Sonnenschein Nath & Rosenthal, LLP on Trout v. Nationwide Mutual Insurance Co.: An Inconclusive Decision on a New Bad Faith Set-Up
Trout v. Nationwide Mutual Insurance Co., 2009 U.S. App. LEXIS 6298 (10th Cir. Mar. 12, 2009), is an unreported decision reversing a summary judgment because (as everyone agreed) the district court applied the wrong standard and (as the court held) the error was not harmless. But the case reports on a new approach to setting up a liability insurer for bad faith, and leaves open the possibility that the approach might be allowed to work. This commentary examines the new approach, offers an argument that it should not work, and considers how insurers might handle claims where this approach is tried.
Trout was a passenger in a car owned by Budnikov’s father, Raysh, and driven by Kreyche, with Budnikov’s permission. Both Kreyche and Budnikov had been drinking. The car hit a tree and Trout was severely injured in December, 2002. Kreyche was insured by Nationwide, with a per person limit of $100,000 and the car was insured by American Express, with a per person limit of $25,000. American Express assumed the defense.
The commentary summarizes the set-up facts as follows:
In January, 2004, Trout’s lawyer asked Kreyche’s lawyer if Kreyche’s insurer would offer its limits (also saying that he was not agreeing to accept the limits). He set a short deadline for response, but extended that once. Defense counsel responded by offering Nationwide’s $100,000 limit, with conditions, and reporting that American Express had also offered its limit, later adding that there was no other insurance available. Trout rejected Nationwide’s conditional offer, made no counteroffer, went to trial, and was awarded $640,000 plus costs.
The commentary examines the conceded error of the district court in applying the wrong bad faith standard and explains why that may have made a difference, even though both turn on what is “reasonable.”
In any event, as the commentary points out:
What makes the approach taken by Trout novel is that she essentially ignored Nationwide’s effort to settle. Usually, bad faith actions not based on rejected demands have relied on the failure of the insurer to make an offer. Once an offer has been made, there has typically been either a demand for more money (if the offer were less than limits) or for removal of objectionable conditions, giving the insurer at least one opportunity to improve its offer. Trout simply rejected the offer and went to trial. Even if a court holds that an insurer has an obligation to explore settlement, it would be a considerable extension of that principle to say that the insurer must make the best possible offer as the opening of negotiations.
The commentary argues that such an extension would be particularly inappropriate on facts like those in Trout. Rather, the commentary makes this argument and offers some thoughts on lessons insurers might draw from the case.
In order to avoid later disputes about whether a within-limits offer would have been accepted and to limit abuse by plaintiffs, I argue that the plaintiff should be required to make a demand that the insurer fails to accept before any bad faith claim can arise. If that were the law of Colorado, there would have been no need for a remand in Trout.