Why Liability Insurers Are Not Fiduciaries To Their Insureds and Why Missouri Courts Should Stop Saying They Are
Douglas R. Richmond1 |
Patrick J. Kenny1 |
I. Introduction
When a person is sued for alleged negligence, she typically sends the suit papers to her insurance agent or broker, who, in turns, notifies her liability insurer. In most cases, the insurer accepts coverage, assumes the insured’s defense, and appoints defense counsel for the insured. The insurer and defense counsel then work cooperatively to favorably resolve the litigation. This is a straightforward arrangement. The insurer is contractually obligated to defend and indemnify the insured in connection with covered occurrences, and has the contractual right to defend and settle related litigation as it deems expedient.
In a typical case, the insurer, through defense counsel, makes most litigation decisions. But the insurer’s discretion is not limitless. Insurance policies include an implied duty of good faith and fair dealing, which assumes the insurer’s agreement not to injure the insured’s right to receive the benefits of their contract.2 Essentially, the implied duty of good faith and fair dealing requires an insurer to give an insured’s financial interests consideration equal to its own. An insurer cannot subordinate an insured’s financial interests.3 In a case in which the insurer controls settlement, for example, the duty of good faith and fair dealing may, on the right facts, require it to settle within policy limits if presented with a reasonable opportunity to do so. An insurer that refuses to settle in bad faith risks incurring extra-contractual liability.
Liability insurers’ duty of good faith and fair dealing, and potential tort liability for its breach, are firmly established. The Supreme Court of Missouri recognized them years ago in Zumwalt v. Utilities Insurance Co.4 The problem is that Missouri courts commonly characterize the relationship between liability insurers and their insureds as “fiduciary.”5 This is a material and unwarranted departure from the duty of good faith and fair dealing, which, again, allows a liability insurer to consider its own interests when defending and settling claims so long as it does not subordinate the insured’s interests to its own. In contrast, a fiduciary relationship is essentially that of the relationship between a trustee and a beneficiary.6 A trustee is duty-bound to act solely in the beneficiary’s interests.7
Why does this matter? Correctly describing the insurer-insured relationship is important because the nature of the relationship determines the parties’ duties and rights. In this article, we explain why liability insurers are not fiduciaries to their insureds and analyze how Missouri courts have come to incorrectly describe the liability insurer-insured relationship as fiduciary.
II. Insurance Law and Fiduciary Duty
Fiduciary relationships may be found in many areas of law. One area of law generally thought to be free of fiduciary ties, however, is that of contract.8 Insurance law is grounded in contract. Even Missouri courts reject the principle that insurers are fiduciaries to insureds except where a liability insurer has the exclusive right to contest or settle a claim against its insured.9
The fact that a liability insurer owes its insured a duty of good faith and fair dealing does not mean that it is a fiduciary to its insured. “An implied duty of good faith and fair dealing has never been held to constitute a fiduciary duty.”10 Merely acting for another’s benefit will not spawn fiduciary duties unless the alleged fiduciary consciously assumes such duties.11
A fiduciary must treat the beneficiary’s interests as paramount when acting within the bounds of their relationship. A liability insurer’s duties to its insured are quite different. For example, a liability insurer has a right to defend its insured as well as a duty to do so.12 An insurer has this right because in most cases only the insurer’s assets are at risk. The insurer is generally free to settle or litigate without fear of liability to its insured for decisions with which the insured disagrees. Even where an insured has reputational or business interests that it wants to vindicate by way of a trial, the insurer typically has the right to settle as it deems expedient and can protect its interests by settling to avoid further defense costs or any possible verdict.13 The insurer’s interests thus trump the insured’s interests. That would not be possible if the insurer-insured relationship was truly fiduciary.
Moreover, an insurer’s control of litigation against its insured cannot reflect a degree of control over the insured that would support a fiduciary relationship.14 An insured can always have a voice in its defense by engaging personal counsel to monitor the insurer’s litigation conduct. The insured also has some say in her defense because she shares an attorney-client relationship with the attorney hired by the insurer to defend her, and the defense attorney has ethical obligations to her that exist independent of the insurance policy.15 The insured’s ability to retain at least some control over its defense is inconsistent with a fiduciary relationship based on the surrender of personal control to another.16
As for liability insurers’ implied duty to settle, it is important to recognize that the duty is not absolute. In Missouri, an insurer has no duty to settle unless the plaintiff makes a settlement offer or demand within policy limits.17 Assuming that the insured is aware of the plaintiff’s offer or demand, the insured must further demand that the insurer settle within policy limits to trigger the insurer’s duty.18 Even then, an insurer may opt for a vigorous defense over settlement if it reasonably believes that the insured is not liable, or that the plaintiff’s demand exceeds a probable jury award.19 For an insurer to breach its duty of good faith, the insurer must be something more than mistaken or negligent in refusing to settle.20 In sum, Missouri courts do not presuppose that settlement is always the preferred means of protecting insureds’ interests.
