Railsback v. Mid-Century Ins. Co., 2004 WL 1068019 S.D. 2004 (May 12, 2004)

Representatives of a liability target’s insurer owe a claimant a duty to disclose accurate liability policy limits when communicating about such matters, according to a recent decision by the South Dakota Supreme Court. The admittedly adversarial relationship does not diminish the duties of parties to a contract (a settlement agreement in this case) to refrain from material misrepresentation.

Personal injury plaintiff brought suit in this matter against the liability carrier alleging fraud, deceit, and misrepresentation in that the carrier’s representative had allegedly misrepresented the amount of liability coverage afforded by the company in an underlying matter. The trial court granted summary judgment in favor of the carrier, and on appeal, plaintiff argued, and the appeals court agreed, that the trial court erred in holding that (1) the liability insurer did not have a duty to speak truthfully to an injured third-party claimant, and that (2) her claim was a prohibited direct action against an insurer.

The important issue for purposes of this article is the first one, i.e. whether the liability insurer had a duty to speak truthfully to the injured third-party claimant as to the amount of the tortfeasor’s – its insured’s – liability limits. In that the question of a subrogation target’s liability limits arises frequently, and in that there is often no easy way to be certain what those limits are, this should be a matter of major concern for recovery professionals.

Plaintiff’s claims arose out of an automobile accident in which she was injured as a passenger; and the defendant carrier’s insured was the driver. At the time of the accident, the driver’s policy limit was $50,000.00 per person and $100,000.00 per occurrence. Plaintiff made a claim against the driver for the injuries she suffered in the accident. She filed the claim, and eventually negotiated a settlement with the carrier.

Two adjusters handled the claim. Plaintiff alleged that they both misrepresented the amount of liability coverage available under the driver’s policy. Specifically, she asserted that they led her to believe that the policy limit was $25,000.00 rather than $50,000.00, and that they knew she was misinformed about the policy limits yet they reinforced that misinformation with ambiguous communications. Entries in their logs indicated that they were aware that Plaintiff was misinformed.

Plaintiff ultimately released her claim for $25,000.00, thinking that $25,000 was her maximum recovery possible, but she found out later that the policy limit was actually $50,000.00. In her subsequent suit, she asserted that, had she known the policy limit was greater than $25,000.00, she would not have entered into the settlement. She also asserted that – through their written and verbal communications – the adjusters intentionally reinforced her misunderstanding of the policy limits.

Along the way to concluding that the trial court erred in holding that the liability insurer did not have a duty to speak truthfully to an injured third-party claimant, the South Dakota Supreme Court discussed how the relationship between an insurer and a third party claimant is not a fiduciary or confidential relationship. On the contrary, the court recognized that the relationship is in fact adversarial. Thus, it said, the parties deal at arms length, and there is no duty on the part of the insurer to disclose the policy limits during settlement negotiations. However, on the narrower question of whether an insurer may knowingly cause or further a claimant’s misunderstanding of the policy limits to her detriment, the court reasoned otherwise.

The carrier argued that it did not have a duty to (1) disclose policy limits or (2) correct plaintiff’s mistaken belief about them. It also argued that, because an insurer has no duty to disclose policy limits, even if the third party is known to have been operating under a mistaken belief, there can be no breach of duty giving rise to a fraud action. For its part, the trial court found that an insurer need only disclose its insured’s policy limits if a reasonable person in the same or similar circumstances would believe that the disclosure would be in the insured’s best interest.

In disagreeing with the trial court, the appeals court found that it could be reasonably inferred that the adjusters were aware of and exploited plaintiff’s misinformation regarding the policy limits, and that one could infer that the exploitation amounted to affirmative representations of facts they knew were untrue. Thus, it found that there were questions of material fact whether the claims adjusters’ knowledge of plaintiff’s mistaken belief and manipulation of that belief for the company’s benefit amounted to fraud, deceit or misrepresentation.

In so finding, the court also rejected the carrier’s argument that an insurer never owes a claimant a duty to disclose policy limits just because it is an adversarial relationship. The court stated that the fact that settlement negotiations are an adversarial process does not diminish the duties of parties to a contract to refrain from material misrepresentation.

PRACTICE TIPS:

1. Trust, but verify. If it does nothing else, this case shows that liability adjusters are capable of creating and/or contributing to a false impression concerning the amount of liability limits in play in a given subrogation case. Thus, the case can be mentioned in connection with one’s polite assertion of the need for documentation of the target’s liability limits. If the liability adjuster (or opposing attorney) balks at the request, be wary. There’s nothing necessarily confidential about limits information, so the adjuster or attorney has little basis to deny you it.

2. Moreover, in every case where you have a sense of the applicable liability limits (though no actual documentation thereof), submit a statement of your sense in writing. That is, it would be helpful – and protective – to write a letter to your adversary using language such as, “Settlement of this matter at $XX,XXX.XX is predicated upon my belief and your representation that the applicable liability limit of insurance is in the amount of $YY,YYY.YY. If I am mistaken in any respect as to the amount of the applicable limit, please advise immediately.”