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$1.875 Settlement in Bad Faith Automobile Accident Costs Insurance Co. 36 Times Policy Limits | Shamberg Johnson & Bergman

In the latest of several insurance “bad faith” cases, Shamberg, Johnson & Bergman successfully pursued an insurance company for its failure to defend a permissive driver in an automobile collision case. The case follows a $10.25 million bad faith settlement in 2012 and two other recent claims reported on in this issue.

In 2007, our client’s car was struck at an intersection on his way to work, resulting in severe neck, shoulder, and head injuries. Proof of who had the green light was thin. The defendant's driver claimed he had the green light. Our client could not remember the collision. No independent witnesses were found.

The defendant was insured for $50,000.00. His insurer initially said it had talked with its insured and would defend him. But after the suit was filed, the company denied the defendant both coverage and defense, based on lack of cooperation, leading to a un/underinsured case against our client’s insurers that settled in 2011 for $755,000.00.

Following the un/underinsured case, Lynn Johnson and David Morantz obtained a default judgment against the driver. A garnishment action was then filed against the defendant’s insurance company on the theory that the company negligently or in bad faith refused to defend and provide coverage for its insured. Kansas law imposes a burden of proof on insurance companies who deny a defense based on an insured’s alleged lack of cooperation to show that the lack of cooperation materially prejudiced the defense of the case.

The garnishment action was then removed to the federal court, and the insurance company hired counsel for the driver. The insurer then attempted to set aside the default judgment, but the driver assigned his rights against his insurance company to our client. The insurance company then sought to intervene in the state court case to try to set aside the default judgment. The state court allowed the company to intervene for the limited purpose of contesting damages but did not allow the company to challenge the procedural validity of the default judgment.

Both sides sought an interlocutory appeal. The plaintiff argued that when the insurance company denied coverage to its insured, it forfeited its right to contest any aspect of the default judgment. The insurance company argued it should be permitted to contest the amount of the default judgment and the underlying liability upon which the judgment was based. Both requests for interlocutory review were denied. Both sides then sought direct appeals, which were dismissed for lack of jurisdiction, because the insurance company’s rights had not been fully and finally terminated by the trial court’s ruling.

Discovery then proceeded in state court to challenge the amount of the default judgment. At mediation, the case settled for $1,875,000.00, costing the insurance company an extra $1,825,000.00 nearly 36 times its policy limits.