If the relationship between a liability insurer and its insured were fiduciary, the insurer’s duty to settle could not pivot on a plaintiff’s policy-limits demand or offer. Instead, the insurer would have an implied duty to settle even where the plaintiff made no offer, or made an offer exceeding the insurer’s policy limits. If the insurer-insured relationship were fiduciary, the duty to settle clearly could not further depend on the insured’s demand that the insurer come to terms with the plaintiff. Neither alternative reflects Missouri law.
It does no good to counter that these settled principles of Missouri bad faith law are irrelevant because a fiduciary relationship exists “aside from [the] insurer’s subsisting implied covenant of good faith and fair dealing….”21 Were that so, an insurer could decline to settle a case within policy limits because neither the plaintiff nor the insured demanded that it do so, proceed to trial based on its honest judgment that settlement was unwarranted in any event, and still be exposed to extra-contractual liability for breaching its separate fiduciary duty to settle. That would be an absurd result. It clearly would be inconsistent with Missouri insurance bad faith law.22 It also demonstrates that a duty of good faith and fair dealing cannot exist side-by-side with fiduciary duty; the latter necessarily swallows the former.
The principle that an insurer weighing settlement must give its insured’s interests consideration equal to its own to satisfy its duty of good faith is inconsistent with a fiduciary relationship.23 A fiduciary must give a beneficiary’s interests exclusive consideration, not equal consideration.24 Were the insurer-insured relationship fiduciary, the insurer would always be required to place the insured’s interests above its own. An insurer’s good faith duty of equal consideration is more constrained.25 Again, recognizing a fiduciary duty to settle within policy limits renders the duty of good faith and fair dealing utterly meaningless.
If an insurer’s duty to settle were a fiduciary duty, the insurer could never reject a policy limits settlement offer or demand if the insured wanted to settle the case. This would lead to head-scratching outcomes. Consider a case in which an insured with an automobile liability insurance policy, with $100,000 per person liability limits, has an accident. The other driver sues. Assume also that any objective observer would conclude that the maximum value of the plaintiff’s claim is $15,000. When the plaintiff makes a $99,000 settlement offer, however, the insured demands that the insurer accept. The insured does not want to take time off from work for trial, and he finds litigation stressful. Thus, he demands that his insurer immediately settle the case by paying the plaintiff’s price.
If an insurer’s duty to settle is a fiduciary duty, the insurer in this hypothetical scenario is obliged to settle for $99,000. Unreasonable though that may seem, and despite the fact that the insurer is legitimately interested in ensuring that any settlement is reasonable, a fiduciary must give priority to its beneficiary’s interests. Thus, when an insured instructs its insurer to settle within policy limits, an insurer owing a fiduciary duty to the insured must settle within policy limits, even though the insurer never would have faced bad faith liability on the same facts. That cannot be.
III. Missouri’s Road to Fiduciary Duty
How did Missouri courts come to incorrectly describe the relationship between liability insurers and their insureds as fiduciary based on insurers’ control over litigation and settlement? The route to the answer leads back in time from the decision in
Freeman v. Leader National Insurance Co.,26 where the court stated unequivocally that “[a]n insurer’s right to control settlement and litigation under a liability insurance policy creates a fiduciary relationship between insurer and insured.”
27 The
Freeman court cited
Duncan v. Andrew County Mutual Insurance Co.28 as authority for that statement.
