies but also suggests that insurers may in some cases be liable if they take unfair advantage of the claimant's misunderstanding of ambiguous circumstances.
The Supreme Court rejected the trial court's view that all was fair in love, war, and insurance adjusting.
The relationship between an insurer and a third party claimant is not a fiduciary or confidential relationship. In fact, we have noted that the [liability] insurer stands in the shoes of the insured and therefore, the relationship between the claimant and the insurer is adversarial. The parties deal at arms length and there is no duty on the part of the insurer to disclose the policy limits during settlement negotiations. Therefore, to the extent the trial court held that there is generally no duty to disclose policy limits, it was correct. However, the question here is narrower. Specifically, whether an insurer may knowingly cause or further a claimant's misunderstanding of the policy limits to her detriment. Mid-Century concedes that South Dakota law allows a claimant to affirm a settlement agreement and bring a fraud action against an insurance company without obtaining judgment against the insurance company.
See 680 N.W.2d at 654-655.
In addition, state law precedent established that an insurer may have a duty to disclose policy limits where this was in the best interests of the policyholder (e.g., if this would make resolution more likely and protect the policyholder from an excess judgment). But Mid-Century then argued that in the absence of an insurer's view that full disclosure would benefit the policyholder, the insurer was allowed to play its policy limits cards close to the vest. The Court rejected this view, noting that under prevailing tort law concepts, an action for deceit may lie against a party that does not outright lie but merely takes knowing and unfair advantage of another party's misunderstanding.
Assuming all facts in favor of Railsback, there is a genuine issue of material fact whether the insurer deceived or defrauded her or made misrepresentations in the settlement negotiations ... Drawing inferences from the facts in the record in favor of Railsback, it could be reasonably inferred that the adjusters were aware of and exploited her misinformation regarding the policy limits. We do not accept the insurer's argument that an insurer never owes a claimant a duty to disclose policy limits just because it is an adversarial relationship.
See 680 N.W.2d at 655-56.
As to the issue of whether Railsback's suit was an impermissible "direct action" against the insurer, the court agreed with the general proposition that an absence of contractual privity between insurer and third-party claimant generally prohibits a third-party from suing the insurer for transgressions such as bad faith toward its policyholder, failure to negotiate, failure to accept a reasonable settlement demand, and so on. However, the Court saw Railsback's claim not as an impermissible direct action against an insurer for mistreatment of the policyholder. Rather, Railsback's claim was one arising not from the insurance contract but from tort-like duties not to mislead or deceive an adverse party in a legal matter. In particular, the Court found that it would not be logically consistent to require a defendant to deal in honest fashion with a plaintiff but then allow the defendant's insurer cart blanche for deception. According to the Supreme Court, the trial court decision
would remove all rules of fair dealing in settlement negotiations between third-party claimants and insurance companies. The inequity of the determination can be clearly seen by the following example. If the tortfeasor was uninsured, and he and the claimant entered into settlement negotiations, the tortfeasor would be required not to defraud, deceive or make misrepresentations to the claimant. Under the trial court's interpretation of "direct action," the insurer, which stands in the shoes of the insured, has no such duty and cannot be held directly accountable. [This would create an untenable situation in which:] First, insurance companies would have everything to gain and nothing to lose by systematically defrauding tort claimants into accepting low settlement offers. Second, the opportunities for overreaching and committing fraud in releases of tort claims may be greater than in typical cases of commercial contract fraud, where the parties are more often on an equal footing.
See 680 N.W.2d at 657, quoting DeSabatino v. United States Fidelity & Guar. Co., 635 F. Supp. 350, 355-56 (D. Del. 1986). In addition, the Supreme Court found that Railsback's action was not one arising "under the terms of the policy" and hence was not barred by South Dakota's ban on direct actions against the insurer for claims against the policyholder. See 680 N.W.2d at 657-58.
The Railsback opinion seems sensible in stating that minimal standards of honesty apply to opponents in legal matters. Although Railsback was negotiating informally with Mid-Century, the situation was obviously not far removed from litigation, which was the logical next step if an accord were not reached. Had the matter been in litigation, either policyholder Hauglin or his insurance company-appointed lawyer would have been required not to make misrepresentations to Railsback or to engage in similar deception. Although there is not a wealth of case law on the topic, it also seems logical to conclude that an insurer brokering a settlement of an auto accident claim cannot lie or mislead without providing the plaintiff with grounds for setting aside the settlement.
In addition, a legal system permitting such self-serving deception by insurers might be disastrous for the policyholder. What if Hauglin was facing the prospect of an excess verdict? Under the circumstances, a truthful insurer might have been able to settle for the policy limits, protecting the policyholder. But an insurer that hornswaggles the plaintiff into a lower settlement by deception may find the settlement set aside, thereby needlessly exposing the policyholder to uninsured liability in excess of the actual policy limits or otherwise creating problems for the policyholder, particularly if the accident occurs in a small community of which tortfeasor and victim are both members. Presumbably the insurer does this only to save some of its money at the expense of protecting the policyholder--which sounds like bad faith. The mere absence of formal litigation should not bring a different analysis or justify tricking, deceitful behavior by an insurer that would not be permitted during formal litigation.
In addition, the civil rules of federal courts and nearly every state judicial system require that the defendant/policyholder disclose the policy limits or produce the actual policy to a litigation opponent, often without even a formal demand by the plaintiff. Although it may be tempting to say that Railsback got the legal representation for which she paid in "going it alone" against the insurer during informal negotiation rather than retaining counsel, it would make little sense to let an insurer take advantage of a third-party claimant in a manner that could almost never occur in formal litigation, where the rules and the presence of counsel and a supervising court nearly always result in full disclosure about insurance. If insurers routinely refuse to disclose limits or are deceptive when discussing limits during the adjustment process, this potentially creates a perverse incentive for claims to be turned into formal lawsuits simply so the claimant can be sure he or she is getting accurate information about policy limits.
Furthermore, this was an automobile accident insurance case. Each state has laws requiring auto insurance out of a belief that this is necessary regulation to ensure that victims of negligent driving are compensated. This public policy goals would be thwarted if insurers were able to pay less than policy limits for an injury based on concealing the actual amount of available auto insurance rather than on the basis of the severity (or lack thereof) of the claimant's injuries or disputes over the degree of the defendant/policyholder's negligence.
If anything, one can argue that the Railsback Court did not go far enough. Perhaps, despite the adversarial nature of the relationship between an auto accident claimant and the defendant driver's insurer, there should be an ironclad duty for the insurer not only to avoid fraud but to affirmatively provide the claimant with accurate and complete information about available coverage and policy limits. Such a rule would not only foster candor in dispute resolution but would also likely make the negotiation process more efficient and reduce litigation. Although full disclosure of limits might encourage some claimants to ask for more than they might otherwise seek, the insurance company would of course be under no obligation to pay a doubtful or inflated claim.
Jeffrey W. Stempel
University of Nevada, Las Vegas
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|Title Annotation:||Recent Court Decisions|
|Author:||Stempel, Jeffrey W.|
|Publication:||Journal of Risk and Insurance|
|Date:||Dec 1, 2004|
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