Opinion ID: 1448289
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Heading Rank: 18

Heading: Damages Over Policy Limits

Text: An insured's action for damages for breach of an insurer's implied good faith settlement obligation is contractual in nature. Aves v. Shah, 258 Kan. 506, 511-12, 906 P.2d 642 (1995); see Guarantee Abstract & Title Co. v. Interstate Fire & Cas. Co., 232 Kan. 76, Syl. ¶ 2, 652 P.2d 665 (1982). If a claim for breach of the implied covenant of good faith or breach of any other provision of the insurance policy is contractual in nature, then the term extracontractual damages is a misnomer. The damages awarded should place the injured party in the same position as if the breach(es) had not occurred. The appropriate phrasing of this issue is whether plaintiffs are entitled to recover any amount in excess of NPIC's policy limit of $25 million as breach of contract damages. Two Court of Appeals cases have considered the issue of an insurer's bad faith in coverage denial: George R. Winchell, Inc. v. Norris, 6 Kan. App.2d 725, 633 P.2d 1174, rev. denied 230 Kan. 871 (1981), and Snodgrass v. State Farm Mut. Auto. Ins. Co., 15 Kan. App.2d 153, 804 P.2d 1012, rev. denied 248 Kan. 997 (1991). In Winchell, the insurer denied coverage and refused to defend Norris. Winchell, the third-party claimant, obtained a default judgment against Norris over the $10,000 policy limit. In Winchell's garnishment against the insurer, coverage was found, but judgment was entered against the insurer only for the policy limit because a substantial question regarding coverage existed and the carrier had acted in good faith in refusing to defend. The Winchell court concluded its analysis as follows: A showing that bad faith was exercised when the insurer made the initial decision of whether to defend or not is not required. [Citations omitted.] In the latter situation, a wrongful refusal is enough to constitute breach. If no settlement offer is made, the existence of good or bad faith is irrelevant. 6 Kan. App.2d at 730. Under the Winchell rationale, bad faith should not be relevant to a breach of the coverage obligation, because, like the duty to defend, coverage is expressed in the policy. Snodgrass also involved denial of coverage and a refusal to defend. The personal injury claimant, Snodgrass, recovered judgment against the insured, Owen, over the policy limits and obtained an assignment of rights from Owen after the insurer, State Farm, denied coverage and refused to defend. During the trial of Snodgrass's action against State Farm, State Farm rejected Snodgrass' policy limits settlement offer. Snodgrass recovered an excess judgment against State Farm. The jury found that State Farm negligently and in bad faith breached the contract. The Court of Appeals affirmed coverage, but did not find substantial competent evidence to support findings that State Farm denied coverage or rejected the settlement offer either in bad faith or negligently. State Farm was not liable for the portion of the judgment over the policy limits. As to State Farm's denial of coverage, Snodgrass stated: In the present case, State Farm had legitimate grounds to believe it was justified in denying coverage. An insurance company should not be required to settle a claim when there is a good faith question as to whether there is coverage under its insurance policy. If there is no coverage, there is no fiduciary relationship between the tortfeasor and the insurance company. Given State Farm's good faith claim that its insurance policy did not cover the Camaro, it did not have to attempt to settle the claim, and there was no bad faith prior to judgment. 15 Kan. App. 2d at 166. The Snodgrass court also found that the settlement offer was unreasonable, having been tendered during trial only to show the jury that State Farm had rejected the offer. Courts in other jurisdictions have struggled with the perplexing problem of settlement rejection based on coverage denial. The struggle has reflected different approaches. See McGuire & Mc-Mahon, Bad Faith, Excess Liability and Extracontractual Damages: Counsel for the Excess Carrier Looks at the Issues, 72 U. Det. Mercy L. Rev. 49, 62-63 (1994) (comparing a court's holding that an insurer which allows coverage doubts to affect its settlement decision does so at its peril, see Johansen v. California State Auto. Assn. Inter-Ins. Bureau, 15 Cal.3d 9, 123 Cal. Rptr. 288, 538 P.2d 744 [1975], to those holding that an insurer incurs no liability for bad faith if it insists on litigating a serious coverage issue before agreeing to a policy limits settlement demand, see Mowry v. Badger State Mut. Cas., 129 Wis.2d 496, 385 N.W.2d 171 [1986]). Mowry reasoned that the California approach in effect, renders an insurer strictly liable for any decision not to settle within policy limits, whether or not made in good faith, when a subsequent judgment against the insured exceeds policy limits .... .... Although we acknowledge the apparent goal of the California approachto protect the insured from liability for an excess judgment by placing the risk of an erroneous decision not to settle on an insurerwe decline to accept that strict approach for this jurisdiction. Such a policy is unduly oppressive on insurance companies and would force them to settle claims where coverage may be dubious. 