Duncan, of course, had nothing to do with liability insurance; that case involved property insurance. The court in Duncan “reject[ed] extension of the tort of bad faith applicable to third party claims in the context of liability insurance to first party claims in the context of property and related insurance.”29 In doing so, the court observed that courts in a number of other states, while recognizing third-party bad faith, had refused to extend bad faith doctrine to first-party insurance. In explaining the reasoning of those other courts, the Duncan court wrote:
By way of explication, an insurer’s right to control settlement and litigation under a policy of liability insurance creates a fiduciary relationship between insurer and insured. Concomitantly, an insurer owes a duty to exercise good faith in evaluating and negotiating third party claims against its insured and may be held liable in tort (commonly referred to as the tort of bad faith) by its insured for a third party judgment in excess of the policy limits in the event it fails to exercise good faith in the performance of its fiduciary obligation. It is the existence of this fiduciary relationship between insurer and insured under a policy of liability insurance, beyond and apart from any subsisting implied covenant of good faith and fair dealing on the part of an insurer under a policy of insurance, which exposes an insurer to liability in tort for failure to exercise good faith in evaluating and negotiating third party claims against an insured. The postulate for this fiduciary relationship is notably absent in claims by an insured against an insurer under policies of property and related types of insurance.30
There are at least four flaws in this reasoning. First, the Duncan court never explained why a liability insurer’s right to control settlement and litigation gives rise to a fiduciary relationship. It could not have done so had it so wanted. These are expressly contract rights.31 They would not exist but for the policy. All of an insurer’s duties to an insured are attributable to the fact that they are parties to a contract. An insurer and insured would have no relationship were it not for the insurance policy. Contracting parties generally are not fiduciaries to each other.32
Second, to the extent the court considered an insurer’s implied duty to settle within policy limits to be distinct from its contractual obligations, it erred. The duty to settle is an aspect of an insurer’s duty of good faith and fair dealing, which is rooted in contract law.33 The fact that an insurer’s breach of this duty is actionable in tort does not remove its contractual underpinnings. Where there is no policy, i.e., no contract, there is no duty, and thus no possible tort.
Third, and as explained previously, it is impossible for an insurer’s duty of good faith and fair dealing to exist concomitantly or subsist with a fiduciary duty. It is inescapably true that the latter necessarily swallows the former.
Fourth, the court was obviously confused, as evidenced by its statement that it is “the existence of this fiduciary relationship between insurer and insured . . . which exposes an insurer to liability in tort for failure to exercise good faith in evaluating and negotiating third party claims.”34 That is an incorrect statement of the law. A fiduciary relationship imposes a duty of trust, which is higher than good faith and fair dealing.35
The Duncan court cited no Missouri authority when attempting to distinguish the insurer-insured relationship in the first- and third-party contexts. It is apparent, however, that the court was strongly influenced by Craig v. Iowa Kemper Mutual Insurance Co.,36 which it quoted.37 The Craig court wrote:
The cause of action in tort for breach of the obligation of fair dealing presupposes an insurer and an inured in a subsistent fiduciary relationship. . . .
The fiduciary duty of an insurer for good faith rests on the reservation of exclusive right to contest or negotiate the claim of liability brought against the insured, and so withhold from the insured the right to settle without consent of the insurer. Zumwalt v. Utilities Ins. Co., supra, l.c. 753[2]. Such terms of agreement repose in the insurer the power to act for the insured, akin to authority a client vests in an attorney, or a principal in an agent – each a relationship of inherent fiduciary obligation. . . . The duty to deal in good faith, therefore, does not arise from consent and contract but from the nature of the relationship. . . . Zumwalt v. Utilities Ins. Co., supra, l.c. 753[2]. . . .38
The court in Craig, unfortunately, made several analytical missteps, starting with its statement that the tort of bad faith presupposes a subsistent fiduciary relationship. Without belaboring the essential principle that it is impossible for the duty of good faith and fair dealing to subsist with fiduciary duty, the tort of bad faith presupposes no such thing. Courts’ motivation for recognizing tort remedies for an insurer’s unreasonable refusal to settle was two-fold: (1) the perceived “inadequacy of contract remedies to compensate insureds” who were wronged by their insurance companies in the settlement context; and (2) a desire to “deter insurers from elevating their own interests above their insureds’” interests.39 This approach was further consistent with courts’ recognition of tort actions for contract breaches in situations where the law imposes special duties on one of the parties.40 Of course, not all special relationships are fiduciary relationships (e.g., innkeeper-guest, common carrier-passenger, bailor-bailee).
Second, the court was mistaken when it reasoned that an insurer’s fiduciary duty rests on its right to defend or settle a claim against its insured, and to so withhold from the insured the right to settle without its consent. The insurer’s rights to defend and settle are contract rights. They support or create nothing more. No insurer, by issuing a policy, intends to create a fiduciary relationship with an insured. This distinguishes the insurer-insured relationship from attorney-client and principal-agent relationships, into which lawyers and agents voluntarily enter knowing that they are assuming fiduciary duties.
Third, the court’s view that an insurer’s duty of good faith and fair dealing “does not arise from consent and contract but from the nature of the relationship,”41 is, as previously explained, inaccurate. The insurer and insured would have no relationship but for their contract. As an example of how critical and controlling the contractual relationship is, consider that an insurer does not owe a duty of good faith to a third-party claimant harmed by the insured’s conduct because the claimant is not the policyholder.
