“An Insured Is an Insured Is an Insured Is an Insured” for Purposes of an Insurer’s Duty of Good Faith and Fair Dealing

“[A]n insured is an insured is an insured is an insured for purposes of an insurer’s duty of good faith and fair dealing,” the Indiana Court of Appeals wrote in its recent decision in Schmidt v. Allstate Prop. & Cas. Ins. Co. In this case, Monika Schmidt was injured in a car accident. She was riding as a passenger in a vehicle being driven by her friend, Deborah Fisher. The driver of the other vehicle was Robert Bromley. Bromley had a Progressive insurance policy with $50,000 per person liability coverage. Fisher had an Allstate insurance policy with $100,000 per person liability coverage and $100,000 in underinsured motorist coverage. Schmidt was an “insured” under the provisions of Fisher’s Allstate policy. Schmidt sued Bromley and Fisher for her injuries. After Allstate refused to tender Fisher’s policy limits for underinsured coverage, Schmidt amended her lawsuit and added an underinsured claim and bad faith claim against Allstate. Ultimately, Schmidt and Allstate settled the underinsured claim and Fisher and Bromley were dismissed from the case.

Allstate filed for summary judgment on Schmidt’s bad faith claim. Under Indiana law, while an injured third party cannot sue an at-fault party’s insurance company for handling the claim in bad faith, there is an implied duty of good faith in all insurance contracts that an insurer will act in good faith with its insured, and insureds can sue their insurers in tort when their insurers act in bad faith in handling their claims. The duty of good faith and fair dealing owed by insurers includes, among other things, the obligation to refrain from making an unfounded refusal to pay policy proceeds, causing an unfounded delay in making payment, deceiving the insured, and exercising an unfair advantage to pressure an insured into a settlement. Here, Allstate argued that an insurer does not owe a duty of good faith and fair dealing to an insured who is not the policyholder.

On appeal, the Indiana Court of Appeals reviewed prior court decisions relied upon by the trial court in granting summary judgment in favor of Allstate, including Cain v. Griffin, which the Court distinguished on the basis that it involved a third-party beneficiary claim for medical payments coverage as opposed to a claim by an additional insured. The Court also reviewed the duty analysis under Webb v. Jarvis, which provides that courts should balance the following three factors in determining the existence of duty: (1) the relationship between the parties, (2) the reasonable foreseeability of harm to the person injured, and (3) public policy concerns.

As to the three factors, the Court noted that, aside from the fact that Schmidt did not sign the insurance contract and pay premiums, there was little difference between her (an additional insured) and Fisher (the policyholder) with regards to their relationship to Allstate under the policy. The Court recognized the foreseeable nature of the harm resulting to insureds, who are in need of insurance proceeds after a loss, when good faith is not exercised by an insurance company in deciding whether or not to honor their claims. The Court also found that public policy concerns weighed in favor of allowing non-policyholder insureds to sue for bad faith, referencing generally Indiana’s Unfair Claims Practices Act, Indiana Code § 27-4-1-4.5, and Indiana law requiring motorists have minimum liability insurance, Indiana Code § 9-25-4-1, and insurers to offer uninsured and underinsured motorist coverages, Indiana Code § 27-7-5-2. The Court also noted that, to the extent that a policyholder has a “special relationship” with the carrier above that of an additional insured, dealing with additional insureds in good faith benefits the policyholder.

The Indiana Court of Appeals reversed the trial court’s entry of summary judgment for Allstate and remanded the case for further proceedings on Schmidt’s bad faith claim.

You can read the full opinion here.