II. First-Party Claims: Insured against His Own Insurer
First-party claims involve a party to the insurance contract (either the insurer or the insured) bringing a claim against the other. While it is very unlikely that an insurance company would sue its own insured given the fiduciary relationship, it does occur. This article will touch on the major claims brought in first-party suits, including declaratory judgment action related to the duty to defend, breach of contract claims, and vexatious refusal to pay.
A. Declaratory Judgment for Duty to DefendWhen an insured seeks to compel its insurer to assist in providing litigation support before adjudication with the injured third party, the sole pro-active approach is to file a declaratory judgment action against the insurer. Though there are no enumerated elements to such a claim, it can be inferred that the insurer refuses to defend. Beyond that, the declaratory judgment action focuses exclusively on whether the insurer owes the insured the duty to defend under the insurance contract.
The duty to defend is a broad duty, which can be ascertained before the trial transpires. The duty to defend is so broad it covers both actual and potential claims. The duty to defend is verified by comparing the facts alleged in the complaint to the insurance policy itself. Thus, the duty to defend arises whenever there is even a possibility of liability. The duty to defend is not based on the probability of facts being proven at trial; it is based solely on a comparison of the alleged facts in the complaint to the coverage of the insurance contract. The insurance contract will be interpreted by plain language. For instance, courts lean toward construing the language in its most common, layman definition, unless the contract clearly specifies a technical use.
The duty to indemnify, or the insurer’s duty to pay for the judgment entered against the insured in her action against the injured third party, is not ripe during a declaratory judgment action. The duty to indemnify is established through facts at trial, and as a declaratory judgment occurs before the trial, it is impossible to say what the facts at trial were before it happens.
B. Breach of Contract (Duty to Defend and/or Duty to Indemnify)Tort claims predominate the style of action when a third party is involved, but when the lawsuit is between the insured and the insurer, the law of contract, and, when appropriate, the vexatious refusal to pay statutes apply. Breach of the duty to defend and the duty to indemnify are the primary considerations when an insured attempts to recover under her insurance policy against her insurer. The duties have different scopes, though, and will be discussed separately.
An insurer has breached its contract with the insured when it wrongfully refuses to pay or when it wrongfully refuses to defend. Regardless of the duty utilized for remedy, damages for breach are limited to the loss of the benefit and the damage amount is limited to putting the insured back in the position he would have been had the contract been performed. Attorney’s fees are not recoverable under breach. However, the compensatory provisions of §§ 375.296 and 375.420 provide for the insured’s attorney’s fees, thereby actually making the insured whole. These statutes do not preempt breach of contract claims. In fact, they were intended to be supplementary to such claims. These statutes will be discussed in greater detail in § II-C.
The duty to defend is a broader duty than the duty to indemnify. The duty to defend is a broad duty, which can be ascertained before the trial transpires in a declaratory judgment action. However, the insured can demonstrate the duty to defend in a breach action by showing (1) the insurer had a duty to defend, and (2) it breached that duty when it did not defend the insured.
Commentators have held that notice must be given by the insured to the insurer. In Stark Liquidation Co. v. Florists’ Mut. Ins. Co., the Missouri Court of Appeals in the Eastern District held that insurers garner additional duties to defend when subsequent petitions are filed and the insurer is placed on notice of these successive petitions. Thus, the insured must put the insurer on notice to recover for breach of a duty to defend. This notice requirement is almost always mandated in the insurance contract.
As discussed earlier, the insurer must defend facts that are not only known but also facts that are reasonably ascertainable through investigation at the commencement of the lawsuit. To extricate itself from the duty to defend, the insurer must demonstrate no possibility of coverage and must overcome the burden of proof if it attempts to defend on the basis of a policy exclusion. As it relates to exclusionary language within the policy itself, the insurer has the burden of proving clear and unambiguous intent to exclude such acts, but an insurer only needs to prove one exclusion applies and not all exclusions. Additionally, exceptions and limitations included in the policy are strictly construed against the insurer.
The duty to indemnify is determined by a final judgment, like a summary judgment or settlement, or by facts discovered at trial. Therefore, the insurer’s duty to indemnify or pay arises after the injured third party’s successful suit against the insured. Like the duty to defend, the litigation will focus on the policy’s coverage and any possible policy exclusions.