Fourth, the analogy from which the court concluded that an insurer has a fiduciary relationship with an insured is flawed. A lawyer acting on behalf of a client is generally prohibited from having a personal interest in the subject matter of the representation.42 Agents are similarly restricted when handling matters within the scope of their agency.43 The opposite is true when a liability insurer negotiates a settlement of a claim or suit against its insured. An insurer has legitimate interests that parallel those of its insured in ensuring the reasonableness of any settlement. That duality of interests distinguishes the insurer-insured relationship from fiduciary relationships such as attorney-client and principal-agent.
Setting aside the many problems with the court’s reasoning, Craig points clearly to the Supreme Court of Missouri’s decision in Zumwalt v. Utilities Insurance Co.44 as the source of fiduciary terminology in third-party bad faith cases. Twice the Craig court cited “Zumwalt v. Utilities Ins. Co., supra, l.c. 753[2]” as authority for its fiduciary duty position.45 The “l.c.” in the court’s citation to Zumwalt is an abbreviation for the Latin phrase “loco citato,” or “in the place cited.” Here is everything the Zumwalt Court wrote in the place cited, that being section [2] on page 753 of its published opinion:
We have reviewed many authorities on the question and think the weight of authority is that where the insurer in a liability policy reserves the exclusive right to contest or settle any claim brought against the insured, and prohibits him from voluntarily assuming any liability or settling any claims without the insurer’s consent, except at his own costs, and the provisions of the policy provide that the insurer may compromise or settle such a claim within the policy limits; no action will lie against the insurer for the amount of the judgment recovered against the insured in excess of the policy limits, unless the insurer is guilty of fraud or bad faith in refusing to settle a claim within the limits of the policy. There are cases that hold that the insured is entitled to recover upon proof that the insurer in refusing to settle a claim for damages was guilty of negligence. But this test is rejected in the better reason[ed] cases and we think rightly so. Consult cases discussed in 71 A.L.R. 1484 and 131 A.L.R. 1496.
In ruling this assignment of error, the question before us is: Did the defendant act in bad faith in refusing to settle the Burneson case?46
There is obviously no description or mention of a liability insurer’s fiduciary duty in the cited text. For that matter, there is no mention of a liability insurer’s fiduciary duty on page 754 of the Zumwalt opinion, where section [2] concludes.
If Zumwalt could be interpreted as supporting a fiduciary duty on liability insurers’ part, that interpretation would have to come from the italicized language in the following passage, which the Craig court did not cite:
The most that can be said of the evidence in this case is that the defendant [insurance company] did not act in good faith in handling the Burneson case. That is to say that under the facts of that case it could be said that the defendant looked after its own interest only, while under the law it owed a duty to have considered the Zumwalt Company’s interest. “If, in the effort to do this, its own interest conflicted with those of the respondent, it was bound, under its contract of indemnity, and in good faith, to sacrifice its interests in favor of those of the respondent.” Tyger River Pine Co. v. Maryland Casualty Co., 170 S.C. 286, 170 S.E. 346, loc. cit. 348. This the defendant failed to do.47
Even the italicized language, however, does not support the recognition of a fiduciary duty. Reading the italicized language in context, it is apparent that the Court was simply explaining that when presented with a settlement offer within its policy limits, a liability insurer cannot subordinate the insured’s interests to its own. That is clear from the preceding sentence, in which the Court stated that, on the facts presented, it could be said that the insurer “looked after its own interest only, while under the law it owed a duty to have considered the [insured’s] interest.”48 The Court explained elsewhere that an insurer can reject a policy limits settlement offer and instead proceed to trial without risking extra-contractual liability so long as its decision is made in good faith.49 That reading is also confirmed by decisions interpreting or applying South Carolina’s “Tyger River doctrine,” which concerns an insurer’s duty to settle within policy limits and is named after the South Carolina Supreme Court’s decision in Tyger River Pine Co. v. Maryland Casualty Co., which the Zumwalt Court quoted in the foregoing passage.50
In summary, Zumwalt establishes only that a liability insurer’s duty of good faith and fair dealing requires it to give an insured’s financial interest consideration equal to its own when evaluating a policy limits settlement offer. That is the majority rule nationally and it amply protects insureds who have entrusted their defenses to their insurers.
Given the plain language of Zumwalt, how could the Craig court have gone so far astray and, in turn, innocently misled subsequent courts? In all likelihood, the Craig court was attempting to succinctly describe the special contractual relationship that characterizes liability insurance and settled on “fiduciary” as a metaphor. Metaphor can be a powerful rhetorical device. Unfortunately, the metaphorical use of technical legal terms is rarely commendable because of the great potential for confusion.51 This is just such a situation.
