Token Offers By UIM Insurer Do Not Constitute Unfair Claims Settlement Practice

By Bill Lipscomb

In Elliott v. Am. States Ins. Co. 2018 U.S. App. LEXIS 3952 (4th Cir. 2/20/2018), the 4th Circuit held that a UIM insurer, in a claim where the tortfeasor’s liability coverage had already been paid, did not violate paragraphs (f), (g) and (h) of N.C.G.S. § 58-63-15 (11) by declining to make an offer until after its insured filed a lawsuit against the tortfeasor and then making only “token offers” before the arbitration hearing (which resulted in an arbitration award close to the UIM limit), because the UIM carrier’s liability is derivative of the tortfeasor’s liability and is not determined until the tortfeasor’s liability for damages has been determined.

Elliott was injured in an auto accident on 1/16/2013 with Michael Jones, who had $30,000 of liability coverage with State Farm. Elliott submitted a demand package to State Farm alleging $234,847 in total damages. State Farm paid its $30,000 policy limit. Elliott had $100,000 per person UIM coverage with American States Insurance Co. (ASIC). She submitted the same demand package to ASIC and demanded the full UIM exposure of $70,000. ASIC declined to make any offer. On 10/08/2014 Elliott filed a lawsuit against Jones in Durham County Superior Court. ASIC defended as an unnamed party. Elliott demanded arbitration pursuant to the UIM provisions of her policy. An arbitration hearing was conducted on 2/2/2016. Elliott alleged that ASIC made “token offers” to settle between her filing of the lawsuit and the arbitration hearing, and that these offers were substantially less than the amount of UIM coverage ultimately recovered. The arbitration award was $90,000, plus pre-judgment interest and costs. A judgment was entered based on the arbitration award and ASIC paid the full amount of the judgment, after deducting State Farm’s $30,000.

Elliott then filed a lawsuit against ASIC in Durham County Superior Court, which was removed to federal court, alleging that ASIC’s conduct of forcing her to initiate arbitration to get her claim paid constituted an unfair claims settlement practice in violation of N.C.G.S. § 58-63-15 (11) and thus, as a matter of law, an unfair and deceptive trade practice in violation of N.C.G.S. § 75-1.1. The District Court, Judge N. Carlton Tilley, Jr., granted ASIC’s Rule 12(b)(6) motion to dismiss. The Fourth Circuit affirmed.

The Court began its analysis by observing that, under North Carolina law, even when UIM coverage is triggered by exhaustion of the tortfeasor’s liability coverage, the UIM carrier’s liability is derivative and is conditioned upon the insured being legally entitled to recover damages from the underinsured tortfeasor, and the “legally entitled” requirement means that plaintiff must have a cause of action and “a remedy by which he can reduce his right to damages to judgment.”  “ASIC was thus not required to settle Elliott’s UIM claim until after it was determined that Elliott was legally entitled to recover from Jones – i.e., until after judgment was entered in Elliott v. Jones.”  The Court then addressed plaintiff’s specific arguments that her complaint sufficiently alleged that ASIC violated three provisions of N.C.G.S. § 58-63-15 (11).

Plaintiff alleged ASIC violated paragraph (f) of the statute because it “did not attempt in good faith to effectuate a prompt, fair and equitable settlement of plaintiffs claims in which liability had become reasonably clear.”  The Court stated that “[w]e conclude that Elliott did not plausibly state a claim upon which relief can be granted based on this subsection because liability did not become reasonably clear until after a judgment was entered in Elliott v. Jones, and, consequently, ASIC had no obligation to settle Elliott’s claim before this time.”

Plaintiff alleged ASIC violated paragraph (g) of the statute because it compelled plaintiff to institute litigation by first refusing to offer any settlement and then making “token offers” before the arbitration hearing. The Court rejected that argument “because no amount was due to Elliott until liability had been determined, and, consequently, ASIC’s alleged failure to make higher settlement offers prior to that time does not violate the statute.”

Plaintiff alleged ASIC violated paragraph (h) of the statute because it “attempted to settle plaintiff’s UIM claim for an amount of UIM coverage less than the amount of the UIM coverage provided by the … policy which a reasonable person would have believed Elliott was entitled to….”  The Court rejected this argument because “Elliott has not alleged any facts indicating that a reasonable person would have believed she was entitled to either the maximum coverage provided under the policy, or the amount ultimately recovered, before the fact or amount of liability had been determined.”  “Additionally, it cannot be that an insurance company per se engages in an unfair or deceptive trade practice simply because the settlement offers made are less than the final judgment rendered – especially when, as here, the amount to which Elliott was entitled was first determined in arbitration, after all settlement offers had been made.”

It is important to note that Elliott’s complaint did not allege a violation of N.C.G.S. § 58-63-15 (11)b. (failing to acknowledge and act reasonably promptly upon communications), d. (refusing to pay claims without conducting a reasonable investigation, or n. (failing to promptly provide a reasonable explanation for denial of a claim or for the offer of a compromise settlement). It is also important to recognize the differences between this case and Guessford v. Pa. Nat’l Mut. Cas. Ins. Co., 918 F. Supp. 2d 453 (M.D.N.C. 2013), which was mentioned and distinguished in Judge Tilley’s opinion, but was not mentioned in the Fourth Circuit’s decision. The plaintiff’s complaint in Guessford alleged that the UIM carrier failed to investigate plaintiff’s claim properly and misrepresented pertinent facts or insurance policy provisions. The Court in Guessford found that those allegations of aggravated conduct and bad faith delay stated a plausible claim of unfair or deceptive trade practices.

Plaintiff filed a Petition for Rehearing on 3/6/2018, arguing that the Court misunderstood and misstated North Carolina law by stating that “a plaintiff is legally entitled to recover under a UIM policy only once a judgment is issued against the underinsured motorist determining liability and damages owed to the plaintiff” and that “North Carolina expressly recognizes a duty to settle UM and UIM claims prior to judgment against the tortfeasor.”