Jury’s Rejection of Bad Faith Claim Did Not Preclude Award of Statutory Fees Based on Insurer’s Refusal to Pay Claim
In a recent decision, the United States Court of Appeals for the Eighth Circuit determined that a jury’s rejection of an insured’s bad faith claim does not preclude an award of fees pursuant to South Dakota statute where an insurance company’s refusal to pay an insured’s claim is “vexatious or without reasonable cause.” Tripp v. Western Nat. Mut. Ins. Co., 664 F.3d 1200 (8th Cir. 2011). A copy of the court’s decision is available here.
After sustaining injuries in a motor vehicle accident, the insured plaintiff, Cindy Tripp (“Tripp”), settled with the other driver for $87,500, just short of the driver’s $100,000 liability limits. Tripp demanded that Western National Mutual Insurance Company (“Western”) pay the remaining $150,000 limits of her underinsured motorist policy (“UIM”). Western offered $10,000 in settlement of Tripp’s UIM claim. Thereafter, Tripp brought suit against Western asserting breach of contract and bad faith.
A jury awarded Tripp the full amount of her UIM coverage but denied her bad faith claim. Nonetheless, the district court found Western’s refusal to pay “vexatious or without reasonable cause” and awarded Tripp $65,000 in attorney’s fees pursuant to S.D. Codified Laws § 58-12-3 ( A copy of the statute is available here).
The district court found Western’s settlement offer of $10,000 unreasonable where evidence revealed that Western valued Tripp’s claim between $120,000 and $150,000. The district court even considered Western’s contention that its total estimate included the $100,000 available under the other driver’s policy, remarking that if Western’s explanation is true, then, by Western’s “own calculation” Tripp was entitled to between $20,000 and $50,000 in UIM coverage. Consequently, the court found that Western’s offer constituted “vexatious conduct” entitling Tripp to attorney’s fees. Western appealed, arguing that the jury’s rejection of Tripp’s bad faith claim should preclude an award of fees under the statute.
The Eighth Circuit concluded that a jury’s adverse finding on a bad faith claim does not, as a matter of law, preclude the trial court from awarding attorney’s fees under § 58-12-3. Rather, a trial court “should undertake a separate analysis . . . in those cases where a jury finds an insurer did not act in bad faith.” In reaching this decision, the Eighth Circuit found, among other things, that the statute does not require a finding of bad faith before a court may determine whether an insurer violated the statute, and that, although there is “some overlap” between bad faith conduct and a vexatious or unreasonable refusal to pay, “vexatiousness is not an element of a bad faith claim.”1 Thus, while a trial court may consider the jury’s disposition on a bad faith claim relevant, it is not bound by such a finding.
The Eighth Circuit also found that the district court’s award of attorney’s fees was not clearly erroneous where Western’s own files revealed that it valued Tripp’s claim much higher than what it offered. Further, if Western disputed Tripp’s claim then it should have conducted an independent investigation – the court found that Western did not seek additional information from Tripp’s treating physicians, or conduct an independent medical examination, or retain an economist to dispute her claim for future wage loss. Consequently, the district court’s award of attorney’s fees under S.D. Codified Laws § 58-12-3 was affirmed.
1 Under South Dakota law, to prove bad faith, “there must be an absence of a reasonable basis for denial of policy benefits and the knowledge or reckless disregard of a reasonable basis for denial.” Champion v. U.S. Fidelity & Guar. Co., 399 N.W. 2d 320 (S.D. 1987).