IV. Illusory Case Law References to Insurers as Fiduciaries
Aside from the serious analytical problems explained above, Missouri courts’ use of fiduciary language is confused in other respects, as Grewell v. State Farm Mutual Auto Insurance Co. (“Grewell II”)52 illustrates. Grewell II was a second appeal of a dispute over an insurance claims file for an auto accident in which Mrs. Grewell was injured. Both Mrs. Grewell and the other driver were insured by State Farm. The State Farm claims specialist handling the loss originally assessed Mrs. Grewell’s fault at no more than 20 percent, but later changed the assessment to 50 percent. The Grewells objected to the change and requested the contents of their claims file. State Farm refused, asserting the work product doctrine. When State Farm only partially granted a second request, the Grewells sued.
The Grewells sought a declaration that Missouri law recognized a special relationship between insurers and insureds that would obligate State Farm to provide them with access to their claims file. The trial court dismissed the suit. The Grewells appealed to the Missouri Court of Appeals for the Western District, which transferred the case to the Supreme Court of Missouri. The Supreme Court decision in that first appeal is best known as Grewell I.53
In Grewell I, the sole issue before the Supreme Court of Missouri was whether insureds have a right to their liability insurance claims files. In addressing that issue, the Supreme Court analogized the relationship between insurers and insureds to the relationship between attorneys and clients.54 That analogy works for the file-access question because of liability insurers’ duty to defend their insureds. As a result of that duty, communications from insureds to their insurers about events giving rise to covered claims are akin to communications from insureds to their attorneys for purposes of litigation.55 Thus, the Supreme Court understandably reasoned that Mrs. Grewell’s claims file, which was held by State Farm, was “analogous to the file of a client held by an attorney.”56 Because a client’s legal files belong to the client and not to the attorney representing the client,57 the conclusion in Grewell I that an insured has a “right of access to his or her claims file”58 in the liability insurance context is unobtrusive.
The Supreme Court in Grewell I made clear that, although the analogy of a liability insurer-insured relationship to an attorney-client relationship is valid with respect to an insured’s right to see her liability insurance claims file, the analogy does not extend much (if at all) beyond that setting. To the contrary, even though the Grewells previously had argued that the relationship between insurer and insured was fiduciary,59 the Grewell I Court never once referred to “fiduciary duties” or, indeed, ever used the term “fiduciary.” It also noted when beginning its analysis that the liability insurer-insured relationship is “admittedly and distinctly different” from an attorney-client relationship.60 Then, after resolving the Grewells’ file-access question, the Supreme Court added a final word of caution:
While the attorney/client relationship carries with it numerous duties and privileges, the Court today refrains from recognizing all of those duties and privileges in the insured/insurer relationship.61
The Court ultimately reversed the trial court’s dismissal of the Grewells’ claims and remanded the matter to the trial court.
Following remand, State Farm allowed the Grewells to review their entire claims file.62 A dispute arose over copying parts of the file that State Farm considered to be the equivalent of lawyers’ work product. The Grewells then filed an amended petition alleging their entitlement to copies of all documents in the claims file based on Grewell I. They also sought an award of attorneys’ fees based on State Farm’s persistent refusal to release its claims file to them, and punitive damages “based on breach of the fiduciary relationship between insurer and insured.”63 The trial court ordered State Farm to provide the Grewells with copies of all documents in the claims file, but entered summary judgment for State Farm on the Grewells’ attorneys’ fees and punitive damage claims. The Grewells then appealed, leading to Grewell II.
