Missouri Bad Faith Insurance Law

What is bad faith by an insurance company in Missouri?

Highly summarized, in Missouri, a bad faith claim against an insurance carrier occurs when the insurance carrier fails to honor its duties under an insurance contract.  

At their most basic level, insurance policies, whether auto insurance, home insurance, professional liability insurance, or business/commercial insurance are protection for a customer/insured.  The insurance carrier takes money from customers (called an insurance “premium”) and promises protection when claims are made against the customer.  

Missouri law creates a fiduciary relationship between an insurance carrier and their insured, called a “fiduciary duty.”  What this means is that an insurance carrier in Missouri is legally required to place the interests of its customers/insureds above its own interests!  An insurance carrier in Missouri is “bound under its contract of indemnity, and in good faith, to sacrifice its interest in favor of those of the [insured].”  Zumwalt v. Utilities Ins. Co., 228 S.W.2d 750 (Mo. 1950).

When an insurance carrier fails to honor its fiduciary duty to its customers/insured, then it has likely acted in bad faith, creating a bad faith claim by the customer/insured against the insurance carrier.

There are 2 main types of bad faith cases in Missouri:

1.    Bad faith failure to defend an insured/customer; and

2.    Bad faith failure to settle a claim or lawsuit.

Missouri insurance carriers’ duties to their customers/insureds

An insurance carrier in Missouri has a number of duties to their insureds.  These duties are typically grouped into 2 categories:

1.    The insurance carrier’s duty to defend a Missouri customer (called an “insured”) when a claim is made or lawsuit is filed.  The duty to defend includes a number of other duties, including the duty to conduct a proper investigation; and

2.    The insurance carrier’s duty to indemnify a Missouri customer (called an “insured”) when a claim is made or lawsuit is filed.  The duty to indemnify means the duty to pay damages in a valid claim or lawsuit made against a Plaintiff or injured person against the insured.

These duties apply to out of state insurance carriers when their Missouri customers/insureds are involved in an accident or claim.  For instance, if you live in Missouri and your home or auto insurance carrier is located outside of Missouri, Missouri law will apply to any claims or lawsuits filed against you that are covered by your insurance policy.

These duties usually do not apply when out-of-state insureds/customers are covered by an out-of-state insurance carrier.  For instance, if a Kansas resident was involved in an automobile crash in Missouri, Missouri law would apply to the underlying claim but most likely would not apply to a bad faith claim.  In that instance, Kansas bad faith law would apply.  

A Missouri insurance carrier’s duty to defend a customer/insured when a claim is made or lawsuit is filed.

Missouri law surrounding an insurance carrier’s duty to defend is extremely complicated.  An insurance company’s actions may be permissible under one set of circumstances, but may not be legal under a slightly different set of circumstances.  

Highly summarized, under Missouri law, an insurance carrier whose insured is faced with a claim or lawsuit in Missouri has a duty to investigate the claim and defend their customer/insured regardless of the merits of the claim or lawsuit.

Missouri Courts have used the following language regarding the duty to defend:

“An insurance company has a duty to defend an insured when the insured is exposed to potential liability to pay based on the facts known at the outset of the case, no matter how unlikely it is that the insured will be found liable and whether or not the insured is ultimately found liable. McCormack Baron Mgmt. Servs., Inc. v. Am. [Guar.] & Liab. Ins. Co., 989 S.W.2d 168, 170 (Mo. banc 1999). To extricate itself from a duty to defend the insured, the insurance company must prove that there is no possibility of coverage.” Truck Ins. Exchange v. Prairie Framing, LLC, 162 S.W.3d 64 (Mo.App. W.D. 2005).

A Missouri insurance carrier’s duty to indemnify a customer/insured when a claim is made or lawsuit is filed.

Similarly, Missouri law defining an insurance carrier’s duty to indemnify an insured is very complicated.  The smallest details can impact a Missouri insurance company’s duties to its customer/insured when faced with a valid claim/lawsuit.

What are the elements of a bad faith claim against an insurance company in Missouri?

1.     The liability insurer reserves the exclusive right to contest or settle the claim to themselves;

2.    The liability insurer prohibits the insured from voluntarily assuming any liability or settling any claims without consent; and

3.    The liability insurer is guilty of fraud or bad faith in refusing to settle a claim within the limits of the policy.  

Scottdale Ins. Co v. Addison Ins. Co., 448 S.W.3d 818, 827 (Mo. Banc 2014).

For more information on the elements of a bad faith claim and when they are met, go here.

An example of a Missouri commercial insurance bad faith claim:

In Zumwalt v. Utilities Ins. Co., the plaintiff was a door company, who while installing a 300 pound overhead door, allowed it to fly up and strike two separate people, injuring them.  The second person who was injured made a claim against the Zumwalt door company and eventually filed a lawsuit.  

The defendant, Utilities Insurance, insured Zumwalt with a $10,000 commercial insurance policy.  Utilities itself was “reinsured” by another insurance carrier, which meant that the most liability Utilities faced at trial was $5,000. 

The injured plaintiff’s lawyer offered to settle the case for $8,500, well within the limits of the commercial insurance policy.  Utilities replied, stating that it would never, under any circumstances, have to pay more than $5,000 (because of the reinsurance) and counter offered for $4,500. 

After a judgment was entered against the insured for $15,000, the insured sued its insurer for not settling the claim when it should have.