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Louisiana Legislature Enacts Changes to Bad Faith Statutes

Published on: October 14, 2024

The Louisiana Legislature recently enacted Act 3, which reflects an effort to address the handling of insurance claims in Louisiana – particularly for catastrophic losses – and define ambiguities in the law. This blog addresses changes to Louisiana’s “bad faith” statutes. Broadly, Act 3 amends and enacts new sections of La. R.S. 22:1892, repeals La. R.S. 22:1973, and enacts La. R.S. 1892.2 to address situations involving catastrophic losses.

Prior Louisiana Bad Faith Statutes – La. R.S. 22:1892 and La. R.S. 22:1973

Previously, La. R.S. 22:1892(A) stated an insurer must:

  • Issue payment to an insured within 30 days of receipt of satisfactory proof of loss;
  • Pay the amount of a bona fide third-party’s property damage or reasonable medical expenses within 30 days of a written settlement agreement;
  • Initiate loss adjustment within 14 days of notice of a non-catastrophic loss or within 30 days of receipt of notice of a catastrophic loss;
  • Make a written offer to settle property damage within 30 days of receipt of satisfactory proof of loss.

If an insurer did not follow the requirements of La. R.S. 22:1892(A), the insurer could be required to pay the insured the amount owed under the policy plus a penalty if the insured established that the insurer’s conduct was “arbitrary, capricious and without probable cause.” Courts defined this standard as “vexatious” and without justification. The penalty is calculated as either 50% of the amount owed under the policy or 50% of the difference between the amount owed and a partial tender made by the insurer, if any. Additionally, if the insured established entitlement to the penalty, the insured could also recover attorneys’ fees and costs from the insurer.

Former La. R.S. 22:1973 codified an insurer’s duty of good faith and fair dealing. It set an affirmative duty to adjust claims fairly and promptly and make reasonable efforts to settle claims with the insured, a claimant or both. This general duty of good faith and fair dealing applies only to insureds.^ The statute also outlined six prohibits acts that, if knowingly performed, constituted a violation of the statute. Five of these six prohibited acts applied to both insureds and third-party claimants.^*

If an insured proved a knowing violation of La. R.S. 22:1973, the insurer could be required to pay the amount owed under the policy, damages caused by the insurer’s violation of the statute and a penalty of up to 200% of the damages that the insured or claimant incurred as a result of the breach. Such damages were separate and distinct from the amounts owed under the policy but could extend to anything for which the insured could establish a causal link.˚̃

Revisions to La. R.S. 22:1892

The new revisions enact several important changes. While the text of the new statute should be considered when evaluating any pending or potential claims, a summary is provided here.

  1. Time Delays

Under amended and re-enacted La. R.S. 22:1892(A), insurers must generally adhere to the time delays and conduct outlined under the previous law. Under La. R.S. 22:1892.2, for catastrophic events at residential properties, an insurer’s payment is owed within 60 days of receipt of satisfactory proof of loss. For catastrophic losses at non-residential properties, the statute provides an insurer’s payment is owed within 90 days of receipt of satisfactory proof of loss.

Another exception exists when an insurer initiates loss adjustment before the 14-day or 30-day deadline. If this occurs, the insurer’s obligation to issue a written offer to settle is extended by the number of days the insurer initiates loss adjustment before the deadline.

  1. Reciprocal Duty of Good Faith

Under the new law, La. R.S. 22:1973 is repealed and the general duty of “good faith and fair dealing” owed by an insurer to its insured and the prohibited insurer conduct previously outlined in La. R.S. 22:1973 is now encompassed within §1892.

The new statute also provides that the insured, the claimant or the representative of the insured/claimant owes the duty of good faith and fair dealing. If an insured fails to comply with affirmative duties under the policy, misrepresents pertinent facts and coverages, submits an estimate that lacks a basis in the evidence or the policy, then the insured’s conduct may be considered in determining whether the insurer’s conduct warrants an award of penalties.