On the appeal, the Court of Appeals for the Western District read Grewell I too broadly. The Grewell II court was apparently upset by State Farm’s conduct, accepting the Grewells’ characterization of it as “frivolous, reckless and without substantial legal grounds.”64 For that reason, the court held that “the facts were sufficient to create a genuine dispute regarding the existence of special circumstances” under which attorneys’ fees might be awarded.65
More importantly, the court also allowed the Grewells to seek punitive damages. While the court was displeased with State Farm, there was no basis to reverse summary judgment on the Grewells’ punitive damage claim. The Grewells premised their punitive damage claim solely on the existence of a fiduciary duty between an insurer and an insured, which, they claimed, had been recognized in Grewell I.66 Of course, the Supreme Court in Grewell I recognized no such duty; indeed, it went out of its way to avoid any such holding. Nevertheless, the Grewell II court reasoned that while “Grewell I did not formally declare that an insurer has a fiduciary duty to the insured . . . that conclusion is a logical extension of the Supreme Court’s reasoning.”67 Because “the nature of an attorney’s responsibility to the client creates a fiduciary relationship,” and because an insurer “is entrusted to defend a claim on behalf of the insured,” the Grewell II court concluded that “it seems apparent” that a liability insurer is acting “in a fiduciary capacity.”68
That is incorrect. As noted in Grewell I, the insurer-insured relationship is “distinctly different” from the attorney-client relationship.69 Indeed, aside from contingent fees and liens for unpaid fees, attorneys are generally prohibited from having an interest in their clients’ litigation. A liability insurer, on the other hand, has a legitimate pecuniary interest in pursing the reasonable resolution of a suit against its insured. Moreover, lawyers owe clients duties of confidentiality and loyalty that are foreign to the insurer-insured relationship. It presumably was for such reasons that the Grewell I Court cautioned that:
While the attorney/client relationship carries with it numerous duties and privileges, the Court today refrains from recognizing all of those duties and privileges in the insurer/insured relationship.70
In the few years following the Grewell decisions, another Missouri appellate court in a different context already has implied that the holding in Grewell I is not nearly as expansive as Grewell II suggests. In State ex rel. Tillman v. Copeland,71 the issue was whether a plaintiff could discover the insured-defendant’s statements to her liability insurer that were contained in the insurer’s claims file. The insured, Tillman, objected on the basis of work product immunity and attorney-client privilege. The plaintiff obtained an order from the trial court compelling production and Tillman sought a writ of prohibition.
The appellate court entered the writ in a split (2-1) decision. The majority reasoned that the holding in Grewell I that an insured has a right to her liability insurance claims file just as a client has a right to his file held by his lawyer led to the conclusion that the insured’s statements to the insurance company were absolutely protected under the attorney-client privilege and thus were not discoverable under the exceptions to the work product doctrine.72
Notwithstanding that narrow reading of Grewell I, the dissent in Tillman concluded that the majority had still read Grewell I too broadly. In his dissent, Judge Parrish noted that:
[Grewell I] dealt only with an insured’s right to access his or her liability insurance claims file. [Grewell I] acknowledged that an insured has the right to access such a file. However, [Grewell I] specifically refrained from extending its holding to other issues.73
Because nothing suggested that the statements subject to discovery had been taken at the direction or under the supervision of attorneys employed by the insurer, Judge Parrish concluded that the holding in Grewell I – that an insured’s statements to her insurer were “analogous to that between an attorney and her client”74 – did not even apply to the facts in Tillman.75
What the majority and dissent in Tillman have in common is an accurate understanding that Grewell I was not an expansive decision. Whether all communications from an insured to a liability insurer concerning a covered claim are shielded against discovery by the attorney-client privilege, as the Tillman majority holds, or whether the privilege only applies if statements are made at the direction and under the supervision of attorneys, as the Tillman dissent advocates, it is clear that Grewell I did not recognize the fiduciary relationship upon which Grewell II was based.
V. Conclusion
Judicial recognition of the true nature of the insurer-insured relationship is important first because clarity on the subject generally will lead to more accurate decisions. Second, a fiduciary relationship carries with it a panoply of rights and obligations that have no application in the insurer-insured context. Moreover, if insurers are subject to fiduciary obligations to insureds, that will necessarily affect the risks they accept and the premiums they charge.
The insurer-insured relationship should be recognized for what it is – a special type of contractual relationship. The fact that the insurer-insured relationship is special does not compel the conclusion that it is fiduciary. Settled Missouri bad faith law is inconsistent with the notion that liability insurers are fiduciaries to their insureds. Nothing is gained by courts’ efforts to force the square peg of the insurer-insured relationship into the round hole of fiduciary obligations.
Footnotes
1 Douglas R. Richmond is a senior vice president in the Global Professions Practice of Aon Risk Services in Chicago, Illinois. He previously was a partner with Armstrong Teasdale LLP in Kansas City. Patrick J. Kenny is a partner with Armstrong Teasdale LLP in St. Louis. Opinions expressed here are the authors’ alone.
2 Craig v. Iowa Kemper Mut. Ins. Co., 565 S.W.2d 716, 722 (Mo. App. W.D. 1978).
3 See Robert H. Jerry, II & Douglas R. Richmond, Understanding Insurance Law 180 (4th ed. 2007).
4 228 S.W.2d 750, 753-56 (Mo. 1950).
