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In Bamford, Inc. v. Regent Ins. Co., the 8th U.S. Circuit Court of Appeals held the insurer acted in bad faith in its handling of the settlement negotiations and trial of one of its insureds. The underlying plaintiff was injured when a steel pipe flew off the roof of the insured vehicle during a collision and penetrated the plaintiff’s abdomen and pelvis. Not surprisingly, the plaintiff needed extensive medical treatment after the accident.

Prior to litigation, the plaintiff’s attorney offered to settle the claim for the $6 million policy limits based on his assessment that the case had a verdict potential of $7.5 million to $10 million. Shortly thereafter, the insurer’s counsel opined that the value of the case was nowhere near the policy limits. Rather, he valued the case closer to $1 million. Further, the insurer learned that the insured’s employee had a history of seizures and estimated its loss-of-consciousness defense at a 25% chance of success.

During this time, the insurer increased its internal settlement value to $1.75 million when it became clear that the plaintiff required extensive medical treatment. During the first mediation, the mediator valued the case at $2.5 million to $3 million. During a second mediation, the insurer’s largest offer was $1.6 million, despite the mediator valuing the case at no less than $3 million.

Ultimately, the plaintiff filed suit and liability was decided in favor of the plaintiff via summary judgment. In the days leading up to trial, the insurer made its final offer of $2.05 million. The issue of damages was submitted to the jury. After a seven-day trial, the jury returned a verdict of $10.6 million for the plaintiff. The parties ended up settling the matter for approximately $8 million. The insured was responsible for the amount in excess of the policy limits.

After the trial, the insured filed a declaratory judgment action asserting the insurer breached its fiduciary duty and acted in bad faith in refusing to settle the plaintiff’s claim. Following the trial in the coverage litigation, the jury returned a verdict in favor of the insured for approximately $2 million (the amount in excess over the policy limits). The insurer filed a motion for judgment as a matter of law or for a new trial. The question of whether the insurer committed bad faith was put before the 8th Circuit when the insurer appealed the District Court’s denial of its motion.

The 8th Circuit affirmed the District Court’s finding that the insurer acted in bad faith in handling the claim. Under Nebraska law, the insurer needed to show its failure to settle “was an honest mistake in judgment.” In finding there was sufficient evidence to show the insurer acted in bad faith, the 8th Circuit held “the jury could have concluded that [the insurer]—by relying on valuations received from mediators, counsel, and internal adjusters—reasonably embraced a low value for the [plaintiff’s] claims early in the case, but ultimately acted in bad faith in failing to reassess the value of the claims in light of case developments and advice from its own players that the low value was inaccurate.”

This decision provides a useful reminder that, in order to avoid bad faith claims, it is important for insurance carriers to continually reevaluate claims as the facts develop. For example, the jury in the declaratory judgment action viewed correspondence in the claims file stating that “a large increase in the reserve would be a ‘big red flag’ to senior management….” The reasoning of the 8th Circuit makes clear that it was not necessarily looking for perfect claims handling. Rather, the insurer may have been able to avoid the bad faith claim, even if its initial evaluation was too low, by properly evaluating the claim once it had sufficient information, regardless of the fact that raising the reserve would have also raised “red flags.”