5/8/2017 – Missouri has been on the top of the list of states whose laws have made claims handling decisions by insurers difficult and filled with risk. A misstep in denying coverage, providing a reservation of rights defense, or responding to a policy limits demand in Missouri may very well result in an ultimate exposure to an insurer far exceeding the claim’s reasonable value as well as extra-contractual liability and punitive damages. Indeed, the risks faced by insurers responding to a complex claim involving coverage questions may be characterized as walking on eggshells loaded with dynamite.
Relief is on the Way
On April 27, 2017, the Missouri General Assembly passed a Fair Settlements Bill, House Bill 339/714.
House Bill 339/714 addresses two problematic issues that insurers in Missouri routinely face − the time-limited settlement demand and the Section 537.065 agreement.
Insurers in Missouri routinely face time-limited policy limits settlement demands before they have completed their initial investigation. These demands often include unreasonable deadlines and, if rejected or blown, are later used to lay the predicate for a future bad-faith-refusal-to-settle claim.
House Bill 339/714 now offers insurers a safe harbor in Missouri. Unreasonable time limits are no longer permitted. Under the bill, a time-limited settlement demand must remain open for a time period not less than 90 days from the date the insurer receives the demand.
The bill further requires claimants to provide insurers with basic information about their claim and access to relevant medical and wage information. In conjunction with the 90-day time period, insurers may now have sufficient time and information with which to respond to a time-limited demand. Therefore, recourse by claimants to time-limited demands as a tool for setting up insurers for bad faith claims or Section 537.065 agreements may be sharply curtailed in the future.
The bill also includes a penalty provision to enforce compliance. While the bill does not affect an insured’s right to sue for bad faith based on the insurer’s refusal to accept a settlement demand, the bill penalizes those claimants who fail to comply with the bill’s requirements. If a claimant makes a time-limited demand that does not meet the bill’s requirements, the demand will be inadmissible in any future bad faith claim.
The second component of House Bill 339/714 reforms Section 537.065. Currently, any insurer in Missouri that issues a coverage declination or reserves its right to deny coverage, although providing its insured with a defense, faces the risk of a Section 537.065 agreement. These agreements, as a matter of Missouri public policy, authorize collusion between the insured and the claimant and result in uncontested judgments that far exceed the claim’s reasonable settlement value by depriving the insurer of any right to participate in the insured’s defense.
Moreover, judgments following Section 537.065 agreements often include findings of fact and conclusions of law that are drafted with the objective of defeating the insurer’s coverage defenses in the coverage litigation that typically follows a judgment entered under the statute. As held by the Missouri Supreme Court, an insurer is bound by the facts found by the trial court and has no right to relitigate the issues of liability or damages or those facts decided by the trial court that directly impact the insurer’s coverage position.
As a practical matter, Section 537.065 agreements and the judgments that have followed these agreements have operated to deprive insurers of any meaningful way to limit their exposure or litigate their coverage position. The statute’s chilling effect, thus, resulted in decisions by insurers to provide coverage unconditionally for claims for which they possessed substantial coverage defenses or for which their policies provided no coverage at all. In the end, the insurer’s retention of control over the insured’s defense provided the best means for the insurer to avoid potential exposure for extra-contractual liability and the risks and uncertainty of litigating the insurer’s coverage defenses.
House Bill 339/714 provides some relief from the harshest effects of Section 537.065 practice. The new bill forbids insureds and claimants from entering into Section 537.065 agreements in those cases in which the insurer is providing its insured an unconditional defense. No longer may claimants and insureds resort to a Section 537.065 agreement when the insurer has rejected a settlement demand.
House Bill 339/714 also provides redress to insurers in those cases in which Section 537.065 agreements are permitted. No longer may insureds and claimants enter into these agreements without notice to the insurer. Under the bill, 30 days’ notice is required. Further, the bill gives insurers the right to intervene in tort cases brought against their insureds in which their insureds have rejected the insurers’ reservation of rights defense. In the past, Missouri courts were uniform in holding that insurers had no right to intervene.
House Bill 339/714 has not yet been signed by Missouri’s governor. However, it is anticipated that he will do so, and, thus, the bill will take effect August 27, 2017. Its application will be prospective.
Insurers should be alert to the likelihood that they may face a flood of time-limited demands this summer before the new law takes effect. Claimants’ counsel may take this last opportunity to set up insurers for bad faith under the current law in Missouri that places no controls over time-limited demands.
Also, the bill may be subject to challenge by the claimants’ bar. In particular, the right of intervention may be subject to litigation. The Missouri General Assembly provided no guidance addressing what this new right entails. Do insurers have the right to intervene to defend the claim on the merits after their reservation of rights defense has been rejected, to intervene to litigate the facts necessary to establish their coverage position, or to intervene to seek a stay of the damage action pending a determination of the insurer’s declaratory judgment action? Only the future will tell how Missouri’s appellate courts will decide these questions.