129 Wis.2d at 513-14. Wisconsin, by statute, provides for a bifurcated trial on issues of coverage and the underlying claim. See Wis. Stat. § 803.04(2)(b) (1993-94). In Mowry, the defendant insurer sought a separate coverage trial under the statute, and the parties stipulated to holding the liability and damage issues in abeyance until after the coverage trial. An earlier New York case rejecting strict liability is Gordon v. Nationwide Mut. Ins. Co., 30 N.Y.2d 427, 431, 334 N.Y.S.2d 601, 285 N.E.2d 849 (1972), cert. denied 410 U.S. 931 (1973). Although Illinois did not have a bifurcated coverage trial statute similar to Wisconsin's, the Mowry rule was adopted in Stevenson v. State Farm Fire & Cas. Co., 257 Ill. App.3d 179, 184, 628 N.E.2d 810 (1993), lv. to appeal denied 155 Ill.2d 577 (1994) (We believe that the test used by [the Mowry] court is appropriate whatever the procedure might be in deciding the issues.). The coverage debate between California's strict liability rule and Wisconsin and New York's good faith denial rule is a close one. A logical rationale is advanced for both views. See the dissents in Mowry, 129 Wis.2d at 537, and Gordon, 30 N.Y.2d at 441. Commentators differ in analysis of the direction courts are heading on the denial of coverage issue. See McGuire & McMahon, 72 U. Det. Mercy L. Rev. at 62-63, and Wall, Litigation and Prevention of Insurer Bad Faith § 5.16, p. 222 (2d ed. 1994): In recent decisions, courts have shown a significant change in attitude toward a liability insurer's denial of coverage. This tidal shift in attitude has made available an entirely new defense in extracontractual damages actions against liability insurers.... Unless the evidence in the extracontractual damages action shows that the insurer denied coverage without a fairly or reasonably debatable basis, there can be no extracontractual damages even if the insurer's denial of coverage was wrong, it has been held. In Wisconsin, insurer bad faith is treated as a tort. Wisconsin makes a distinction between insurer bad faith and negligence. Mowry, 129 Wis.2d at 515 (Bad faith in deciding to litigate rather than settle a claim involves more than a mere finding of negligence on the part of the insurer.). Kansas does not recognize the tort of bad faith. Guarantee Abstract & Title Co. v. Interstate Fire & Cas. Co., 232 Kan. 76, 79, 652 P.2d 665 (1982) (citing Spencer v. Aetna Life & Casualty Ins. Co., 227 Kan 914, 611 P.2d 149 [1980]). We have held that in defending and settling claims against its insured, a liability insurer owes to the insured the duty to act in good faith and without negligence. Bollinger, 202 Kan. at 333. The distinction between the bad faith and negligence standards for insurers has long been blurred. We stated in Bollinger, 202 Kan. at 335: While the terms `negligence' and `bad faith' are not synonymous or interchangeable in a strict legal sense, they share common hues in the insurer's spectrum of duty, and the distinction between the tests is less marked than the terms would suggest. Professor Keeton, in his article Liability Insurance and Responsibility For Settlement, 67 Harv. L. Rev. 1136 (1954), emphasizes the lack of distinction by pointing out that even those jurisdictions following the bad faith rule recognize, at least by implication, that the company must, if it fails to settle, defend with ordinary care, and that negligence in investigation which leads to a mistake in failing to settle is also a breach of this duty of ordinary care of defense. The insurer's duty to act in good faith and without negligence arises under the contract. See Glenn, 247 Kan. at 312. In Guarantee Abstract, we said: Over the years, courts have increasingly been dissatisfied that `good faith' in its ordinary sense was too low a test of acceptable conduct of an insurer in performing under an insurance contract. In the effort to raise the standard of conduct required of an insurer, other tests were utilized such as to act with due care, without negligence, fair dealing, etc. All of these terms are simply statements of the contractual obligation an insurer undertakes under a duty to defend. 232 Kan. at 80. The duty to act in good faith without negligence also encompasses a liability insurer's coverage decision when used as the reason for rejecting a reasonable settlement offer within policy limits. Although we have previously said that something more than mere error of judgment is necessary to constitute bad faith, Glenn, 247 Kan. at 305-06, negligence or a lack of good faith in the coverage investigation or the decision to deny coverage leading to a mistake in failing to settle breaches the insurer's duty. We endorse the Snodgrass rationale that an insurance company should not be required to settle a claim when there is a good faith question as to whether there is coverage under its insurance policy.