An insurance company can be held liable for bad faith even when there is no coverage under the policy.  In September 2014, the Missouri Court of Appeals, Western District upheld a trial court decision stating “[The insurance company] had an unequivocal duty to defend based on its own analysis of the policy…and, having undertaken that duty, was required to do so in good faith.  Moreover, having failed to provide an effective reservation of rights, Mid-Continent was liable on the policy to its policy limits despite the policy language.” Advantage Buildings & Exteriors, Inc. v. Mid-Continent Casualty Company.

Advantage was sued in July 2008 for damages resulting from its construction defects.  Advantage submitted the claim to its insurer, Mid-Continent.  Mid-Continent notified Advantage early on that it would investigate and perform coverage analysis but asserted a “reservation of right”.   They also told Advantage they would promptly notify them “of the outcome of our coverage analysis.”  In another letter Mid-Continental reiterated its promise to “promptly inform.”  That was in September of 2008.

Mid-Continental hired any attorney, investigated and analyzed the case.  Their attorney advised them to settle for the limits because he believed the insured, Advantage, was exposed to damages in the millions.  Mid-Continental determined its coverage was limited to $53,000, well below the policy limits.  They did not inform Advantage of that conclusion nor did they make any settlement offers to protect their insured from damages above what would be covered by the policy.  Mid-Continental did not communicate with Advantage for more than a year.  Advantage hired its own attorney and demanded they settle for the policy limits.  Mid-Continental did not respond.  This refusal to settle continued until July, 2010 when Mid-Continental notified Advantage by letter that the policy did not cover most of the claims against them.

In 2012, the trail court held that Advantage’s policy did not provide coverage for the claims against them, but a jury found the Mid-Continental committed bad faith in its failure to settle and held the insurance company liable for the damages against Advantage.  Because bad faith is an issue of fact, it had to go to a jury to decide.

A “reservation of right” allows an insurance company to, at any time during the proceedings, contest that the injury is not covered by the policy while continuing to defend the insured.  In order for an insurer to maintain a proper reservation of rights:

Mid-Continental did not promptly advise Advantage of its position once it had concluded the coverage analysis.  Mid-Continental’s internal analysis concluded the only potential coverage for which they would be liable under the policy was $53,000.  Mid-Continental also knew, because their lawyer had advised them, that the risk to the insured was a large judgment if the plaintiffs prevailed.  They made this conclusion 2 years before notifying Advantage.  Mid-Continental knew its own position, but they did not communicate it to Advantage until four days before trial.  Therefore, because Mid-Continental did not properly reserve their rights, they owed a duty to Advantage to act in good faith.

Citing another Western District case, the Court listed examples of bad faith: “failing to fully investigate a [claim], ignoring that a verdict could exceed policy limits, refusing to consider a settlement offer, and not keeping an insured informed of settlement offers or the risks of an excess judgment.”  The court further stated of Mid-Continental, “All of those factors are present here.”

In this case, the insurer was liable for its bad faith against the insurer  even though  there was no coverage under the policy.  If you believe you have been the victim of bad faith by your insurance carrier, please contact the firm for a consultation.

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