Insurance plays an important role in our society. The average American cannot afford to pay for the most catastrophic losses that they may experience in their life. By combining with others, however, they can pay insurance premiums that distribute the risk of a catastrophic loss or liability. The primary purpose of insurance should be to pool that risk of loss and provide insurance coverage in a time of need.

Bad Faith Insurance Practices

The insurance industry, however, is an extremely powerful industry that is prone to the same type of corporate abuses seen in other industries. Too often insurance companies place their own economic interests above those of the policyholder. Common bad faith practices include conducting inadequate investigations of claims, making “lowball” settlement offers of claims, ignoring claims for long periods of time and refusing to communicate with the claimant, and relying on policy exclusions that were not intended to apply to the claim presented by the policyholder.

When your own insurance company acts in bad faith when you make a claim for damages it called a “vexatious refusal” to pay. Examples of vexatious refusal include refusal to pay and honor uninsured and underinsured motorist claims, refusal to pay medical benefits unless the policyholder agrees to reimburse the insurance company (for many Missouri health insurance policies), and refusal to pay life or fire and casualty insurance claims. Missouri law provides that a policyholder who is a victim of vexatious refusal to pay can recover penalties against the insurance company and be awarded their attorney’s fees.

The second way to fight bad faith practices is to file a bad faith insurance action. These actions apply when someone else’s insurance company treats you unfairly. If someone causes injury to you and their insurance company refuses to offer a fair settlement, fails to conduct an adequate investigation, or denies coverage the insurance company’s actions may rise to the level of bad faith. These actions are very complex as the claim for bad faith cannot ordinarily be brought by the injured party. With proper planning, however, the injured party can negotiate for the right to proceed against the other party’s insurance company or assist the other party in presenting a bad faith claim to their insurance company. A successful bad faith insurance claim may include recovery of all of the damages sustained by the injured party, attorney’s fees incurred by the policyholder, and punitive damages.

Often insurance companies play a valuable role in a time of need. Too often, however, the bottom line is placed above the interests of the policyholder. When this occurs the Carey Law Firm can assist you in forcing the insurance company to live up to its obligations.

The Missouri Trial Lawyer, Summer 2006.  Reprinted with permission.
Jeffrey J. Carey

Introduction

R.S.Mo. • 537.065 agreements allow for the settlement of an unliquidated claim for damages with the ability to specify which assets will be available to satisfy the claim.  These agreements are most often utilized when potential damages are at or near policy limits of applicable insurance coverage.  The plaintiff and the defendant typically enter into a settlement agreement for a specified amount at or below policy limits.  The plaintiff will then usually institute an equitable garnishment seeking to establish coverage.[1]  These agreements, however, may also be utilized when potential damages are in excess of policy limits.  If the insurance company has acted in bad faith, careful planning can open up bad faith exposure as an avenue of recovery in excess of policy limits.  The primary difficulties in accomplishing this goal are 1) ensuring that the defendant has established the necessary elements of a bad faith claim, 2) negotiating the terms of the agreement with the defendant, 3) avoiding pitfalls surrounding the general non-assignability of tort claims and 4) ensuring that the agreement does not negate the damage suffered by the defendant due to the insurance company’s actions.

The Statute

R.S.Mo. • 537.065 provides:
Any person having an unliquidated claim for damages against a tort-feasor, on account of bodily injuries or death, may enter into a contract with such tort-feasor or any insurer in his behalf or both, whereby, in consideration of the payment of a specified amount, the person asserting the claim agrees that in the event of a judgment against the tort-feasor, neither he nor any person, firm or corporation claiming by or through him will levy execution, by garnishment or as otherwise provided by law, except against the specific assets listed in the contract and except against any insurer which insures the legal liability of the tort-feasor for such damage and which insurer is not excepted from execution, garnishment or other legal procedure by such contract. Execution or garnishment proceedings in aid thereof shall lie only as to assets of the tort-feasor specifically mentioned in the contract or the insurer or insurers not excluded in such contract. Such contract, when properly acknowledged by the parties thereto, may be recorded in the office of the recorder of deeds in any county where a judgment may be rendered, or in the county of the residence of the tort-feasor, or in both such counties, and if the same is so recorded then such tort-feasor’s property, except as to the assets specifically listed in the contract, shall not be subject to any judgment lien as the result of any judgment rendered against the tort-feasor, arising out of the transaction for which the contract is entered into.