  1. Cure Period

For catastrophic losses, the new law states suits may only be brought if the insured first provides the insurer with “cure period notice.” This notice requires that the insured provide the insurer with written notice of the violation, a written formal demand and notice of the facts and circumstances of the dispute. After this notice, several options exist:

  1. The insurer can pay the demand in full (along with the insured’s actual expenses and attorney fees no greater than 20%) within 60 days of the notice and extinguish any further cause of action.
  • The insurer can issue partial payment on the claim within 60 days of the notice and reduce the penalty owed, if any, by half.
  • The insurer can request additional information, but this does not extend the insurer’s other deadlines.
  1. Revised Penalty Provisions

The amendments also modify the recoverable penalty. The statute specifies the calculation of the penalty based on the type of violation, the type of property and the type of loss event. Generally, the insured is no longer entitled to recover all damages sustained by a breach of the statute: now the claimant may only recover “proven economic damages.” Notably, the potential for a penalty of up to 200% of the damages sustained as a result of the breach no longer exists.

  1. Timing

The law also formalizes and codifies the prescriptive period for claims brought under La. R.S. 22:1892 or La. R.S. 22:1892.2 to two years.

References:

^Theriot v. Midland Risk Ins. Co., 1995-2895 (La. 5/20/97) 694 So.2d 184.

* Team Contractors, L.L.C. v. Waypoint NOLA, L.L.C., 780 Fed.Appx. 132 (5th Cir. 2019).

˚Durio v. Horace Mann Ins. Co., 2011-0084 (La. 10/24/11) 74 So.3d 1159.

̃ Audubon Orthopedic and Sports Medicine, APMC v. Lafayette Ins. Co., 2009-0007 (La.App. 4 Cir. 4/21/10) 38 So.3d 963.

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Keogh Cox & Wilson, Ltd. provides this blog as a public service for general information only. The materials contained herein may not reflect the most current legal developments or even express the opinion of all or even most of Keogh Cox attorneys. Such material does not constitute legal advice or form any attorney-client relationship. Keogh Cox and all contributing author(s) expressly disclaim all liability to any person with respect to the contents of this Web site and Blog and expect that no reliance will be made upon the information provided.

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Insight

Renewed or Was it New? Dispute over UM Coverage in Auto Policy

Louisiana law requires UM coverage in automobile liability insurance policies in the same amount as the policy’s bodily injury liability coverage. UM coverage will be included in the policy unless the insured rejects UM coverage, selects lower limits, or selects economic-only coverage. This rejection, selection of lower limits, or selection of economic-only coverage must be made on a form prescribed by the commissioner of insurance and must be signed by the insured or its legal representative. See La. R.S. 22:1295. If a rejection form is not completed, UM coverage will be read into the policy. However, a valid UM waiver form executed for a policy of insurance remains in effect when that policy is renewed with a few exceptions. Generally, execution of a new waiver form is not required unless a new policy is issued or the liability limits increased. These basic principles were considered in the recent First Circuit decision in Johnson, et al. v. Bass, Geico General Ins. Co., and GoAuto Management Services, LLC, 2021 CA 0139 (La. App. 1 Cir. 12/22/21).

In Johnson, the plaintiff obtained a policy of insurance from GoAuto on July 17, 2015 and validly rejected UM coverage on the commissioner’s UM rejection form. The plaintiff renewed the policy multiple times and also completed an “Application for Personal Automobile Insurance” on February 23, 2018 to add her husband and an additional vehicle to the policy.

The Johnson plaintiff was in a motor vehicle accident on November 26, 2019 and claimed UM benefits under the policy. She argued that the insurance application she completed in February 2018 to add a new driver and a new vehicle to the policy created a new policy of insurance that required completion of a new UM waiver form. Because a new UM waiver form was not executed in February 2018, the plaintiff argued that UM coverage should be read into the policy. Thus, the question posed to the court was whether the 2018 policy became new or was simply a renewal. The trial court found that the policy was a renewal and dismissed the UM claim.

The First Circuit affirmed and rejected the plaintiff’s argument holding, “the language of La. R.S. 22:1295 is clear and unambiguous; only changes in the ‘limits of liability’ to an existing policy will create a new policy that requires the completion of a new UM selection form.” Despite multiple renewals, the liability limits of the policy did not change from the date it was issued through the date of the accident. Importantly, the limits also did not change when the new driver and vehicle were added to the policy in February 2018. Thus, no new policy was created. The original rejection of UM coverage remained in effect, and the plaintiff’s claims against her alleged UM insurer were dismissed.

Insight

Court Examines Requirements of Financing Provision in Purchase Agreement for  Residential Property

Purchase agreements for residential property routinely include financing provisions that require the buyer to show that he has applied for a loan. The Louisiana Fourth Circuit Court of Appeals recently analyzed such a provision in Abdelqader v. Ramos. The plaintiff in Abdelqader entered into a purchase agreement with the defendant for an unimproved lot on which the plaintiff planned to build his home.

