Opinion ID: 78397
Heading Depth: 2
Heading Rank: 1

Heading: Reasonableness of Auto-Owners' Investigation and Handling of the Rivermar Claim

Text: The jury heard evidence from which it could have concluded Auto-Owners performed an unreasonable and inadequate investigation. Froman ignored the assessment of those who had been involved with the claim for more than three years, including Auto-Owners' independent monitoring attorney (Traster), in-house attorney (Kamp), and claims manager (Smith). The collective impression of those who had been involved in the case since its inception was that there was no exposure on the bond. Froman disregarded the investigation performed by Auto-Owners' representatives and credited Rivermar's investigation and assessment of the case. Also, the Rivermar claim against the bond was not likely to succeed, and it was unreasonable for Auto-Owners to settle for the full amount of the bond when Auto-Owners was advised Rivermar would end all of the litigation for the payment of money to Southeast. On the eve of trial that was scheduled for May 2004, but was continued at the last minute, Rivermar offered to pay money to Southeast to settle the case. Southeast's attorney and ASI's attorney both testified Rivermar had offered to pay Southeast to settle the dispute. Southeast's attorney and Auto-Owners' monitoring attorney both concluded there was no exposure on the part of Southeast or Auto-Owners from Rivermar's claim. The jury could reasonably have concluded that it was not only unreasonable for Auto-Owners to summarily disregard its own initial investigation that indicated the Rivermar claim was not likely to succeed, but also unreasonable for Auto-Owners to conduct an inadequate investigation before settling with Rivermar. First, the attorney Froman enlisted in November 2004 to investigate the claim was tainted by a conflict of interest and therefore unreliable. Hayes testified Crafton himself, as well as other partners in his law firm, had a preexisting attorney-client relationship with ASI or its principal shareholders. Hayes also testified Crafton indicated to her he had never heard of ASI. Crafton attended trial before the district court as counsel for Rivermar, but did not testify in rebuttal of Hayes' testimony. The jury reasonably could have concluded Hayes' testimony was true and Crafton disingenuously denied familiarity with ASI. Second, Crafton's investigation was cursory. In November 2004 Crafton and Hayes talked about the case for about an hour, and then Crafton reviewed Hayes' files for half an hour. Hayes testified it would have taken someone two or three days to thoroughly go through all of the files and the entire reason Mr. Crafton came to my office was because there was a bad-faith claim potential by Rivermar. In mid-November 2004 Crafton contacted McLellan and arranged to have him visit the dock site and inspect the docks. Crafton never informed Hayes of this site inspection, and the parties at the inspection signed a confidentiality agreement prohibiting disclosure of any information exchanged at the meeting. As of December 1, 2004 when Crafton and McLellan visited the dock site, Rivermar had not allowed Hayes or Southeast's experts on the premises to inspect the docks. The jury could have inferred Crafton gained access to the dock site and met with ASI representatives, when Hayes had experienced substantial resistance, because Crafton had a preexisting and favorable relationship with ASI and, consequently, his investigation and assessment of the claim was tainted by that relationship. In addition to concluding Auto-Owners' investigation of the claim was colored by Crafton's friendliness with ASI, the jury could have concluded it was also inadequate. McLellan testified he did not perform any calculations or evaluations of his own on the docks and he never reviewed Rivermar's dock maintenance records. Southeast's president testified maintenance was critical because during the first year all rods holding the docks in place must be retightened because of shrinkage of treated lumber. A review of Rivermar's dock maintenance records by McLellan would have been important because those records would have established if Rivermar performed any maintenance of the docks after they were installed. The jury could have inferred Auto-Owners secretly settled with Rivermar before its engineer had fully and adequately investigated the claim and thus it was unreasonable for Auto-Owners to rely on its engineer's incomplete investigation of the docks as a pretext for settling the claim with Rivermar. The jury could have inferred Auto-Owners' demands for collateral from Southeast were intended to thwart and undermine Southeast's attempt to litigate the claim, which would have impeded Auto-Owners' settlement of the bad faith claim. During the first three years of Auto-Owners' investigation of Rivermar's claim, Auto-Owners concluded there was no reasonable risk of liability and did not seek any collateral from Southeast. In January 2005, Auto-Owners demanded Southeast deposit cash equal to the full penal sum of the bond in the amount of $956,978 within five days. Hayes testified she had many discussions during that time about posting collateral and Auto-Owners did not respond to Southeast's offers. Three months later, on April 4, 2005, Hayes asked Auto-Owners if it was attempting to settle the Rivermar claim, and at that time Southeast offered to put the full sum of the bond in Traster's trust account. Three days later, Auto-Owners demanded Southeast post $3 million in cash with Auto-Owners. Auto-Owners offered no explanation why its demand for collateral increased more than threefold to $3 million when Southeast offered to satisfy its demand for collateral equal to the sum of the surety bond. The jury could have inferred Auto-Owners' collateral demands were precipitated by Auto-Owners and Rivermar's agreement in principle to settle the claim at the March 28th meeting in Louisville, and if Southeast had satisfied the demand for collateral, Auto-Owners could not have settled the claim without Southeast's consent. Thus, the jury could have concluded Auto-Owners' collateral demands were unreasonable and in bad faith. In sum, the jury could have found from the evidence (1) Froman unreasonably ignored the investigation and assessment of Auto-Owners' own employees as to the merits and strength of the claim on the bond, (2) Rivermar's claim against the bond was weak and therefore settlement for the full amount of the bond was unreasonable, (3) Crafton had a bias friendly to Rivermar and relying on his investigation and assessment of the claim was unreasonable, (4) McLellan never completed his investigation and reliance on his preliminary opinion was unreasonable, and (5) Auto-Owners' demand for a threefold increase in collateral, without explanation, was unreasonable. While evidence of an unreasonable and inadequate investigation and handling of a claim, standing alone, may be insufficient to support a finding of bad faith, the jury in this case also heard evidence to support an inference Auto-Owners had an improper and self-interested motive to settle the claim.