The Agreement

A •537.065 agreement is a species of settlement agreement that is specifically authorized by statute.  Once the basic requirements of the statute have been met, the parties are free to fashion an agreement that meets their needs.  In order to meet the requirements of the statute all that is required is 1) for the plaintiff to have an unliquidated claim for damages in tort, 2) that there be consideration in the form of agreement to pay a specified amount, 3) that the right to execute, garnish, or pursue other legal procedure against specified assets or insurance policies be retained and 4) that the parties acknowledge the agreement (if the defendant intends to file the agreement with the Recorder of Deeds to avoid attachment of a lien).[2]
An unliquidated claim contemplates a situation where the liability and damages have not been established.  These agreements are clearly authorized prior to the judicial determination of liability.[3]  The agreement will often provide, in fact, that the insured will withdraw their responsive pleadings and that a trial will occur to determine liability and damages or that the defendant will confess judgment in a specified amount.

Benefits of the Agreements

These agreements can be very effective from a defense standpoint to manage the risk of a defendant where there has been a declination of coverage, a declination of a defense, and/or a defense under reservation of rights.  The plaintiff gains the advantage of securing a liquidated claim through settlement and more expeditiously reaching the coverage issues central to their potential recovery.  The plaintiff is also able to fix the amount of damages through negotiation and, absent collusion with the defendant, may recover substantial amounts.  The Western District of Missouri, for example, has upheld a •537.065 settlement for $300,000 as non-collusive even though a jury had previously returned a verdict of $10,000.00 and the Court of Appeals had ordered an additur of only $28,000 or a new trial.[4]  The documented negotiation of the settlement through counsel for the insured will minimize the risk that the stipulated amount will be deemed collusive.  Where potential damages are in excess of policy limits, these agreements can liquidate the damages in excess of coverage.  If the agreement involves the entry of judgment, many insurance policies will also provide supplementary coverage for post-judgment interest that may result in a recovery in excess of the stated policy limits.[5]

Ensuring That the Defendant Has Established the Necessary Elements of a Bad Faith Insurance Claim

In order to ensure that the defendant has properly established the necessary elements of a bad faith claim, most insured will need legal advice regarding their duties under the policy and the law.  It is difficult for plaintiff’s counsel to perform this role as, at least from the insured’s perspective, an attorney-client relationship is likely to be formed.  If plaintiff’s counsel provides this legal advice and attempts to negotiate an agreement for both parties numerous ethical issues are implicated.[6]   Plaintiff’s counsel should obtain a copy of the policy in question and ensure that the defendant has complied with all terms and conditions of the policy.  The general rule of law, in order to establish a bad faith claim, is that the insured must actually demand settlement within policy limits.[7]  Demand by the plaintiffs, a co-insured, or their counsel, have been deemed not to be sufficient.[8]

Negotiating the Terms of the Agreement With the Defendant

If discovery uncovers that the defendant is being defended under a reservation of rights an excellent opportunity to reach agreement is presented.  A defendant being represented under a reservation of rights is entitled to reject the defense and settle the claim without violating the cooperation clause in their policy.[9]  Plaintiff’s counsel may wish to offer to enter into a •537.065 agreement with the defendant through defense counsel.  A well drafted letter will request that defense counsel advise their client that 1) they have the right to reject a defense under reservation of rights and that 2) if they do, the plaintiff will be willing to enter into a •537.065 agreement that will protect many, if not all, of the defendant’s assets.  Defense counsel, if being paid by the insurer, may determine that it will be necessary to encourage their client to retain outside counsel or, alternatively, will risk a malpractice claim.
If the insurance company has denied a defense altogether, plaintiff’s counsel can negotiate directly with the unrepresented insured or suggest they obtain legal counsel to assist them.  Issues to be addressed in the negotiations include 1) a reasonable settlement amount given the injuries involved, 2) which assets and/or insurance policies will be available for recovery of the settlement, 3) the cooperation duties of the insured in prosecuting any claim against the carrier or other third parties, and 4) the method in which the damages are to be liquidated.

Assignability Issues

It is sometimes desirable to assign the claim for bad faith failure to settle from the insured to the injured parties.[10]  Neither the Eastern or Western Districts of Missouri have issued conclusive rulings allowing, or disallowing, an assignment of a claim for bad faith failure to settle.   The general rule in Missouri is that tort claims are not assignable.[11]  Dicta in Ganaway v. Shelter Mutual Ins. Co., however, states that “a cause for bad faith refusal to settle may be assigned to a judgment creditor either by the insured or his trustee in bankruptcy.”[12]  A careful reading of the opinion reveals that the Southern District relied on federal preemption and provisions of the bankruptcy code to support this proposition.  Subsequent Southern District dicta on this issue, however, has seemed to reaffirm it’s assertion that bad faith insurance claims are assignable.[13]   The Southern District cited Magers and Citicorp in support of the proposition that the tort claim of bad faith failure to settle are assignable.  A detailed reading of the cases cited does not necessarily support this proposition. It is far from certain that the Eastern District[14], Western District[15], or Missouri Supreme Court will reach the same conclusion as the Southern District.  There are strong public policy arguments in support of the proposition that these claims should be assignable.  Until this issue is conclusively decided, however, the conservative approach is to litigate the bad faith claims in the name of the insured or, at a minimum, to ensure that the agreement contains a provision obligating the insured to prosecute the claim in the event there is a judicial determination that the claim is not assignable.
There may be additional reasons, as well, why an assignment may not be desirable.  When the insured has experienced a significant loss because of the actions of their insurance company, the insured may present a more sympathetic plaintiff to the jury.  Other strategic considerations may weigh in favor of a direct action as well.

