Opinion ID: 169059
Heading Depth: 2
Heading Rank: 1

Heading: Insurance Bad Faith Claims Under Kansas Law

Text: 26 In cases arising under diversity jurisdiction, the federal court's task is not to reach its own judgment regarding the substance of the common law, but simply to `ascertain and apply the state law.' Wankier v. Crown Equip. Corp., 353 F.3d 862, 866 (10th Cir.2003) (quoting Huddleston v. Dwyer, 322 U.S. 232, 236, 64 S.Ct. 1015, 88 L.Ed. 1246 (1944)); see also Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The federal court must follow the most recent decisions of the state's highest court. Wankier, 353 F.3d at 866. Where no controlling state decision exists, the federal court must attempt to predict what the state's highest court would do. Id. In doing so, it may seek guidance from decisions rendered by lower courts in the relevant state, Progressive Cas. Ins. Co. v. Engemann, 268 F.3d 985, 988 (10th Cir. 2001), appellate decisions in other states with similar legal principles, United States v. DeGasso, 369 F.3d 1139, 1148 (10th Cir. 2004), district court decisions interpreting the law of the state in question, Sapone v. Grand Targhee, Inc., 308 F.3d 1096, 1100, 1104-05 (10th Cir.2002), and the general weight and trend of authority in the relevant area of law, MidAmerica Constr. Mgmt., Inc. v. MasTec N. Am., Inc., 436 F.3d 1257, 1262 (10th Cir.2006) (internal quotation marks omitted). Ultimately, however, the Court's task is to predict what the state supreme court would do. Our review of the district court's interpretation of state law is de novo. Roberts v. Printup, 422 F.3d 1211, 1215 (10th Cir. 2005). No party to this case has asked us to certify any question of law to the Kansas Supreme Court. 27 The leading case in Kansas defining bad faith claims in the context of an insurer's failure to settle a third-party claim against the insured is Bollinger v. Nuss, 202 Kan. 326, 449 P.2d 502 (1969). The Kansas Supreme Court explained the rationale for the doctrine as follows: 28 When a claim is made against the insured for an amount in excess of the policy coverage, the insurer's obligation to defend creates a conflict of interest on its part. On the one hand, its interests lie in minimizing the amount to be paid; on the other, the insured's interests, which the insurer is supposedly defending, lie in keeping recovery within policy limits, so that he will suffer no personal financial loss. The conflict becomes particularly acute where there is an offer of settlement approximating policy limits. The insured's desire to avoid the risk of a large judgment by settling within the limits of the policy, regardless of the merits of the claim, would compel him, were he in charge of settlement negotiations, to accept the offer. The insurer's interests, on the other hand, are prompted by its own evaluation of the liability aspects of the litigation and a desire not to expose itself to payments which do not adequately reflect the dangers that might be involved in pursuing the case to trial. When the settlement offer approaches policy limits, the insurer has a great deal less to risk from going to trial than does the insured, because the extent of its potential liability is fixed. 29 Id. at 510. The real question, according to the court, is the degree of consideration which an insurer must give to those interests of the insured which conflict with its own. Id. After canvassing the alternatives, the Bollinger court determined that the insurer may properly give consideration to its own interests, but it must also give at least equal consideration to the interests of the insured. Id. The result, the court explained, is that the insurer must conduct itself with that degree of care which would be used by an ordinarily prudent person in the management of his own business, with no policy limits applicable to the claim. Id. at 511. Something more than mere error of judgment is necessary to constitute bad faith. Id. at 514. Although the court held that an insurer is bound to conduct itself both in good faith and without negligence, it considered the difference in these two formulations more a difference in verbiage than results. Id. at 509. Thus, many of the same factors are generally relied upon in those cases finding a breach of good faith as in those finding negligence on the part of the insurer. Id. at 511. 30 The insurer's duty in these cases runs only to its insured; it has no duty to the third-party plaintiff. The Kansas Supreme Court, however, has held that the insured may assign his claim against the insurance company to another party. Glenn v. Fleming, 247 Kan. 296, 799 P.2d 79, 90-91 (1990). Here, the insured, Jerry Wade, assigned his rights to sue the insurance company for any bad-faith claim to Ninh Nguyen, the third-party tort plaintiff, in exchange for a covenant from Mr. Nguyen not to execute the judgment. Thus, it is Mr. Nguyen—not Mr. Wade— who is asserting Mr. Wade's rights against EMCASCO. 31 The Bollinger court stressed that the question of liability depends upon the circumstances of the particular case and must be determined by taking into account the various factors present, rather than on the basis of any general statement or definition. Id. at 512. The court then listed certain factors that should be considered in deciding whether the insurer's refusal to settle constituted a breach of its duty to exercise good faith, id. : 32 (1) the strength of the injured claimant's case on the issues of liability and damages; (2) attempts by the insurer to induce the insured to contribute to a settlement; (3) failure of the insurer to properly investigate the circumstances so as to ascertain the evidence against the insured; (4) the insurer's rejection of advice of its own attorney or agent; (5) failure of the insurer to inform the insured of a compromise offer; (6) the amount of financial risk to which each party is exposed in the event of a refusal to settle; (7) the fault of the insured in inducing the insurer's rejection of the compromise offer by misleading it as to the facts; and (8) any other factors tending to establish or negate bad faith on the part of the insurer. 