Bad Faith - Fifth Circuit Holds Insurer Not Liable Under Mississippi Law For Bad Faith Refusal To Pay When It Offered Less Than Policy Limits Due To A Miscalculation Of Benefits Owed
Last week, in Essinger v. Liberty Mutual Fire Ins. Co., No. 07-60376 (May 20, 2008), the U.S. Court of Appeals for the Fifth Circuit considered whether Liberty Mutual was liable under Mississippi law for bad faith refusal
to pay when it offered less than full policy limits based upon a miscalculation of what was owed under its policy. The court affirmed the district court’s summary judgment in favor of Liberty on the basis that there had never
been a denial of a claim.
Essinger arose from a single car accident on August 5, 2002 in which passenger Jolee Essinger was killed. The driver had no insurance coverage. The owner had coverage under a State Farm policy providing for $25,000 in liability
coverage (which State Farm paid) and 15,000 in uninsured motorist coverage. Essinger was insured under her parents’ policy through Liberty, which had $50,000 in uninsured motorist coverage for each of the Essingers’
two cars.
Several months after the accident, the Essingers made an uninsured motorist claim. Based upon a miscalculation, Liberty offered on multiple occasions to pay $75,000 but those offers were rejected by the Essingers’ attorney
who asserted that an additional $15,000 was owed. Liberty requested that the attorney explain his calculations but he never responded. Eventually, Liberty conferred with Mississippi counsel and became aware that the policy limit
was $90,000 and not $75,000. The Essingers accepted the $90,000 settlement offer, but reserved the right to pursue bad faith claims against Liberty. Thereafter, the Essingers filed suit against Liberty seeking punitive damages for
Liberty’s failure to properly calculate the benefits owed under Mississippi law. The district court granted Liberty’s summary judgment motion, finding no malice or gross negligence in Liberty’s initial failure
to understand how state law affected what was owed.
On appeal, the Essingers framed the issue as whether Liberty could “be ignorant of Mississippi law, adjust a Mississippi claim in violation of Mississippi law, and not be subject to a jury finding that it committed bad faith.”
In considering the issue, the Fifth Circuit noted that under Mississippi law, in order to recover punitive damages for bad faith refusal to pay a claim, the following four relevant questions must be asked: (1) Was there a refusal
to pay a claim or to honor an obligation? (2) Was the claim actually owed? (3) Was there no arguable basis for the company's actions? and (4) Did the company's actions amount to an intentional wrong or occur due to gross
negligence?
While the Fifth Circuit found that the second and third factors had been met, it held that there was never a refusal to pay a claim. Examining Liberty’s actions, the court stated that Liberty offered what it considered to
be its policy limits, but at various points indicated that it would consider further information revealing where it was wrong. Accordingly, the court concluded that there “was never a denial of a claim or failure to honor
an obligation as required to make a jury issue of bad faith.” The court further stated that thus there was no reason to discuss the remaining issue on the relative egregiousness of the insurer’s conduct and affirmed
the district court’s grant of summary judgment.