Wisconsin Supreme Court expands reach of insurance doctrine of bad faith

By Joe Forward, Legal Writer, State Bar of Wisconsin

June 23, 2010 – Where an insurance carrier has control over the claims process and defense, an insured can sue the carrier on a claim of bad faith even if a judgment does not exceed the policy’s limit for damages, the Wisconsin Supreme Court recently held.

In Roehl Transport, Inc. v. Liberty Mutual Insurance Co., 2010 WI 49 (June 22, 2010), Roehl Transport (Roehl) sued its insurance carrier Liberty Mutual (Liberty) on claims of bad faith arising from a personal injury suit against Roehl.

In the personal injury suit, a jury awarded Arthur Groth $830,400 for injuries sustained when a Roehl truck rear-ended Groth’s car. The verdict was within the $2 million covered by Roehl’s insurance policy with Liberty, but cost Roehl its $500,000 deductible.

Roehl’s bad faith claim alleged that Liberty mishandled the personal injury suit and missed an opportunity to settle for less than the deductible amount of $500,000. Liberty argued that Wisconsin law does not recognize a bad faith claim unless the judgment exceeds policy limits.

Noting the issue as one “not previously addressed” and one that “may become more common,” the supreme court – in a 76-page opinion by Chief Justice Shirley S. Abrahamson – rejected the argument that a judgment in excess of a policy limit is “a necessary prerequisite” for a bad faith claim under Wisconsin law.

Case law determines

Noting that the tort of bad faith “is a case law development,” the court examined case law to determine that bad faith claims are viable despite the absence of judgments in excess of policy limits.

Liberty argued that under Wisconsin law, bad faith claims are limited to three fact situations: 1) when the judgment exposes an insured to a judgment in excess of the policy limits; 2) when an insurer withholds payment of the claim in bad faith, and; 3) where an insurer fails to reimburse a claimant for a worker’s compensation claim.

The supreme court rejected this argument, noting that no Wisconsin case holds that bad faith claims are confined to the three fact patterns previously recognized by the courts.

Conflict of interest

The court went on to explain that the tort of bad faith arises from the implied duty of good faith imposed by a contractual relationship that gives an insurance carrier power to settle claims.

Bad faith claims that arise from a contractual relationship, the court explained, protect an insured “when the interests of the insured are in the hands of the insurance company and may come into conflict with the insurance company’s own interests.”

Where an insured has a high deductible, the court explained, an insurance company could offer high settlements within the deductible to avoid investigation costs or “expend insufficient effort to investigate a claim unless or until the insurance company’s own money is at risk. …”

Thus, the court held, the bad faith cause of action is necessary to protect the insured with a high deductible and an insurance company may be liable if it fails to act in good faith.

Evidence of bad faith was credible

A jury found evidence of bad faith and awarded Roehl $127,000 in compensatory damages. Liberty argued the evidence was not credible. But the supreme court held that credible evidence was presented to support the jury’s finding based on proper jury instructions.

Such evidence included using inexperienced claims personnel, high turnover, inadequate supervision and investigation, mishandling of a medical examination, a failure to settle when the opportunity arose, and a failure to retain experts.

Liberty also argued that judicial public policy considerations bar a bad faith claim based on expert testimony that estimates the settlement value of the claim.

Noting that courts have denied recovery in negligence cases based on six judicial public policy considerations, the court explained that Liberty “cites no bad faith case in which the court has applied these judicial public policy factors” and the negligence case it cites is distinguishable.

Attorneys fees

Roehl filed a post-trial motion for attorneys fees and the circuit court denied the motion. Roehl appealed. Liberty mutual argued that although attorneys fees are recoverable as compensatory damage in a bad faith action, it had a “constitutional right to a jury to determine attorney fees.”

The supreme court rejected Liberty’s argument, stating that Roehl was entitled to fees as a matter of law, and remanded the case for a determination of attorneys fees.

Punitive Damages

The circuit court denied Roehl’s post-trial motion for a second trial to pursue punitive damages. Roehl argued that the circuit court erred in making this determination.

But the supreme court rejected Roehl’s challenge. Under the statute that governs punitive damages (Wis. Stat. section 895.043) and statutory interpretation, “[t]he evidence does not show that Liberty Mutual had a ‘purpose’ to disregard Roehl Transport’s rights or was aware that their acts were ‘substantially certain’ to result in such disregard,” the court held.

Notes

Lawrence King and Mark Solheim of Larson and King LLP, St. Paul, and Matthew Biegert of Doar Drill & Skow, S.C., New Richmond, represented Roehl Transport Inc. William Katt and Mark Malloy of Leib & Katt LLC, Milwaukee, represented Liberty Mutual Insurance Co.