Legal Opinion Stating No Coverage Did Not Prevent Bad Faith Judgment

An Oklahoma insurance company's reliance upon a legal opinion that there was no payment due under the policy did not prevent a judgment for bad faith and punitive damages.  In Barnes v. Oklahoma Farm Bureau Mutual Ins. Co., 2000 OK 55, 11 P.3d 162, the insurer purportedly obtained a legal opinion from an Oklahoma lawyer before refusing to pay UIM coverage.  The case was submitted to the jury on the issue of bad faith as well as punitive damages and an award entered in favor of the plaintiffs.

Oklahoma Farm Bureau Mutual Insurance Company was sued by its insured, Julie Barnes, for underinsured motorist (UIM) benefits and for breach of the implied duty of good faith and fair dealing in failing to pay her claim.  The trial judge granted partial summary judgment to Barnes for the $15,000.00 of UIM policy limits and submitted the remainder of the damages to a jury.  The jury awarded an additional $10,000.00 in actual damages and $1.5 Million in punitive damages.  Additionally, the trial court granted her $300,000.00 in attorney fees.

Barnes had been injured in a head on collision with another vehicle and her injuries were extensive.  The other driver had liability coverage of $10,000.00 per person and Barnes had uninsured motorist/underinsured motorist coverage with Oklahoma Farm Bureau and another $25,000.00 with State Farm Mutual Automobile Insurance Company. 

Barnes incurred $15,000.00 in medical bills and lost over $10,000.00 in wages.  She submitted a claim for UIM benefits to both of her insurers.  The claims not being timely paid, Barnes filed suit.

Eventually, the tortfeasor tendered its $10,000.00 of liability limits, but Oklahoma Farm Bureau refused to waive subrogation and further refused a proper substitution under 36 O.S. § 3636(E).  Likewise, the insurer refused to pay the $15,000.00 in UIM benefits claiming it was entitled to the liability coverage from the tortfeasor.

State Farm, unlike the other insurer, evaluated Barnes' claim to be at least $50,000.00 and paid its full UIM limits of $25,000.00 without claiming entitlement to a portion of the liability policy.  State Farm elected not to substitute its own $10,000.00 payment for the tentative settlement from the tortfeasor and instead waived any right at subrogation.

The main defense to the bad faith claim was that Oklahoma Farm Bureau reasonably relied upon the advice of its legal counsel concerning the proper interpretation of 36 O.S. § 3636(E) and, therefore, its behavior in litigating the issue was a legitimate dispute.

The Oklahoma Supreme Court stated:

In a tort case against an insurer for breach of the implied duty of good faith and fair dealing (i.e. for bad faith) it is the unreasonableness of the insurer's actions that is the essence of the tort. Conti v. Republic Underwriters Ins. Co., 1989 OK 128, 782 P.2d 1357, 1360; Alsobrook v. National Travelers Life Ins. Co., 1992 OK CIV APP 168, 852 P.2d 768, 770. Although reliance on the advice of counsel can be a defense to a bad faith suit, the reliance on counsel's advice must be reasonable. Durbin and Loy, Current Status of Good Faith Law in Oklahoma, supra, 24 Okla. City U.L.Rev. at 169-170. Particularly applicable here is the following statement made by the United States Court of Appeals for the Fifth Circuit concerning the advice of counsel defense in bad faith insurance claim litigation:

[I]t is simply not enough for the carrier to say it relied on advice of counsel, however unfounded, and then expect that valid claims for coverage can be denied with impunity pursuant to such advice. The advice of counsel is but one factor to be considered in deciding whether the carrier's reason for denying a claim was arguably reasonable. We believe that where, through verbal sleight of hand, the advising attorney concocts an imagined loophole in a policy whose plain language extends coverage, such advice is heeded at the carrier's risk.

Szumigala v. Nationwide Mutual Ins. Co., 853 F.2d 274, 282 (5th Cir.1988). Further, even where there has been no judicial interpretation of a relevant statutory provision, the reasonableness of reliance on advice of counsel will normally be a fact question where counsel misreads the plain language of a statute. Murphree v. Federal Ins. Co., 707 So.2d 523, 532-535 (Miss.1997).

In short, the Oklahoma Supreme Court held the opinion of the attorney was not reasonable and the insurer should not have relied upon advice that it knew or should have known from its own judgment was patently wrong.

Failure To Obtain A Legal Opinion Can Be Bad Faith

Bad faith can result in Oklahoma from failing to obtain a legal opinion before denying coverage.  In Harrell v. Old American Ins. Co., 1991 OK CIV APP 91, 829 P.2d 75, a claims examiner failed to seek legal advice regarding a coverage question before denying payment.  The Oklahoma Court of Appeals said it was reasonable to infer the lack of a legal opinion was either because the examiner knew there was coverage or she did not want confirmation the claim was not properly excluded under the terms and conditions of the policy.  The Court determined the trial court was justified in submitting the issue of punitive damages to the jury. 

Some advantages to obtaining a legal opinion as to whether coverage exists before issuing a denial are:

  • demonstrates good faith on the part of the insurer
  • having an objective, third person gives a different perspective
  • qualified, competent Oklahoma attorneys give insight into the law
  • the cost for a legal opinion is substantially less than a bad faith award