Retaining Defendant Exposure to Liability to Establish Bad Faith

It has long been argued that if the defendant is relieved of all liability under the •537.065 agreement that a bad faith claim will not lie.  The elements of a bad faith failure to settle within policy limits are that “1) the liability insurer has assumed control over negotiation, settlement, and legal proceedings brought against the insured; (2) the insured has demanded that the insurer settle the claim brought against the insured; (3) the insurer refuses to settle the claim within the liability limits of the policy; and (4) in so refusing, the insurer acts in bad faith, rather than negligently.”[16]  Implied in these elements is the requirement that the insured suffer damage in the form of exposure to liability in excess of the limits of insurance.  The argument has been made that if the defendant enters into a •537.065 agreement that absolves them of personal liability then the insurance company’s actions could not have damaged their insured.  The best practice has historically been for the Plaintiff to demand that the insured retain some liability for the stipulated settlement amount.
This issue may have been recently resolved in favor of the ability to grant a release to the tortfeasor without negating the damages recoverable due to the insurance company’s bad faith refusal to settle.  In Truck Insurance Exchange v. Prairie Framing, LLC a lawsuit was filed for the wrongful death of Eugene Rolf against, among others, Prairie Framing, LLC.[17]  Prairie Framing had a $1,000,000 GCL policy with Truck Insurance Exchange (TIE).  During litigation, TIE issued a reservation of rights letter to its insured and sought to disclaim coverage.  Prairie Framing, in response, exercised its right to reject a defense under reservation of rights and entered into a •537.065 agreement with the wrongful death claimants.  After the agreement was executed there was a bench trial that resulted in a $4,000,000 judgment being entered against Prairie Framing.   The •537.065 agreement, however, cited only a nominal amount as being actually paid by Prairie Framing and it was absolved of any further liability on the judgment.  TIE argued that its liability for bad faith failure to settle was limited to the damages actually incurred by the insured, the nominal payment recited under the •537.065 agreement, or to the limits of its insurance of $1,000,000.  The Western District disagreed stating that
When the insurer refuses to settle, the insured loses the benefit of an important obligation owed by the insurer. An insurer’s ‘mere payment’ of a judgment up to the policy limits does not make the insured whole or put the insured into the same position as if the company had performed its obligations under the policy. The insurer has no incentive to act in good faith. In fact, if we were to hold as TIE suggests, the insurer could receive a windfall if, to its good fortune, the insured is indigent or is forced into the protection of a bankruptcy or a section 537.065 agreement so that the insured cannot be held legally liable on the judgment.[18]
Given the fact that the Supreme Court, en banc, refused to grant transfer in this case it is likely that Truck Insurance Exchange can be relied upon by practitioners when negotiating •537.065 agreements.  A conservative approach, if counsel if concerned that Truck Insurance Exchange may not be followed or may be overruled is to require the tortfeasor to retain some liability under the •537.065 agreement.
The statute specifically contemplates that the parties may enumerate assets that will be available for satisfaction of the judgment.  The asset or assets selected should have the potential to be as valuable as the amount of the stipulated amount of the settlement in excess of the applicable coverage.  The parties can negotiate an asset that is acceptable to both parties.  The defendant may be willing to allow the plaintiff to garnish their wages in excess of $200,000 per year or allow the plaintiff to attach inherited funds.  The defendant could purchase stock with a chance of substantial appreciation.  Some Plaintiff’s attorneys have offered to execute only against gambling or lottery winnings.  The prudent course of action is to ensure that the asset exposed to execution is of sufficient value, or potential value, to avoid any argument that the insured’s damages in excess of policy limits are speculative.   The specific assets utilized are limited only by the imagination of counsel.  Any asset that may potentially be worth more than the stipulated amount of the settlement will help to establish that the Plaintiff has sustained damages.

Conclusion

•537.065 agreements provide a benefit to the insured as well as the plaintiff.  The insurance companies often desire to retain control of the defense of a claim, through a representation under reservation of rights, while seeking to disclaim coverage through a declaratory judgment action.  The plaintiff is then exposed to the risk of an unfavorable determination of the fact of liability or amount of damages as well as the policy risk.  The insured, likewise, is exposed to the risk of an adverse judgment in excess of policy limits and/or a determination that there is no coverage under their policy.  A •537.065 agreement can establish liability and liquidate the amount of damages.  This allows the plaintiff to expeditiously address the coverage issues central to their potential recovery.  In some circumstances, the agreement and subsequent litigation can also cause the Court to stay or dismiss a pending declaratory judgment action.  Where damages are in excess of policy limits, furthermore, the agreement can be used as a vehicle to obtain the insured’s cooperation in establishing and prosecuting a bad faith claim or other third party claim arising out of the claim or litigation process.  Careful planning is required, however, as there are areas of unsettled law surrounding these issues as well as procedural traps for the unwary.

