Let’s Try This Again: New Law Attempts to Fix Loopholes in Missouri Bad Faith Law

On August 28, 2021, the amendments to Missouri’s Section 537.065 went into effect. The statute is frequently used to set up insurance companies for bad faith through “friendly” proceedings between claimant and tortfeasor. Amendments to Section 435.415 relating to arbitrations also went into effect.  The new laws attempt to address several loopholes in the 2017 version of the law exploited by claimants, including: (1) avoiding the insurer’s right to intervene by proceeding with private arbitration instead of a lawsuit, (2) limiting the extent to which insurers may actually participate in the litigation after intervening, and (3) avoiding the insurer’s right to 30-days written notice of a 537.065 agreement and a right to intervene because there is no “pending” lawsuit.

Under the amendments to section 435.415, arbitration awards for personal injury, bodily injury, or death, including any judgment approving such an award, are not binding on insurers, and are inadmissible as evidence in a suit against an insurer, and cannot provide the basis for a garnishment against an insurer unless the insurer has agreed in writing to the proceeding.  It also provides that, unless otherwise required by the policy, an insurer’s decision to participate in such an arbitration shall not be construed to be bad faith.  The section amendment does not apply to arbitrations required by statute or arising out of an arbitration agreement predating the injury at issue.

This amendment is a potential gamechanger as plaintiffs were routinely able to avoid the intervention requirements of section 537.065 by entering into private, binding arbitration where the insurer had no right to participate or even receive notice prior to the entry of an arbitration award.

The amendments to section 537.065 make clear that claimants may only enter into such an agreement with a tortfeasor after the insurer has refused to withdraw a reservation of rights or has declined coverage.  This should provide the insurer with at least the opportunity to defend without reservation to avoid a 537.065 agreement and potential bad faith setup.

Under the 2017 amendments, there was much debate and considerable confusion as to the extent to which an insurer may participate in the underlying litigation after intervening.  The new law seeks to eliminate the room for interpretation by specifying that the intervening insurer is entitled to all rights afforded to defendants under the Missouri rules of civil procedure and reasonable and sufficient time to meaningfully assert its position, including, but not limited to:

1. The right and time to conduct discovery;
2. The right and time to engage in motion practice;
3. The right to a trial by jury and sufficient time to prepare for trial.

The law also provides that stipulations, scheduling orders, and other orders affecting the rights of the intervenor entered prior to intervention shall not be binding upon the intervening insurer.

Further, the amendments specify the timing requirements for notice of the execution of an agreement under section 537.065 as follows:

1. If any action seeking a judgment on the claim against the tort-feasor is pending at the time of the execution, then, within thirty days after such execution, the tort-feasor shall provide the insurer with a copy of the executed contract and a copy of any such action.
2. If any action seeking a judgment on the claim against the tort-feasor is pending at the time of the execution but is thereafter dismissed, then, within thirty days after the refiling of that action or the filing of any subsequent action arising out of the claim for damages against the tort-feasor, the tort-feasor shall provide the insurer with a copy of the executed contract and a copy of the refiled or subsequently filed action.
3. If there is no pending action seeking a judgment on the claim against the tort-feasor at the time of execution, then, within thirty days after the tort-feasor receives notice of any subsequent action, by service of process or otherwise, the tort-feasor shall provide the insurer or insurers with a copy of the executed contract and a copy of any action seeking a judgment on the claim against the tort-feasor.

Finally, while the new law does not expressly provide whether and to what extent it applies to actions filed before August 28, 2021, we have guidance from the Missouri Supreme Court’s opinion in Desai v. Seneca Specialty Insurance Company, which addressed the 2017 amendments to Section 537.065.  581 S.W.3d 596 (Mo. 2019).  Under that case, the amendments apply to 537.065 agreements “entered into” after the effective date of the statute.  Id. at 601-02.  While there may be an argument that the statute should apply retroactively to agreements signed before that date given that the law was merely meant to clarify the intent of the 2017 statutes, at minimum, the new law should apply to 537.065 agreements executed after August 28, 2021.