When an insurer assumes the duty to defend, there was a time it could take comfort that settling the case within the policy limits would extinguish a possible bad faith claim by the insured. But, with the growing popularity of high deductible plans, insurers can take comfort no longer. On June 22, 2010, the Wisconsin Supreme Court held unanimously in Roehl Transport, Inc. v. Liberty Mutual Insurance Company Case No. 2008AP1303, that an insurer may be liable for bad faith when its appointed counsel mishandled a case, resulting in a settlement in excess of the insured’s deductible. An insurance company’s potential liability for bad faith thus includes exposing the insured to liability for sums within the deductible amount.
Roehl Transport, the insured, had $2 million in liability coverage under a trucker/auto insurance policy with a $500,000 deductible. The case involved an accident where a Roehl Transport truck rear-ended an individual, Arthur Groth. The jury found Roehl Transport liable to Groth and awarded $830,400 in damages. Roehl Transport sued Liberty Mutual for bad faith for failing to properly investigate and handle the case because it had the opportunity to settle the case for less than the $500,000 deductible.
The Court addressed five issues: (1) Does an insured with a deductible for its liability coverage have a cognizable bad faith claim against its insurance company when the company has control over settlement of a third-party claim and engages in bad faith conduct toward the insured? (2) Does sufficient credible evidence support the jury’s finding of bad faith and determination of damages? (3) Do judicial public policy considerations preclude Roehl Transport’s bad faith claim? (4) Is Roehl Transport entitled to attorney fees as a matter of law upon the jury’s finding of bad faith? (5) Did the circuit court err in denying Roehl Transport’s claim for punitive damages. The Court sided with the insured on every issue except punitive damages.
The Court held that a cognizable bad faith claim existed, analogous to the third-party situation in which a claim may exceed the policy limits. The Court wrote: “the insured with a high deductible needs the protection of a bad faith cause of action to guard against the risk that an insurance company’s exercise of control over a claim might favor its own financial interest over those of the insured.” In Roehl Transport, the insurance company had control over settlement, the insured had direct financial exposure as a result of the insured’s conduct, and the interests of the insurance company and the insured conflicted. The insured’s interest was not only to avoid liability in excess of its coverage limits but also to limit any liability within its deductible. In contrast, the insurer seemingly had little concern with the value of a claim that settled below $500,000. Because the insurer had a duty of good faith to protect the interests of the insured, and failed that duty, the Complaint stated a cause of action for bad faith.
Judicial Public Policy Considerations
Liberty Mutual argued that the Court should deny recovery because judicial public policy considerations preclude liability for bad faith in this case even if the Court decided that the jury verdict was not flawed. Liberty Mutual contended that Roehl Transport’s injury was too remote from Liberty Mutual’s actions, Roehl Transport’s injury was wholly out of proportion to Liberty Mutual’s culpability, in retrospect it appears too highly extraordinary that Liberty Mutual’s actions should have brought about the harm, and allowance of recovery would place an unreasonable burden on Liberty Mutual. The Court held that the judicial public policy considerations Liberty Mutual cited apply to tort cases based on negligence – not a breach of good faith. Further, the Court held that Liberty Mutual’s judicial public policy argument was merely a reiteration of a previous failed argument concerning the sufficiency of evidence supporting the jury’s verdict and award of damages.
The Court also reversed a circuit court ruling and held Roehl Transport was entitled to attorney fees as a matter of law as a result of the jury’s finding of bad faith. It further held that the determination of the amount of attorney fees as compensatory damages is a matter of law for the circuit court. Therefore the circuit court erred in denying Roehl Transport’s request for attorney fees and failing to determine the amount to be awarded to Roehl Transport.
Punitive damages however were not justified. Wisconsin law allows punitive damages only in a case where a defendant acts maliciously or in an intentional disregard of the rights of the plaintiff. The Court found that the record did not demonstrate that Liberty Mutual’s actions demonstrated “intentional disregard” of Roehl Transport’s right consistent with the standard for awarding punitive damages.
Implications of the Wisconsin Supreme Court’s Decision
As a result of Roehl Transport, an insurer must take proper precaution when defending an insured with a high deductible. To avoid liability for bad faith, an insurer should treat an insured with a high deductible the same as an insured with a low deductible, specifically concerning investigating the case, planning strategy and evaluating early case settlement, and the specific terms of settlement.