[1] Garnishment pursuant to Chapter 525 and Rule 90 can subject the plaintiff to attorney’s fees if the insurance company successfully establishes its policy defense while a direct action, such as an equitable garnishment, typically will not.  Johnston v. Sweany, 69 S.W.3d 398 (Mo. 2002).
[2] See R.S.Mo. • 537.065.  See also R.S.Mo. • 486.330 for forms of acknowledgement.
[3] Farmers Mutual Auto Ins. Co. v. Drane, 383 S.W.2d 714, 719 (Mo. 1964).
[4] Norris v. Nationwide Mutual Insurance Company, 55 S.W.3d 366 (W.D. Mo. 2001) but see Gulf Ins. Co. v. Noble Broadcast, 936 S.W.2d 810 (Mo. 1997) (holding that trial court was within its discretion to determine that $1,000,000 settlement of claim with just over $12,000 of special damages was unreasonable and ordering proceedings to determine reasonable amount of settlement).
[5] See generally Welhoff v. Farm Bureau Town & County Ins. Co., 54 S.W.3d 589 (W.D. Mo. 2001).
[6] See Missouri Supreme Court Rules 4-1.7 (conflict of interest), 4-1.8(g) (aggregate settlement of claims of or against two or more clients), 4-2.2(c) (mandatory withdrawal from representation of either party after failed intermediation), 4-3.7(a) (disqualification as trial counsel of attorney who is a material fact witness), and 4-4.3 (dealing with unrepresented person).
[7] See Ganaway v. Shelter Mutual Insurance Company, 795 S.W.2d 554, 564 (S.D. Mo. 1990) (the issue was not reached by the Court but demand by the insured remains one of the stated elements of bad faith failure to settle).
[8] Bonner v. Automobile Club Inter-Insurance Exch., 899 S.W.2d 925, 928 (E.D. Mo.  1995).
[9] See generally Ballmer v. Ballmer, 923 S.W.2d 365 (W.D. Mo. 1996).
[10] Western Heritage Ins. Co. v. Sunset Security, Inc., 63 Fed.Appx. 965, (8th Cir. Mo. 2003) (unpublished opinion) (Insurer filed declaratory judgment action in federal court based on diversity jurisdiction.  There was complete diversity between all insured and the insurance company.  There was not complete diversity between the family of the decedent and the insurance company.  After the filing of the federal declaratory judgment action, the family of the decedent and the insured entered into a •537.065 agreement whereby the insured confessed judgment and assigned its rights to proceed in bad faith against Western Heritage to the family.  A bad faith failure to settle case was filed in Jackson County, Missouri. The 8th Circuit sustained a dismissal of the federal declaratory judgment action due to the existence of the later filed bad faith claim).
[11] White v. Auto Club Inter-Insurance Exchange, 984 S.W.2d 156, 160 (W.D. Mo. 1998).
[12] Ganaway at 565.
[13] Freeman v. Basso, 128 S.W.3d 138, 143 (S.D. Mo. 2004) citing Magers v. National Life and Accident Ins. Co. 329 S.W.2d 752, 786 (Mo. banc. 1959) (assignment of right to collect cash value of a policy does not violate non-assignability clause in insurance agreement); Citicorp Indus. Credit Inc. v. Federal Ins. Co., 672 F.Supp. 1105 (N.D. Ill. 1987) (the actual claim presented was a breach of contract claim, not a tort claim for bad faith failure to settle).
[14] For cases where a bad faith claim was assigned but issue of assignability was not reached by the Court see:  Freeman v. Leader Nat. Ins. Co., 58 S.W.3d 590 (E.D. Mo. 2001); and Bonner v. Automobile Club Inter-Insurance Exchange, 899 S.W. 2d 925 (E.D. Mo. 1995).
[15] For cases where a bad faith claim was assigned but issue of assignability was not reached by the Court see: White v. Auto Club Inter-Insurance Exchange, 984 S.W.2d 156, (W.D. Mo. 1998); and Whitehead v. Lakeside Hospital Ass’n, 844 S.W.2d 475 (W.D. Mo. 1992).
[16] State Farm Fire and Casualty Co. v. Metcalf, 861 S.W.2d 751, 756 (S.D. Mo. 1993).
[17] Truck Insurance Exchange v. Prairie Framing, LLC, 162 S.W.3rd 64 (W.D. Mo. 2005) (transfer denied).
[18] Id. at 72-73 (citations omitted).