33 Id. (quoting Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 319 P.2d 69, 75 (1957)). Significantly, the court noted that [s]everal of the listed factors were not relevant to the case at hand, id., and in light of the eighth, catch-all factor (any other factors tending to establish or negate bad faith on the part of the insurer), it is evident that the list of factors is neither exclusive nor necessarily pertinent in every case. 34 Bollinger involved an insurance company's decision to take a case to trial rather than to accept a policy-limits settlement offer. This case, by contrast, involves an insurance company's delay in accepting a policy-limits settlement offer. Approximately two months after Mr. Nguyen's last clear settlement offer apparently expired, and well before the case would have gone to trial, EMCASCO offered to settle for the policy limits. Mr. Nguyen declined to accept the offer at that time. While the first seven Bollinger factors apply to cases involving delay in acceptance of a settlement offer as well as cases involving refusal to settle, Roberts, 422 F.3d at 1219 & n. 5, delayed acceptance cases necessarily implicate other factors tending to establish or negate bad faith on the part of the insurer, Bollinger, 449 P.2d at 512. 35 In Glenn v. Fleming, 247 Kan. 296, 799 P.2d 79 (1990), the Kansas Supreme Court applied the Bollinger bad faith doctrine to a delayed acceptance case. The third-party plaintiff in that case made a policy-limits offer early in the litigation process, when discovery had scarcely begun. Id. at 82. Early investigative reports suggested that the plaintiff, rather than the insured, had caused the accident. Id. at 81. The insurance company requested the plaintiff's medical records and the plaintiff's attorney said that he would send them, but at the time of the offer had not done so. Id. at 86. The insurance company rejected the settlement offer and made a much smaller counter-offer. Id. at 82. When additional evidence later surfaced, the insurance company made a policy-limits offer, which the plaintiff refused. Id. at 83. Following a substantial verdict at trial, the insured assigned his bad faith claim to the third-party plaintiff. Id. at 84. The trial court granted summary judgment in favor of the insurance company, which the Kansas Supreme Court affirmed. Id. at 84, 86. The trial court held that there was no bad faith in refusing to accept the [settlement] offer under these circumstances. Id. at 86. The offer was found to be unreasonable because it was premature, had conditions attached to it, and was only open for two weeks. Id. 36 Similarly, in Covill v. Phillips, 452 F.Supp. 224 (D.Kan.1978), the district court, applying the Bollinger factors, held that an insurance company was not liable in a bad faith claim based upon its refusal of an early policy-limits settlement offer. Id. at 231-33. In Covill, the liability of the insured was not in doubt, but the insurance company questioned the amount of damages suffered by the third-party plaintiff. Id. at 228, 231. As in Glenn, the plaintiff's lawyers promised to provide the company the plaintiff's full medical records, but failed to do so. Id. at 228, 231-32. The court found that it was not unreasonable for State Farm, having voiced its reasonable and specific requests for the medical information it felt was necessary to verify the claimant's injuries, to rely upon the assurances of the plaintiff's attorneys that such information would be forthcoming. Id. at 232. Under the circumstances, the court held that the insurer's failure to accept the policy-limits settlement offer can in no way be viewed as a breach of its duty to its insured. Id. 37 The court held, however, that the company's subsequent conduct did give rise to a bad faith claim. Id. at 233-40. During the months after State Farm's initial refusal of the offer, the company became increasingly aware of the seriousness of [the plaintiff's] injuries, but it made no attempts to initiate settlement. Id. at 234. Indeed, long after the company itself concluded that the claim was worth more than the policy limit, and after the lawyer it hired to represent the insured had repeatedly pleaded with the company to authorize a policy-limits offer, the company continued to offer less than the policy limits. Id. at 236. The court concluded: 38 [T]here is compelling evidence that by early November, 1975, State Farm did not believe and could not have honestly believed that it had a realistic chance of defeating Larry Covill's claim or keeping any possible judgment within the limits of the policy. Furthermore, the evidence strongly suggests that if State Farm had more aggressively investigated Larry's claim instead of relying past the point of all reason on [plaintiff's counsel] to voluntarily furnish all of the information allegedly necessary for adequate evaluation of the claim it would have known much earlier than November, 1975, that the risk of an excess judgment was great. 39 Id. at 238. 40 And in Williams v. American Family Mutual Insurance Co., 101 F.Supp.2d 1337 (D.Kan.2000), the district court, applying Kansas law, granted summary judgment in favor of the insurance company in a bad faith claim, despite refusal of a settlement offer and an attendant excess judgment, where the insurer made a reasonable request for additional documentation and the plaintiff's attorney failed to supply it. Id. at 1342; see also Smith v. Blackwell, 14 Kan.App.2d 158, 791 P.2d 1343, 1347-49 (1990) (upholding bad faith claim where plaintiff's counsel furnished all requested medical reports, agreed to extend time if significant progress toward settlement was being made, and did not file suit `precipitously,' but insurer did not offer to settle until after suit was filed). 