Case Law Update: Underinsured Motorist Coverage - Bad Faith

WDC Journal Edition: December 2001
By: Civil Trial Counsel of Wisconsin

Danner v. Auto Owners Insurance
___ Wis.2d ___, 629 N.W.2d 159 (2001)
Decided July 6, 2001

The supreme court determined that a bad faith claim can arise out of an insurer's handling of an underinsured motorist claim. The supreme court held that (1) a carrier's duty of good faith and fair dealing existed from the inception of the policy and therefore existed during the investigation, evaluation and processing of a claim before the tort feasers liability was established by arbitration; (2) evidence created jury questions on whether causation, damages and negligence in connection with an insured's collision with a left-turning driver were fairly debatable; and (3) the insureds were entitled to attorney's fees and costs as a result of the fact that the jury found the insurer in bad faith in this matter.

This case arose out of a traffic accident between Todd Krause and Darci Danner. Krause claimed that he activated a turn signal and proceeded to negotiate a left turn. He claims he had to stop to avoid hitting several bicyclists. Several witnesses indicated he did not use his turn signal and there were no bicyclists. The witnesses indicated that Krause pulled directly in front of Ms. Danner, she was traveling the speed limit, and had no opportunity to react. Krause carried $25,000 in liability limits and Danner had a policy with Auto Owners with $100,000 in underinsured motorist coverage. She was also living with her parents and there were two other vehicles insured by Auto Owners with $100,000 in underinsured motorist limits for each vehicle, making a total of $300,000 worth of available underinsured motorist coverage.

During the investigation of the claim, Danner incurred $22,000 in medical specials, including a fusion surgery on her back. It was established that she had pre-accident low back complaints and a prior roll-over accident. However, her three treating doctors all testified that her back complaints and medical specials were related to this accident.

A little over two years after the accident, Danner filed an action against Krause, his insurer and Auto Owners. Auto Owners' counsel provided a report that accurately summarized the liability situation and the existence of the pre-existing back problems. He estimated the liability split would be about 90-10 and that it was likely a jury would believe the accident caused Danner's physical complaints and award her over the $22,000 in medical specials.

Dairyland continued to refuse to offer its policy limits, arguing on both the liability and damages, emphasizing the pre-existing problems with the plaintiff's back. During the course of the case and negotiations, Auto Owners' counsel wrote to the other defense attorney that he believed Auto Owners would be willing to help defray costs, settlement offers, etc., provided that Dairyland could settle the claim for below the policy limits. Dairyland eventually settled for the policy limits and the claim between Auto Owners and Danner was submitted for arbitration. Negotiations reached the point where Auto Owners offered $50,000 and Danner demanded $175,000. The arbitration panel awarded $220,050. Auto Owners reduced Dairyland's $25,000 from that amount and sent a check to the Danners. The circuit court granted Danner's motion to confirm the entire award and Auto Owners then forwarded the remaining $25,000.

This bad faith claim was then commenced and a jury found that Auto Owners was in bad faith in the handling of the claim. The jury awarded $125,000 in attorney's fees for prosecuting the bad faith action but awarded no attorney's fees for the underlying claim or any other compensatory or punitive damages. The trial court granted the Danner's motion to change the attorney's fees award on the bad faith claim from $125,000 to $142,967.10 and from $0 to $81,012.97 for attorney's fees on the underlying claim. The court of appeals affirmed the trial court's actions and the supreme court affirmed the decision of the court of appeals.

Before the supreme court, Auto Owners argued that as a matter of law, no cause of action for bad faith can arise until after an arbitration award imposes a duty in an underinsured motorist claim. The supreme court disagreed and held that "every insurance contract from its inception has an applied covenant of good faith and fair dealing between the insured and the insurer. When this duty of good faith and fair dealing is breached, and the insured incurs damages as a result of that breach, a claim for bad faith will lie."

Auto Owners argued that due to the adversarial relationship between an insured and an insurer in an underinsured motorist claim situation, no bad faith claim can arise against the underinsured motorist carrier for the investigation, evaluation or processing of the claim until after the arbitration award. The supreme court noted that other jurisdictions are split on this issue but determined that the duty of good faith and fair dealing existed at all times, including during the investigation, evaluation and processing of an underinsured motorist claim.

Auto Owners also argued the claim was fairly debatable. The supreme court noted the circuit court had denied the motions after verdict on this argument and therefore the standard of review was very narrow. The jury verdict would be sustained if there were any credible evidence to support it. The supreme court went through the various factual points to show that there was support in the record for the jury's determination.