Home Page The Publication The Editor Contact Information Insurance Key issues Book Subscribe


Vol. 5, Iss. 6
May 31, 2016

U.S. Supreme Court – Yes SCOTUS – Asked To Hear A Bad Faith Failure To Settle Case

 

Chance of the United States Supreme Court accepting certiorari in a liability coverage case – 1,000,000:1. Chance of Randy Maniloff beating Steph Curry in a three-point shooting contest: 999,999:1.

Yes, the odds of the U.S. Supreme Court accepting cert. in a liability coverage case really are that long. So, needless to say, it was a real shocker when I saw that a policyholder in a bad faith failure to settle case asked the U.S. Supreme Court to review an adverse result from the Fifth Circuit. And, of course, it was not a surprise when the U.S. high court R.S.V.P.ed no. Of course not. My cousin Vinny could have beat back this cert. petition.

So just what was it that caused a policyholder to throw the longest Hail Mary in the history of insurance jurisprudence?

At issue in Hemphill v. State Farm, 805 F.3d 535 (5th Cir. 2015) was coverage for a catastrophic injury in an automobile accident. The driver of the not-at-fault vehicle – Rodney Taylor -- was rendered a paraplegic. The driver of the at-fault vehicle was Patrick Hemphill. State Farm insured Hemphill’s father’s automobile. The policy provided a $50,000 per person limit. Heather Taylor was also injured. [The situation started out poorly for Hemphill. He initially said that he was not the driver, but his girlfriend was, since he had a suspended license. He also initially denied running the stop sign, but then admitted that he did.]

Following several offers, State Farm ultimately came up to offering the Taylors $50,000 each. The Taylors declined and the case went to trial. A jury returned a verdict in Mr. Taylor’s favor for just under $3,000,000. State Farm paid the $50,000 policy limit to Mr. Taylor in partial satisfaction of the judgment.

Mr. Hemphill filed suit against State Farm in Mississippi District Court, alleging that the insurer breached its fiduciary duty which led to the excess verdict. The District Court found for State Farm and the matter went to the Fifth Circuit.

The Fifth Circuit made clear that “when a suit covered by a liability insurance policy is for a sum in excess of the policy limits, and an offer of settlement is made within the policy limits, the insurer has a fiduciary duty to look after the insured’s interest at least to the same extent as its own, and also to make a knowledgeable, honest, and intelligent evaluation of the claim commensurate with its ability to do so. If the carrier fails to do this, then it is liable to the insured for all damages occasioned thereby.”

Pivoting from this general rule, the Fifth Circuit described the issues before it this way: “Here, it is undisputed the Taylors did not make a settlement offer. Hemphill contends that notwithstanding the Taylors’ failure to make a settlement offer, State Farm breached the following two duties: (i) to timely offer to settle the claim because the claim amount greatly exceeded the policy limits, and (ii) to timely disclose the policy limits to the Taylors. We address, in turn, whether an insurer owes these two duties to its insured absent a settlement offer within the policy limits by a third-party claimant.”

Specifically, State Farm made a settlement offer to Mr. Taylor “five and a half months after State Farm received notice of Hemphill’s admission that he ran the stop sign, two months after State Farm received all of Mr. Taylor’s medical bills, and two days after Mr. Taylor filed the Underlying Lawsuit. Hemphill contends State Farm had a duty to make this settlement offer earlier because State Farm knew Mr. Taylor’s claim amount greatly exceeded the policy limits.”

The appeals court disposed of the “failure to make an offer” issue quickly. Hemphill pointed to a statement by the Mississippi Supreme Court in a 1983 opinion which said that “there is authority for the proposition that in dangerous cases it is the duty of the insurance carrier to initiate settlement offers on its own.” The Fifth Circuit, however, dismissed this as “just dictum,” and noted that no Mississippi court since it had discussed this dictum or cited to the non-binding cases that the 1983 case cited. Held: “Indeed, over the thirty-three years since Hartford [1983 case], no case from either the Mississippi Supreme Court or a Mississippi intermediate appellate court has suggested or even hinted that the Mississippi Supreme Court would hold that an insurer has a duty to make a settlement offer absent a settlement offer by the claimant.”

