Minnesota Supreme Court to Determine Calculation of Bad Faith Damages

On January 3, 2017, the Minnesota Supreme Court heard oral arguments for John Wilbur v. State Farm Mutual Automobile Insurance Company, Case No. A15-1438. The Court looked at the issue of whether “proceeds awarded” in Minn. Stat. § 604.18, subd. 3(a)(1), means (a) the jury’s net award after collateral sources offsets, even when that amount exceeds the policy limit, or (b) the amount of insurance policy proceeds available to be awarded.

Minn. Stat. § 604.18 applies to first party coverage such as UIM. Under the statute, the court may award taxable costs punitively in the absence of a reasonable basis for denying benefits. Lacking a reasonable basis, an insurer may face an award of attorney fees not to exceed $100,000 and an amount equal to one-half the proceeds awarded in excess of the insurance company offer made at least 10 days prior to trial subject to a $250,000 cap. In Wilbur, the court will construe the meaning of “net proceeds”, the basis upon which the 50% award of taxable costs may be ordered.

In the underlying action, John Wilbur was injured in an automobile accident and sought underinsured motorist (UIM) benefits from State Farm Mutual Automobile Insurance Company. When the parties could not resolve the UIM claim, Wilbur brought a breach of contract action against State Farm. State Farm made an initial settlement offer and payment of $1,200 as UIM benefits and later offered an additional $26,800 to settle Wilbur’s UIM claim. Wilbur declined both of these offers and submitted a settlement offer of $100,000, the full amount of UIM benefits under the insurance policy. State Farm declined the offer, and the matter proceeded to a jury trial in April 2011.

The jury returned a verdict in favor of Wilbur in the amount of $412,764.63 as personal injury damages. After reducing the verdict for the $100,000 payment from the at-fault driver’s insurer and other collateral source payments, the district court determined Wilbur’s underinsured loss was $255,956.59. Because Wilbur’s policy with State Farm provided only $100,000 of UIM coverage and State Farm had previously paid $1,200 to Wilbur as UIM benefits, the district court ordered that judgment in the amount of $98,800 be entered in Wilbur’s favor.

Following the jury verdict, the district court found State Farm liable for unreasonably denying UIM benefits under Minn. Stat. § 604.18. The district court determined that Wilbur was entitled to recover $36,000 pursuant to Minn. Stat. § 604.18, subd. 3(a)(1), “an amount equal to one-half of the proceeds awarded that are in excess” of the amount offered by State Farm before the trial began.

In March 2015, Wilbur filed a motion asserting that the district court incorrectly construed the statute because the term “proceeds awarded”, referred to the net jury verdict of $255,956.59 and that he was entitled to taxable costs of $113,978.29, one-half of the net-verdict in excess of State Farm’s last offer. Nonetheless, the district court limited judgment to the amount of $36,000 for “one half” taxable costs, $100,000 for attorney’s fees, and $35,832.90 for reasonable disbursements. The Minnesota Court of Appeals interpreted “proceeds awarded” consistent with the district court to affirm the $36,000 in statutory cost determination.

On appeal to the Minnesota Supreme Court, Wilbur argued “proceeds awarded” is ambiguous because it has more than one reasonable interpretation. Wilbur contended that since Minn. Stat. § 604.18 is a remedial statute, it is entitled to a broad interpretation and therefor he should be awarded $113,978.29 (one-half of the net verdict less the State Farm offer). Wilbur argued that State Farm’s construction of “proceeds awarded” would frustrate the legislature’s goal of deterring insurance companies from making low settlement offers by providing only a modest penalty for a violation of Minn. Stat. § 604.18.

State Farm countered that Minn. Stat. § 604.18 is unambiguous and must be interpreted by its plain meaning. Therefore “proceeds awarded” means the jury verdict, adjusted for collateral source payments and capped by the policy limit; in other words, the amount awarded by both the trial court and the court of appeals. State Farm maintained that the other references to “proceeds” in Minn. Stat. § 604.18 demonstrate that the lower court rulings are consistent with the only reasonable interpretation of the statute.

This decision will be significant to determine the level of exposure for a bad faith denial of first-party insurance benefits. We expect the decision to be issued within the next 3-6 months.

Please contact Robert L. McCollum at rlm@mccollumlaw.com (952) 345-9700 should you have any questions.

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