May 27, 2021

Overview and Recent Developments of Kansas Bad Faith

The Kansas Court of Appeals recently issued its long-awaited opinion in Gruber v. Marshall which helps provide an update and overview to avoiding and defending bad faith claims in Kansas.  In Gruber, two friends died when the plane they were in crashed outside of Manhattan, Kansas.  Claiming pilot negligence, the estate of the passenger—Marshall—sued the pilot’s estate—Gruber.  The pilot’s underlying insurance policy contained a voluntary settlement provision which was intended to provide a way for an insured to dispose of a liability claim without discussions of fault that required the insurer to pay $100,000 upon a request by the policyholder made within one year of the occurrence.  The insurer offered the $100,000 policy limits to Gruber’s estate, but it waited for more than a year after the crash to do so, which was after investigators concluded Marshall lost control of the plane causing the crash.  Gruber’s estate rejected the settlement and filed a wrongful death lawsuit against Marshall’s estate.   

The two estates agreed that Marshall would assign to Gruber its contract claim against the insurer while admitting fault for the crash.  In exchange, Gruber’s estate agreed not to collect any judgment from Marshall’s estate. The trial court heard the Gruber estate’s wrongful death action against Marshall and found in the Gruber estate’s favor, awarding damages over $11 million. The insurer did not participate in the trial. The trial court found that the insurer both negligently and in bad faith breached its insurance contract with Marshall by not making a timely voluntary settlement offer and that this breach caused the entry of the $11 million judgment, making the insurer liable for the entire $11 million judgment. 

On appeal, the Court held that Marshall’s insurer acted negligently and in bad faith when it failed to offer this voluntary settlement as required by Marshall’s policy. This “bad faith” led to an excess judgment against Marshall’s estate, and the district court did not err by holding that this excess judgment against the Marshall estate could be enforced against Marshall’s insurer. 

Consequently, when handling insurance claims in Kansas it is critical to understand Kansas law regarding insurers and their duties.  In defending and settling claims against its insured, an insurer owes to the insured the duty to act in good faith and without negligence.  The failure to do so will lead to the insurer being held liable for the full amount of the insured’s resulting loss, even if that amount exceeds policy limits.  An insurer must conduct itself with that degree of care which would be used by an ordinarily prudent person in handling his or her own business.  While an insurer may consider its own interests, it must at least equally consider the interest of its insured.  This means that the insurer must evaluate the claim without a consideration of the policy limits and as though it alone would be responsible for the entire amount of any judgment rendered on the claim.

Liability for bad faith ultimately depends on the circumstances of the case and must be determined by considering various factors which include:

  • the strength of the claimant’s case on the issues of liability and damages;
  • attempts by the insurer to induce the insured to contribute to a settlement;
  • failure of the insurer to properly investigate the claim;
  • the insurer’s rejection of the advice of its own attorney or agent (including retained defense counsel for the insured);
  • failure of the insurer to inform the insured about a settlement offer;
  • the amount of financial risk to which the insured is exposed;
  • the fault of the insured in inducing the insurer’s rejection of a settlement offer by misleading it on the facts; and
  • any other factors tending to establish or negate bad faith.

It is important to remember that under Kansas law the fiduciary relationship between the insurer and insured imposes a duty on the insurer to make reasonable efforts to negotiate a settlement.  In fact, the insurer has a duty to begin settlement negotiations regardless of the actions of the claimant.  Keep in mind, however, that an insurer need not accept a premature settlement offer without having adequate information when investigations are ongoing.  But, in cases where liability is unquestioned and damages are clearly in excess of the policy limits (i.e., wrongful death claim with $25,000 policy limits and no defense to liability) an insurer acts in bad faith by refusing to make a reasonable attempt to settle within the policy limits.  

In summary, Kansas law reflects the realities of the relationship between an insurer and its insured.  The insurance contract between the two apportions risk and can create a tension between the two.  On one side, the possibility of being found liable for any resulting financial loss because of an insured’s negligence, makes an insured vulnerable.  On the other side, an insurer is protected by the terms and limits of its insurance policy.  Because an insured is potentially exposed to loss, an insurer must act diligently and in good faith.  An insurer must keep the interests of the insured in mind at all times.  Thus, Kansas law requires an insurer to be financially responsible for a loss in excess of policy limits when the insurer fails to act reasonably on behalf of its insured.