As for an insurer’s duty to disclose policy limits, the Court held that “there is no genuine dispute that State Farm verbally disclosed the policy limits to the Taylors before Mr. Taylor filed the Underlying Lawsuit. Having verbally disclosed the policy limits, State Farm did not have an additional duty to disclose the policy limits in writing via a certificate of coverage before Mr. Taylor filed the Underlying Lawsuit.”

The most interesting part of the case – to me at least – is that State Farm admitted that it did not advise Hemphill of his potential excess exposure and right to retain independent counsel. However, as the Fifth Circuit saw it, there was a causation problem for Hemphill, holding that there was no genuine dispute that, “before Mr. Taylor filed the Underlying Lawsuit, Hemphill was aware of his potential excess exposure and consulted an independent attorney for financial protection. Thus, Hemphill independently knew the information that he complains State Farm did not advise him about. For these reasons, the district court did not err in finding no genuine dispute that the excess judgment was not caused by State Farm's failure to advise Hemphill of his potential excess exposure and right to retain independent counsel.”

Mr. Hemphill Goes to Washington

Obviously this is a serious case – for Mr. Hemphill, facing a huge judgment and Mr. Taylor, facing a catastrophic injury and virtually no recompense from the driver who caused it. Under these circumstances, Hemphill, presumably, must have believed that, despite the very, very long odds, he had no choice but to file a Petition for a Writ of Certiorari to the U.S. Supreme Court.

It is beyond the scope here to write chapter and verse on the competing cert. petitions. Instead I’ll set out a portion of State Farm’s petition that discussed why the Supreme Court should decline to accept the matter for review. State Farm’s Petition stated:

“This case meets none of this Court’s criteria for granting certiorari. There is no conflict as to any question of federal law between the Circuit Courts, between the Fifth Circuit and a state high court, or between the Fifth Circuit and any decision of this Court. Nor has the Fifth Circuit departed from the usual practice and course of proceedings so as to justify the exercise of this Court’s supervisory power. As this Court had made clear, certification is not ‘obligatory’ even if available, and the decision whether to certify or abstain ‘rests in the sound discretion of the federal court.’ Lehman Bros. v. Schein, 416 U.S. 386, 391 (1974). Here, the Fifth Circuit acted well within the bounds of its discretion in declining to certify to the Mississippi Supreme Court the question suggested by Petitioner.

Moreover, this case does not present the federalism and other concerns that, under this Court’s jurisprudence, counsel the federal courts to defer to the state court on an issue of state law. The Fifth Circuit has not invalidated a state law on federal constitutional grounds and has not ventured into legal territory where it is an ‘outsider.’ Furthermore, Petitioner chose a federal forum for this diversity case and should not now be heard to complain that the federal courts should not have decided the issues of state law that his claims presented. Granting certiorari in this case will only result in delay and obstruction in the functioning of the federal courts in diversity cases.

Accordingly, the Fifth Circuit’s decision in this case presents no issue of federal law requiring resolution by this Court and satisfies none of this Court’s criteria for granting certiorari. See Sup. Ct. R. 10.”

This is no doubt the reason why unsuccessful litigants in coverage cases – policyholders and insurers – virtually never, ever seek SCOTUS review.

So what made Hemphill take his shot? Certainly not an argument that the case somehow, some way, had a federal or constitutional hook. The petition for review stated:

“Insurance companies demand documentation (written documentation) before they will pay out a single solitary penny in settlement of claims. Under the facts of this case, or in any serious claim, it is submitted that a third party claimant such as Taylor is not going to accept oral representations of an insurance agent over the phone, and the State Farm adjuster plainly knew this and acknowledged this. State Farm is a company that understood that it did not expect Taylor to settle his claim without delivery of the certificate of coverage.

The Fifth Circuit Court of Appeals decided this case on an issue not addressed under Mississippi law that neither party raised in the pleadings, at the summary judgment level or at the appellate level. Mississippi has a well-established protocol in place to answer such questions. The Fifth Circuit has utilized that procedure sparingly. But here, rather than certify that question to the Mississippi Supreme Court and receive a definitive answer, the Fifth Circuit made a sua sponte ‘Erie guess’ that deprived Patrick Hemphill of his right to have a jury decide his case. It is submitted that the industry standard is to provide that certificate of coverage when requested particularly so when the claimant had been so severely injured, and the coverage is inadequate to avoid financial disaster to an insured like Hemphill.”

 


Website by Balderrama Design Copyright Randy Maniloff All Rights Reserved