5 See, e.g., Grewell v. State Farm Mut. Auto. Ins. Co., 162 S.W.3d 503, 509 (Mo. App. W.D. 2005); Freeman v. Leader Nat’l Ins. Co., 58 S.W.3d 590, 598 (Mo. App. E.D. 2001).
6 State v. Russell, 265 S.W.2d 379, 381 (Mo. 1954); In re Estate of Mansour v. Solomon, 185 S.W.2d 360, 369 (Mo. App. E.D. 1945); see also Black’s Law Dictionary 488 (7th ed. 1999).
7 Corr v. Smith, 178 P.3d 859, 863 (Okla. 2008); Restatement (Second) of Trusts § 170(1) (1959).
8 See Original Great Am. Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., 970 F.2d 273, 280 (7th Cir. 1992) (stating that “parties to a contract are not each other’s fiduciaries”).
9 See, e.g., Koger v. Hartford Life Ins. Co., 28 S.W.3d 405, 411 (Mo. App. W.D. 2000) (“Under Missouri law, no fiduciary duty generally exists between insurer and insured.”); Kruse Concepts v. Shelter Mut. Ins., 16 S.W.3d 734, 738 (Mo. App. E.D. 2000) (recognizing that the first-party insurance relationship is contractual rather than fiduciary).
10 Robacki v. Allstate Ins. Co., 468 N.E.2d 1251, 1253 (Ill. App. Ct. 1984).
11 See Rajala v. Allied Corp., 919 F.2d 610, 623 (10th Cir. 1990).
12 McCormack Baron Mgmt. Servs., Inc. v. Am. Guar. & Liab. Ins. Co., 989 S.W.2d 168, 170 n.2 (Mo. banc 1999).
13 See, e.g., New Plumbing Contractors, Inc. v. Edwards, Sooy & Byron, 121 Cal. Rptr. 2d 472, 474 (Cal. Ct. App. 2002).
14 See Bernhard v. Farmers Ins. Exch., 915 P.2d 1285, 1289 (Colo. 1996).
15 See Finley v. Home Ins. Co., 975 P.2d 1145, 1154 (Haw. 1998); Rogers v. Robson, Masters, Ryan, Brumund & Belom, 407 N.E.2d 47, 49 (Ill. 1980); Miller v. Sloan, Listrom, Eisenbarth, Sloan & Glassman, 978 P.2d 922, 930-31 (Kan. 1999); Hartford Accident & Indem. Co. v. Foster, 528 So. 2d 255, 269 (Miss. 1988); State Farm Fire & Cas. Co. v. Mabry, 497 S.E.2d 844, 847 (Va. 1998) (quoting Norman v. Ins. Co. of N. Am., 239 S.E.2d 907 (Va. 1978)).
16 See Bernhard, 915 P.2d at 1289.
17 State Farm Fire & Cas. Co. v. Metcalf, 861 S.W.2d 751, 756 (Mo. App. S.D. 1993).
18 Bonner v. Auto. Club Inter-Ins. Exch., 899 S.W.2d 925, 928 (Mo. App. E.D. 1995).
19 Landie v. Century Indem. Co., 390 S.W.2d 558, 563 (Mo. App. W.D. 1965) (stating that “where the company in good faith believes there is a valid defense to the claim, even though the defense proves unsuccessful and results in a judgment against the insured above policy limits, the company is not liable because of such honest mistake, beyond the limits of its policy”).
20 Truck Ins. Exch. v. Prairie Framing, LLC, 162 S.W.3d 64, 94 (Mo. App. W.D. 2005); Ganaway v. Shelter Mut. Ins. Co., 795 S.W.2d 554, 556 (Mo. App. S.D. 1990).
21 Freeman v. Leader Nat’l Ins. Co., 58 S.W.3d 590, 598 (Mo. App. E.D. 2001).
22 See Landie, 390 S.W.2d at 563 (stating that “where the company in good faith believes there is a valid defense to the claim, even though the defense proves unsuccessful and results in a judgment against the insured above the policy limits, the company is not liable, because of such honest mistake, beyond the limits of its policy”).
23 See Zumwalt v. Utilities Ins. Co., 228 S.W.2d 750, 756 (Mo. 1950) (expressing the equal consideration standard).
24 Corr v. Smith, 178 P.3d 859, 863 (Okla. 2008).
25 Bernhard v. Farmers Ins. Exch., 915 P.2d 1285, 1289 (Colo. 1996).
26 58 S.W.3d 590 (Mo. App. E.D. 2001).
27 Id. at 598.
28 665 S.W.2d 13 (Mo. App. W.D. 1983).
