IF AN INSURANCE COMPANY DOESN’T DEFEND IT’S INSURED ARE THEY SUBJECT TO PENALTIES IN MISSOURI?

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.

Fohn v. Title Insurance Corp., 529 S.W.2d 1 (Mo. 1975).

This case addresses the following issue:

Do the statutory penalties outlined in Section 375.420 apply to title insurance policies?

Section 375.420 imposes a penalty for an insurance company that refuses to pay a claim “without reasonable cause or excuse,” in the form a percentage of the amount not paid and attorneys’ fees. Id. at 5-6. This case determined whether the penalties for vexatious refusal contained in Section 375.420 applied to title insurance policies. Id. at 5. Though the statute is “penal in nature” and thus, strictly construed, the failure to name title insurance policies did not prevent the statute from applying to such policies. Id. at 5-6. Because the statute does apply and the insurer here clearly acted with bad faith, imposing the penalties was proper. Id. at 6.

In this case, the Plaintiff purchased a large amount of land in Camdenton County. Id. at 2. Just after the purchase, Plaintiff purchased a title insurance policy from Defendant. Id. Plaintiff requested that two local businesses remove signs from the property so that development could begin. Id. at 3. One business complied; the other business claimed that it owned title to the portion of the land where its sign was located. Id. Plaintiff immediately notified Defendant, but Defendant refused to defend the claim. Id. The business ultimately prevailed, with its claim to title to the small portion of the land prevailing. Id. Plaintiff then filed suit against Defendant for its bad faith in handling the claim. Id.

The court agreed with Defendant’s argument regarding how the statute should be interpreted. Id. at 5. Because the statute imposes a penalty, “the statute is to be strictly construed.” Id. The statute does not directly identify title insurance policies among the 15 types of policies that are named. Id. at 6. However, the statute does name indemnity insurance agreements, and “a title insurance policy is one of indemnity.” Id. Thus, Section 375.420’s penalties do apply to title insurance policies like the one at issue in this case. Id.

The court noted that whether such a penalty was proper “must turn on the particular facts presented.” Id. In this case, such facts existed because the insurer had completely denied any legal defense for Plaintiff. Id. As the court itself put it: “it would be difficult to conceive of an insured being more totally abandoned by his insurer than occurred in this case.” Id. The jury was correct to award Section 375.420 penalties. Id.