41 Courts in other states have rendered similar decisions. In Miel v. State Farm Mutual Automobile Insurance Co., 185 Ariz. 104, 912 P.2d 1333, 1336 (1995), a lawsuit against the insured resulted in an excess judgment. The insurer was then sued for delaying acceptance of the plaintiff's settlement offer until after it had expired. Id. The Arizona Court of Appeals reversed a decision against the insurer, holding that it was error for the trial court to refuse to allow evidence regarding the plaintiff's motives in setting a time limit for the settlement offer. Id. at 1339-40. The court explained that the reasons the Plaintiff adhered to the deadline are relevant to whether the insurer acted unreasonably. Id. at 1339. The court emphasized that [w]hat is reasonable on the part of the insurer ... must be judged in light of all the facts surrounding the demand. Id. Even though [the insurer] does not claim that the deadline was so short that it could not have been met, the reasons for a specific deadline may be relevant to whether the claimant has `set up' the insurer for a claim of bad faith. Id. 42 Similarly, in Adduci v. Vigilant Insurance Co., 98 Ill.App.3d 472, 53 Ill.Dec. 854, 424 N.E.2d 645 (1981), the Illinois Court of Appeals upheld dismissal of a bad faith claim where the insurer attempted to accept a settlement offer forty days after the offer expired. Id. at 649. The court explained: 43 No facts sufficiently indicate why the claimants found it impossible to accept the offer at this time, so as to fairly place the blame for failure of settlement upon Insurer. The allegations of the complaint simply do not show why the offer would have been good on May 7, 1976, but was not acceptable on June 18, 1976. 44 Id. at 649; see also Haugh v. Allstate Ins. Co., 322 F.3d 227, 232-33 (3d Cir.2003) (reversing summary judgment in favor of insurer where delay in settlement imposed substantial litigation costs upon the plaintiff, leading the plaintiff to reject the later offer); Associated Wholesale Grocers, Inc. v. Americold Corp., 261 Kan. 806, 934 P.2d 65, 92 (1997) (A claimant may be more willing to negotiate with the insured before undertaking the risk and expense of a trial.). 45 In light of these decisions, we agree with the district court's observation that courts should exercise caution when the gravamen of the complaint is not that the insurer has refused a settlement offer, but that it has delayed in accepting one. Mem. Op. 14 (citing Adduci, 53 Ill.Dec. 854, 424 N.E.2d at 649; Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 605 N.Y.S.2d 208, 626 N.E.2d 24, 28-29 (1993)). This caution arises from the desire to avoid creating the incentive to manufacture bad faith claims by shortening the length of the settlement offer, while starving the insurer of the information needed to make a fair appraisal of the case. Id. at 15. As the First Circuit commented in Peckham v. Continental Casualty Insurance Co., 895 F.2d 830, 835 (1st Cir.1990): 46 [T]he doctrinal impetus for insurance bad faith claims derives from the idea that the insured must be treated fairly and his legitimate interests protected.... In other words, the justification for bad faith jurisprudence is as a shield for insureds—not as a sword for claimants. Courts should not permit bad faith in the insurance milieu to become a game of cat-and-mouse between claimants and insurer, letting claimants induce damages that they then seek to recover, whilst relegating the insured to the sidelines as if only a mildly curious spectator. 47 In particular, in light of the purposes of the bad faith cause of action, courts cannot presume that any failure to reach a settlement when the insurer did not meet a deadline unilaterally imposed by the third-party plaintiff—no matter how arbitrary or manipulative the deadline may be—may reasonably be blamed on the insurer. 3 As the New York Court of Appeals has explained: 48 Permitting an injured plaintiff's chosen timetable for settlement to govern the bad-faith inquiry would promote the customary manufacturing of bad-faith claims, especially in cases where an insured of meager means is covered by a policy of insurance which could finance only a fraction of the damages in a serious personal injury case. Indeed, insurers would be bombarded with settlement offers imposing arbitrary deadlines and would be encouraged to prematurely settle their insureds' claims at the earliest possible opportunity in contravention of their contractual right and obligation of thorough investigation. 49 Pavia, 605 N.Y.S.2d 208, 626 N.E.2d at 28-29. It is therefore necessary to take into consideration, in addition to the other pertinent Bollinger factors, relevant aspects of the third-party plaintiff's conduct, including any responsibility the plaintiff might have for the insurer's lack of adequate information upon which to judge a proposed settlement offer and the reasons the plaintiff had for declining to entertain an offer after expiration of a deadline. 50 We now turn to the undisputed facts regarding EMCASCO's delay in accepting Mr. Nguyen's offer of a policy-limits settlement in this case. For convenience, we divide our analysis into two time segments. First, we will consider the period between May 1, 2001, and August 20, 2001, during which Mr. Nguyen formally kept open his policy-limits settlement offer. Then, we will consider the period between August 20, 2001, and November 19, 2001, when Mr. Nguyen rejected EMCASCO's policy-limits settlement offer. 51