29 Id. at 20.
30 Id. at 18-19.
31 See, e.g., ISO Props., Inc. Commercial General Liability Coverage Form (CG 00 02 12 04), at 1 (2003) (“We will have the right and duty to defend the insured against any ‘suit’ seeking [covered] damages. . . . We may, at our discretion, investigate any ‘occurrence’ and settle any claim or ‘suit’ that may result.”); ISO Props., Inc., Personal Auto Policy (PP 00 01 06 98), at 2 (1997) (“We will settle or defend, as we consider appropriate, any claim or suit asking for [covered] damages.”).
32 Original Great Am. Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., 970 F.2d 273, 280 (7th Cir. 1992).
33 Ganaway v. Shelter Mut. Ins. Co., 795 S.W.2d 554, 564 (Mo. App. S.D. 1990) (quoting and approving Maguire v. Allstate Ins. Co., 341 F. Supp. 866, 877 (D.Del. 1972)).
34 Duncan, 665 S.W.2d at 18-19.
35 Compare John R. Boyce Family Trust v. Snyder, 128 S.W.3d 630, 636 (Mo. App. E.D. 2004) (“A trustee is a fiduciary of the highest order and is required to exercise a high standard of conduct and loyalty in administration of the trust. . . . As part of [the trustee’s] duty [of loyalty], the trustee is to administer the trust solely in the interest of the beneficiary.”) with Birdsong v. Bydalek, 953 S.W.2d 103, 120 (Mo. App. S.D. 1997) (describing the duty of good faith and fair dealing as “a general duty to cooperate so as to enable performance and achievement of expected benefits . . . and a general duty ‘not to prevent or hinder performance by the other party’”) (quoting Robinson v. Powers, 777 S.W.2d 675, 681 (Mo. App. S.D. 1989)).
36 565 S.W.2d 716 (Mo. App. W.D. 1978).
37 Duncan, 665 S.W.2d at 19.
38 Craig, 565 S.W.2d at 723.
39 Jerry & Richmond, note 3, at 180.
40 Id. at 181.
41 Craig, 565 S.W.2d at 723.
42 Mo. Sup. Ct. R. 4-1.8(i) (prohibiting lawyers from acquiring a proprietary interest in a cause of action or litigation they are handling for clients, with the exception of liens securing fees and expenses, and contingent fees).
43 See Restatement (Third) of the Law of Agency §§ 8.01-.04 (2007) (detailing several fiduciary duties agents owe to their principals).
44 228 S.W.2d 750 (Mo. 1950).
45 Craig, 565 S.W.2d at 723.
46 Zumwalt, 228 S.W.2d at 753.
47 Id. at 756.
48 Id.
49 Id. at 754.
50 See, e.g., Royal Ins. Co. of Am. v. Reliance Ins. Co., 140 F. Supp. 2d 609, 612, 617 (D.S.C. 2001); Doe v. S.C. Med. Malpractice Liab. Underwriting Ass’n, 557 S.E.2d 670, 674 (S.C. 2001).
51 Deborah A. DeMott, Beyond Metaphor: An Analysis of Fiduciary Obligation, 1988 Duke L.J. 879, 891.
52 162 S.W.3d 503 (Mo. App. W.D. 2005) (“Grewell II”).
53 Grewell v. State Farm Mut. Auto. Ins. Co., 102 S.W.3d 33 (Mo. banc 2003) (“Grewell I”).
54 Id. at 36.
55 Id. at 36-37 (quoting State ex rel. Cain v. Barker, 540 S.W.2d 50 (Mo. banc 1976)).
56 Id. at 37.
57 Id.
58 Id.
59 Grewell v. State Farm Mut. Auto. Ins. Co., No. WD 60615, 2002 WL 31455545, at *2 (Mo. App. W.D. Aug. 20, 2002) (acknowledging the Grewells’ argument that “[t]he law imputes fiduciary obligations upon the insurer because the insurer has ‘the power to act for the insured’”).
60 Grewell I, 102 S.W.3d at 36.
61 Id. at 37.
62 Grewell II, 162 S.W.3d at 505.
63 Id. at 506.
64 Id. at 507.
65 Id.
66 Id. at 508.
67 Id.
68 Id. at 508-09.
69 Grewell I, 102 S.W.3d at 36.
70 Id. at 37.
71 271 S.W.3d 42 (Mo. App. S.D. Nov. 17, 2008).
72 Id. at 48.
73 Id. at 48 (Parrish, J., dissenting).
74 Grewell I, 102 S.W.3d at 37.
75 Tillmann, 2008 W.L. 4901377, at *5 (Parrish, J., dissenting).