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Insurance Claim Blunder Costs 100 Times Policy Limits

An insurance company’s failure to timely offer its $100,000 liability policy after a motor vehicle accident resulted in the company’s payment of a $10.25 million settlement of a Kansas “bad faith” action handled by Vic Bergman and Dave DeGreeff. The case was battled in state and federal court for three years

On May 29, 2009, our 15-year-old client was injured when the car in which she was riding ran a yield sign in rural Lyon County, Kansas, slid under the side of a tanker-trailer unit, and rolled over. She was Lifeflighted to Topeka, with devastating injuries. The hospital bill alone, submitted to the insurance adjuster just two months after the collision, exceeded $530,000. The insurance company for the 17-year-old driver of the car received written notice of the incident within two days.

Vic Bergman was employed two weeks later. He spoke briefly to the driver’s mother, who said the policy limits were only $100,000. But since she worked for an insurance agency, Bergman was skeptical; he wanted confirmation of the limits from the adjuster. Bergman immediately called the claims adjuster, who had already inspected the scene and vehicles and had obtained an admission from the insured driver that he drove through a stop sign. The adjuster knew our client was comatose in the intensive care unit on life support with a poor prognosis. Bergman asked for confirmation of policy limits and the existence of any umbrella coverage. The adjuster said to send a letter of representation, “and we’ll go from there.” On the same day Bergman talked with the adjuster, a home office claims superintendent reviewed the file, concluding there was “clear liability” and “catastrophic damages.”

Failing to get a response to his representation letter for 30 days, Bergman called the adjuster in July, left a voicemail, without response. His associate called again in mid-August 2009 and was asked by the apologetic adjuster to sending another letter of representation, which was sent that day. By mid-September 2009 still having received no response to three telephone calls and two letters, Bergman advised the clients of his opinion that the insurance company was in bad faith under Kansas law. He recommended using the driver, getting a judgment and then pursuing the excess liability claim against the company.

In cases of reasonably clear liability, Kansas law requires liability insurance companies to initiate settlement negotiations. This independent fiduciary and contractual duty does not depend on demand from the claimant. If the insurer may be able to protect its policyholder from excess liability by an offer of settlement within policy limits then, under Kansas law, the insurer must initiate settlement.

The unique features of this case were the absence of any offer to settle the case made on behalf of our client, and the lack of any notice or deadline to the company that after a certain date the company’s failure to act on behalf of its insured would be considered in “bad faith” and the opportunity to settle would be withdrawn.

Bergman filed suit against the 17-year-old driver in Lyon County in November 2009. About one month later the company offered its $100,000 policy limits, which were promptly rejected.

The insurance company then deposited its $100,000 policy into Lyon County court in an interpleader action and also filed a declaratory judgment action in Lyon County asking the court to determine that it had fulfilled its duty to its insured by payment of its policy limits. The declaratory judgment action was dismissed as premature, and the interpleader was allowed to stand.

The suit against the insured driver was resolved by an agreement, pursuant to Glenn v. Fleming, 247 Kan. 296, 799 P.2d 79 (1990), with the driver admitting fault and agreeing to let the court determine damages at an evidentiary hearing through live testimony from plaintiff and her family and stipulated reports of a physiatrist, a life care planner and an economist. The driver also assigned his rights to a negligence/bad faith claim against his insurance company to our client. Our client agreed not to execute on the judgment against the driver beyond the insurance policy limits. In January 2011, after an evidentiary hearing, the Hon. Janice Russell, sitting in the Lyon County District Court entered judgment for $18,676,499.77.

The insurance company then promptly refiled its declaratory judgment action, this time in federal court. Bergman and Dave DeGreeff filed a counterclaim “bad faith” action, which was aggressively litigated before the Hon. Julie Robinson and Magistrate Kenneth G. Gale.

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