The financing provision in the purchase agreement required the buyer to provide the seller with (1) written documentation; (2) from a lender; (3) that a loan application has been made; and (4) that Buyer authorized lender to proceed with the loan approval process. The provision also required that this documentation be provided to the seller “within 3 calendar days after” the date of Agreement.

After the parties executed the purchase agreement, various disputes led the seller to terminate the agreement and re-list the property for sale. The plaintiff sued for stipulated damages and attorney’s fees, which were allowed under the contract if either party breached the purchase agreement.

The buyer introduced evidence that his agent sent the seller’s broker a USDA pre-approval letter and certificate of eligibility for financing under a USDA Rural Development Program. These documents were sent to the seller’s agent before the parties executed the purchasing agreement. Generally, such pre-approval letters show the buyer appears qualified for a loan in the amount of the purchase. They do not confirm a loan was applied for or approved by the lender for the property to be purchased.

The seller argued that the pre-approval letter furnished by the buyer before the parties entered into the purchase agreement was not an actual loan application and did not verify that a loan application for the purchase had been made. The seller also argued that the buyer did not comply with the terms of the financing provision because he did not provide the subject documents within the three-day window after the purchase agreement was signed. The court rejected these arguments. The Court found the agreement did not require the buyer to produce his loan application to the seller or that the loan application be dated within three days of the Agreement. The buyer’s lender produced the pre-approval letter and the certificate of eligibility in response to the buyer’s application for financing and pursuant to the buyer’s instruction to proceed with the loan process. Though its ruling may be limited to the facts of this case, the Court found that the buyer complied with the terms of the financing agreement.

It appears the court viewed the seller’s claim that the seller did not comply with the financing provision of the purchasing agreement as after the fact justification for the seller unilaterally terminating the purchase agreement for some unrelated dispute. The Court found that the seller breached the purchase agreement and awarded the buyer stipulated damages of 10% of the contract price and attorney’s fees. This ruling also serves as a reminder that purchase agreements for residential properties are contracts, and breaches of these contracts can have consequences if terminated on a whim.

Reference:

Abdelqader v. Ramos, 2022-0305 (La. App. 4 Cir. 11/30/22), 353 So.3d 750.

Insight

Louisiana Supreme Court Now Allows Direct Negligence Claims Against Employer

In a previous blog, we outlined developing law in the Louisiana appeals courts, and federal district courts in Louisiana on the issue of whether a claimant may maintain a separate cause of action against an employer for independent negligence when it is stipulated that the employee was in the course and scope of employment.1 Most courts held a claimant could not maintain a separate action against the employer under these circumstances, reasoning that the employee’s fault would impute to the employer, and therefore, additional inquiry was not appropriate. However, the Louisiana Supreme Court recently addressed the issue and stated:

“(A) plaintiff may pursue both a negligence cause of action against an employee for which the employer is vicariously liable and a direct claim against the employer for its own negligence in hiring, supervision, training, and retention as well as a negligent entrustment claim, when the employer stipulates that the employee was in the course and scope of employment at the time of the injury.” (Emphasis added) See Martin v. Thomas et al., 21-1490 (La. 12/21/21), 328 So. 3d 1164.

This holding notably overturned the 1st Circuit Court of Appeal ruling in Elee v. White, - - So.3d - - (La. App. 1 Cir 7/24/20), 2020 WL 4251974 and other Louisiana 5th Circuit Court of Appeals decisions. The Supreme Court in Martin reasoned that “the initial assessment of fault required by the law is not bypassed due to the employer-employee relationship” and “shielding a potential tortfeasor from liability is not compatible with a comparative negligence regime.” The Court further stated that the possibility that both the employee and employer may be at fault is not “subsumed” by the employer’s admission on course and scope. In fact, if the fault of the employee is shown, then the issue of whether there is also fault on the part of the employer remains and must be decided by the evidence on a case-by-case basis.

The consequences of this decision remain to be seen, but it is expected that claimants may also pursue employers separately on theories such as negligent hiring, supervision, and entrustment. The scope of such discovery will remain within the sound discretion of the trial judge.

By: John P. Wolff, III and Richard W. Wolff

1Louisiana Appeal Courts Prohibit Direct Negligence Claims Against Employer; US District Court Uses Rule to Limit Discovery - Keogh Cox

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