Additionally, the insurer must indemnify if it had the duty to protect the insured from liability provided it had an opportunity to control and manage the litigation.If the insurer refuses to defend, then the insured can make reasonable settlement offers or compromises “without losing the right to recover on the policy.” The insured, though, may not take collusive action with the injured third party. “The legal effect of the insurer’s unjustified refusal to defend a claim” is the obligation to pay the insured for any settlement.
C. Vexatious Refusal to Pay
Missouri statutes §§ 375.296 and 375.420 allow the recovery of attorney’s fees and damages by the insured from the insurer. Litigation expenses outside of attorney’s fees are not recoverable. Actions brought under the two statutes are typically brought together, unless a slight difference precludes the insured from bring that particular action. § 375.296 allows recovery after the insurer has refused to pay and thirty days has passed. § 375.420 does not have that requirement. The Missouri courts have not explained the difference between the two beyond stating that § 375.296 potentially applies even when the insurance company merely delays payment of a policy. Therefore, the commentary here will reference “vexatious refusal to pay” and neither statute specifically, because holdings often do not clarify which statute they are referring to, instead discussing generally vexatious refusal to pay.
The vexatious refusal to pay statutes are penal in nature, and thus are strictly construed. The statutes do not allow third parties to recover against insurers; it is solely between insured and insurer. The policy must require coverage in order to recover under this statute.
An insurer that refuses to pay after discovering they have no meritorious defense embodies the typical situation subjecting the insurer to penalty for vexatious refusal to pay. To defeat a claim, the insurer must present evidence demonstrating good faith and a reasonable defense, but it need not be a successful defense of why they refused to pay. “To show vexatious refusal to pay, claimant must show: (1) the claimant made a demand; (2) the insurer failed or refused to pay for a period of thirty days after the demand; and (3) the refusal to pay was vexatious and without reasonable cause.” This test is exclusive to § 375.296, but the test under § 375.420 merely omits the thirty-day provision.
Insured must show the insurer willfully and without reasonable cause refused to pay. The standard to review the reasonableness of the insurer is as the facts appear to a reasonable and prudent person before trial. The reasonableness is a jury question, and the jury may examine a number of circumstances in making that determination. Katz Drug Co. v. Commercial Standard Ins. Co., echoes the test being how the facts appeared before trial, and the reasonableness is ascertained by comparing the known facts to the allegations in the complaint making this very similar to the duty to defend.
Litigation has primarily focused on the definition of reasonable cause. The adequacy of the investigation is one factor that may be considered when determining vexatious refusal to pay. For instance, thorough investigation by the insurer does not constitute vexatious behavior. Another factor is whether the insurer provided reasons for its denial. Failing to provide grounds for denial of claim is sufficient to warrant submission to jury of insured’s vexatious denial claim. Tauvar held that an inadequate investigation and denial of liability without grounds are demonstrative of evidence of vexation.
Additionally, an insured can recover under a vexatious refusal to pay statute even if the insurer was justified in its actions. In Stark Liquidation, the presence of a “litigable issue,” an indication of reasonableness, is not dispositive if the insurer also possesses a vexatious and recalcitrant attitude. Additionally, failing to investigate the insured’s claims constitutes a vexatious and recalcitrant attitude. This attitude can be inferred from a lack of information provided by the insurer.
However, insurers are not subject to penalty under vexatious refusal to pay if there is an “open question of law or fact relating to a claim under an insurance policy.” If insurers are uncertain about the existence of an open question of law or fact, they can insist upon a judicial determination.
Lastly, there is question as to what types of insurers fit under the vexatious refusal to pay statutes. It encompasses sureties even though the language makes reference to polices of insurance. Mutual assessment insurance companies are not “insurance companies” under this statute,  while life insurers are.
When defending on grounds of justification or a good faith attitude, insurers may present evidence in their defense that includes potential hearsay evidence because it is not being offered for the truth of the matter; instead, it is offered to show knowledge by the insurer as a basis for denying coverage. But the insured is not required to put on direct or specific evidence. It can demonstrate vexatious refusal to pay with a “general survey and a consideration of the whole testimony and all the facts and circumstances in connection with the case.”
Attorneys fees that are recoverable under the statute is a jury question, provided sufficient expert testimony has been offered to give them a guide as to the appropriate compensation. Russell says it is improper to submit to the jury unless evidence in the record demonstrates reasonableness of the fees. The fees must be supported by pleadings and sustained by proof, but that proof need not be direct or specific; it can be general.