IN MISSOURI, CAN AN INSURER BE LIABLE FOR VEXATIOUS REFUSAL TO INVESTIGATE CLAIMS IF THE INSURER BELIEVES THERE IS NO COVERAGE FOR UNDER THE INSURANCE CONTRACT?

Sometimes the black letter law passed by the legislature is unclear. The legislature can’t anticipate every possible fact scenario when they pass a law, so it lay to the courts to interpret the law and give guidance to what it means. This interpretation is called case law. When the court decides a certain meeting to the law it essentially answers a legal question. Lawyers and other courts then can rely on that ruling when they have a similar issue in their case. The following case answers the question above.

Stark Liquidation Co. v. Florists’ Mutual Insurance Co, 243 S.W.3d 385 (Mo. Ct. App. 2007).

This case addresses the following issue:

Can an insurer be liable for vexatious refusal to investigate claims if the insurer believes there is no coverage for under the insurance contract?

In this case, the insurer-defendant firmly believed that the insurance contract provided no coverage for the underlying claims. Id. at 401. The court found that the insurer-defendant’s repeated failure to investigate the claims of its insurer created liability, in addition to the breach of duty to defend. Id. The court would not allow the insurer to refuse to investigate a claim that may or may not have been covered, and failure to consult additional information was a separate wrong aside for the failure to defend. Id.

Insured-plaintiff in this case was a commercial arbor company, selling a variety of trees. Id. at 390. It sold one batch of apricot trees to an orchard in California. Id. However, these trees failed to produce fruit due to a bacterial infection. Id. A suit was ultimately filed against insured-plaintiff for the sale of these trees. Id. Plaintiff informed Defendant of the suit, and Defendant quickly and summarily denied coverage of the claims. Id. The lawsuit was amended to add new claims and an offer for settlement was produced, but each time new facts were offered to Defendant, the claim was again denied without any investigation or consideration. Id. Plaintiff ultimately settled the lawsuit brought by the seller and filed a lawsuit against Defendant for failure to defend and vexatious refusal to investigate the claims. Id. at 391.

The court was first asked in this case to determine if the Defendant was correct regarding whether or not the claims at issue were covered by the insurance contract. Id. at 398. The court ultimately found that all claims fell within the language of the insurance contract, creating a duty to defend. Id.

Having found the duty to defend existed, just as the trial court had, the real crux of the case could be discussed: can an insurance company be liable for both a failure to defend and vexatious refusal? The insurer argued that it was essentially being punished twice for its wrong act, and that because it presented a meritorious reason for denying coverage, there could be no vexatious refusal. Id. at 400-01. The court, disagreed. Id. at 401. The insurance company had not only denied coverage, but it had repeatedly refused to even conduct an investigation into the claims. Id. This is true even as more and more allegations arose. Id. The court found this behavior to warrant additional penalties and liabilities aside from the wrongful denial to defend. Id. The fact that a “novel question of coverage and a dearth of evidence of a vexatious and recalcitrant attitude” existed was sufficient to find liability. Id.