Pre-Trial Offer of Full Policy Limits Negates "Bad Faith" Claim against Insurer

            In Hughes v. Progressive Direct Insurance Company, Inc., the United States District Court for the District of Maryland held that when an insurance carrier offers the full extent of its policy limits before trial, there is no basis for a claim of “bad faith” for failure to settle as a matter of law, and granted Progressive Direct Insurance Company’s (“Progressive”) motion to dismiss for failure to state a claim upon which relief can be granted.

            The underlying case involved an automobile accident where Jarrett Pratt broadsided a vehicle driven by Joseph P. Hughes in Baltimore City.  Hughes filed suit in the Circuit Court for Baltimore City against Pratt for his injuries and against his insurer, GEICO Insurance (“GEICO”), for uninsured motorist coverage benefits.  Pratt was insured by Progressive, a Wisconsin corporation with its principal place of business in Ohio.  Pratt's insurance policy with Progressive provided coverage up to $100,000 per accident.

            While the lawsuit was pending, but before it proceeded to trial, Progressive offered the full $100,000 policy limits to Hughes.  Pratt’s insurer, GEICO, was placed on notice of the offer. According to Hughes, GEICO did not respond in writing within 60 days after receipt of notice, as is required by Maryland law. See Md. Ins. Code Ann. § 19-511.  As a result, Hughes filed a Motion to Enforce Settlement.  In response to that motion, GEICO claimed that an email its counsel sent to Hughes qualified as notice.  Progressive did not join Hughes’ Motion to Enforce Settlement against GEICO.  The court ultimately denied the motion, finding that the email was proper notice under Section 19-511.

            The lawsuit proceeded to trial in the Circuit Court for Baltimore City.  The jury returned a verdict of $725,000.93, which was reduced upon consent motion to $720,000.03 to conform to the applicable statutory cap on damages for pain and suffering.  GEICO paid $500,000 of the verdict, thereby satisfying its contractual obligation to its insured.  This left the remaining $220,000.93 judgment against Pratt unsatisfied.

            Subsequently, Hughes, as Pratt’s assignee, filed a complaint for “bad faith” against Progressive in the Circuit Court for Baltimore City.  The case was thereafter removed to the United States District Court for the District of Maryland.  In his complaint, Hughes alleged that Progressive failed to use “good faith” in handling the claim pending against Pratt.  Specifically, Hughes alleged that Progressive failed: 1) to join in Hughes’ Motion to Enforce Settlement against GEICO; 2) to appeal the court’s ruling denying the motion; 3) to attend a court-ordered mediation prior to trial; 4) to pressure or encourage GEICO to resolve the claim within its policy limit; 5) to report to Pratt regarding the consequences of the failure to settle within GEICO’s policy limits prior to the verdict; 6) to depose any of Hughes’ treating physicians; 7) to set up an independent medical examination with a physician other than one who only handles  insurance carrier medical exams; 8) to file any post-trial motions requesting remittitur or a new trial, or to file an appeal; 9) to negotiate with Hughes to satisfy the excess judgment against Pratt at a reduced amount; 10) to communicate the status and seriousness of the lawsuit to Pratt during the pendency of the lawsuit; and 11) to obtain Pratt’s consent to concede liability.  Hughes also alleged that Progressive and GEICO conspired to keep Pratt as a party in an attempt to mitigate the amount of the verdict.

            Progressive filed a motion to dismiss for failure to state a claim upon which relief could be granted, also known as a demurrer, because Progressive had offered its policy limits in settlement prior to trial.  According to Progressive, although Hughes’ allegations may have set forth a malpractice claim against the legal counsel selected by Progressive, they did not constitute the basis for a claim of “bad faith” for failure to settle.

            The District Court acknowledged that, in Maryland, a third-party insurer may be liable for “bad faith” in the insurer’s dealings with its insured when the insurer refuses an opportunity to settle a claim against the insured within policy limits.  State Farm Mut. Auto. Ins. Co. v. White, 248 Md. 324, 330–331 (1967); Sweeten v. Nat'l. Mut. Ins. Co., 233 Md. 52 (1963).  In Sweeten, the Maryland Court of Appeals held that the plaintiff had set forth a cause of action sounding in tort given the insurer’s “exclusive control ... of investigation, settlement and defense of any claim or suit against the insured” and the existence of “a potential, if not actual, conflict of interest giving rise to a fiduciary duty.” 233 Md. at 54–55.  In White, the Court of Appeals held that an insurer faced with an opportunity to settle a claim within the limits of an insured’s liability policy owed the insured a duty of good faith.  248 Md. at 332–33.  In doing so, Maryland’s highest court laid out several factors for determining whether a bad faith failure to settle exists, namely: (1) the severity of the plaintiff’s injuries giving rise to the likelihood of a verdict greatly in excess of the policy limits; (2) a lack of proper and adequate investigation of the circumstances surrounding the accident; (3) a lack of skillful evaluation of the plaintiff’s disability; (4) a failure of the insurer to inform the insured of a compromise offer within or near the policy limits; (5) pressure by the insurer on the insured to make a contribution towards a compromise settlement within the policy limits, as an inducement to settlement by the insurer; and (6) actions which demonstrate a greater concern for the insurer’s monetary interests than the financial risk attendant to the insured’s predicament.  Id., at 332.

            In the present case, the U.S. District Court determined that Progressive had offered its policy limits in settlement of the underlying action prior to trial.  The court held that even if Hughes’ allegations that Progressive’s late settlement offer constituted “unreasonable delay,” Progressive ultimately did offer its policy limits before the start of trial.  The court found that no case had been cited to the court in which a Maryland court held that an insurer that offered its policy limits in settlement of a claim prior to trial could be held liable in tort for bad faith.  Thus, considering all the facts alleged, the court found that Hughes failed to state a claim for “bad faith” failure to settle as a matter of law.  See Sobus v. Lumbermen’s Mut. Cas. Co., 393 F.Supp. 661, 673 (D. Md.1975), aff'd. sub nom. Sobus v. Lumbermen’s Mut. Cas. Co., 532 F.2d 751 (4th Cir. 1976) (finding no basis for liability even where the insurer offered its policy limits in settlement on the day of trial).  Following this line of cases, the court granted Progressive’s motion, and dismissed Hughes’ case with prejudice.

Article contributed by James Buck