Minnesota Insurance Bad Faith
Short v. Dairyland Insurance Company, 334 N.W. 2d. 384 (Minn 1983)
Facts and Legal Principles Involved
Short v. Dairyland Insurance Company is a landmark Minnesota Supreme Court decision, and Minnesota’s leading case on insurance "bad faith”.
When a person buys automobile insurance, they are buying protection from claims against them when their own fault causes an accident. However, the insurance company retains control of the settlement. The insurance company thus has a major conflict between its own interests (to pay as little as possible) and that of its insured (to be protected from the personal exposure that would result from a verdict in excess of their liability coverage).
That is exactly what happened under the facts of Short v. Dairyland. A drunk driver crossed the centerline and killed Donald Morin, a 40-year old husband, high wage earner, and father of five young children. The drunk driver had only $25,000 of liability coverage from Dairyland Insurance Company, and it was immediately clear he was at fault, and that the damages to Mr. Morin's family vastly exceeded his $25,000 limits.
However, Dairyland, rather than protecting its insured, tried to save money for itself. Instead of paying its full $25,000 limits to Mr. Morin’s family, as we demanded, Dairyland’s adjuster tried to force the Morin family to take less than the full limits by misrepresenting the effect of Minnesota’s No-fault law and claiming they would get less if they sued their insured drunk driver. However, we did sue him, and a jury found that he owed $745,000 to the Morin family.
Case Review
While there had been bad faith decisions in Minnesota before Short v. Dairyland, this was the first case to explicitly address the insurance company’s conflict of interest. The Minnesota Supreme Court held (in a ruling now used by all Minnesota attorney representing people with claims against insurance companies) that because of this conflict, an insurance company owes a “fiduciary” duty to the people it insures.
A fiduciary duty is the highest standard of duty implied by law. It is a duty of openness, loyalty and the highest integrity, and essentially prohibits an insurance company from putting its own interests before the interests of the people it insures.
Under Minnesota law, where a liability insurance company acts in "bad faith" (or, to put it more accurately, breaches its fiduciary duty to its insured) by denying settlement offers within its policy limits (as Dairyland did when we demanded it pay its full $25,000 limits to the Morin family), the insurance company becomes liable for the full excess judgment against its insured. In this case, the verdict against Dairyland’s drunk driver insured was $745,000. Dairyland thus became liable for the $720,000 (plus interest!) that the verdict exceed the insurance coverage.
In practical terms, the underlying premise of bad faith law is really quite simple--without the threat of a bad faith claim, a liability insurer has no reason or incentive to consider the fiduciary duty owed to its insured when a demand is made for its policy limits. Without the threat of its own exposure beyond its limit of liability coverage, an insurance company might as well take the risk of going to trial and hope for a low verdict, even if this decision put its insured’s personal assets in jeopardy.
Resolution
The case was strongly contested by Dairyland Insurance Company, both because of the huge amount it now had to pay, and because of the important legal principle involved. When the case against Dairyland was called for trial, Dairyland (clearly worried about what a jury would think of its “bad faith” conduct) agreed to have the case decided by the judge instead of a jury. We, on behalf of the Morin family, and Dairyland, submitted “cross motions for summary judgment” to the judge. The judge ruled in our favor and the Minnesota Supreme Court, in its landmark ruling, affirmed the decision. Short v. Dairyland Insurance Co., 334 N.W.2d 384 (Minn. 1984)
Impact
The case had a huge impact, both for the Morin family, which was paid over a million dollars, and for all other people with claims against insurance companies. They can now rely upon this case to force insurance companies to pay claims they are responsible for, or face the consequences of being in “bad faith.”
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