Attentive readers will note that this space is in tune with the nascent college football season. Last week, we brought you “Paul Bunyan’s Axe.” Today, in yet another conflict of laws decision, we bring you a variant of the Border War between Kansas and Missouri. Moses v. Halstead, 2009 WL 2857187 (10th Cir. Sept. 8, 2009), holds that Kansas law supplies the rule of decision in regard to a third-party action for negligent or bad-faith refusal to settle.
The case has its origins in a November 22, 1996, automobile accident in the State of Missouri. The accident involved a car owned by Moses’ father and driven by Chris Halstead. Allstate Insurance had issued to Moses’ father, a Kansas resident, in the state of Kansas an automobile liability insurance policy, affording coverage for uninsured motorists’ benefits. Moses’ father reported the accident to Allstate, requesting coverage for his daughter’s injuries. 2009 WL 2857187, at * 1. A year later, Moses’ counsel made an offer to Allstate to settle her claims against Halstead under the Allstate insurance policy for the policy limit of $25,000. Both Ms. Moses’ offer to settle and Allstate’s rejection of the offer occurred in Kansas. Id.
Ms. Moses then filed a tort action against Halstead in Missouri. The jury awarded her $100,000 in actual damages. Allstate then paid Ms. Moses $25,000 in partial satisfaction of the judgment. Ms. Moses registered the judgment in Kansas state court and requested an Order of Garnishment against Allstate in satisfaction of its putative negligent or bad-faith refusal to settle her claim against Mr. Halstead.
Allstate removed the case to federal court. Following a bench trial, the district court held that Missouri law governed Ms. Moses’ claim. Applying Missouri law, the district court found that Allstate Insurance had acted in bad faith in refusing to settle and entered judgment for Ms. Moses. On Allstate Insurance’s motion for reconsideration, the district court granted judgment for Allstate Insurance on the ground that Missouri law requires an assignment from the insured before a judgment creditor can file an action against the insurance company for its bad-faith refusal to settle. The Tenth Circuit reversed, holding that Kansas law, which does not require an assignment, governed Moses’ claim. Id.
Kansas law holds that an insurance company can be held liable for either negligence or bad faith in its failure to settle a claim against its insured. 2009 WL 2857187, at * 2. Missouri law, however, holds that an insurance company is liable for its refusal to settle only where the insurer acted in bad faith. Id.
Kansas applies the less than intelligible Restatement (First) of Conflict of Laws (1934) in addressing choice-of-law issues. Id. The First Restatement instantiates two general rules for a contract action. First, where the issue relates to the substance of the contractual obligation, the law of the state where the contract was made applies. 2009 WL 2857187, at * 3. Second, where the issue concerns the manner and method of performance, the law of the place of performance applies. Id.
The court observed that “Kansas courts have struggled in determining whether questions raised in cases before them are governed by the law of the place of performance or the place where the contract was made.” Id. What is more, the court remarked that “the Kansas Supreme Court has not directly addressed what the law of place of contracting or performance governs the question whether an injured party may, under Kansas law, bring an action for negligent or bad-faith refusal to settle against a tort-feasor’s insurance company in a garnishment action.” 2009 WL 2857187, at * 5.
Venturing an Erie guess, the court held that the issue of “whether Ms. Moses had a cause of action for negligent or bad-faith refusal to settle against Allstate goes to the substance of Allstate’s contractual duties rather than the manner of performance under the insurance policy.” Id. “Therefore, the issue is governed by the law of the place where the contract was made; in this case, Kansas.” Id.
Oddly, that holding was not entirely dispositive of the choice-of-law analysis. Rather, the court determined that a separate choice-of-law issue was presented by the question whether Allstate had fulfilled its contractual obligation to act in good faith to settle Ms. Moses’ claim. Id. Once again, the court concluded that Kansas law supplied the rule of decision. “In general, fulfillment of a contractual obligation goes to the manner and method of performance by the party charged with the obligation.” Id. Because both Ms. Moses’ offer to settle and Allstate’s rejection of the offer took place in Kansas, “Kansas is the place Allstate was required to perform its contractual obligation to consider Ms. Moses’ settlement offer in good faith.” Id.
Missouri and Kansas apply divergent rules regarding the assertion of a claim by a judgment creditor against a liability insurer for bad-faith refusal to settle. Under Missouri law, a judgment creditor must obtain an assignment from the insured in order to pursue a claim for bad-faith refusal to settle against the judgment debtor’s liability insurer. Applying a decidedly more latitudinarian rule, Kansas law affords a judgment creditor the right to proceed by garnishment against a liability insurer. Id. Indeed, Kansas courts hold “that a judgment creditor may proceed by garnishment against a tort-feasor’s insurer for the unpaid balance of the judgment which is in excess of the policy limits where the insurer refused to settle within policy limits by virtue of negligence or bad faith.” Id. n. 2. Such a claim sounds in contract and is subject to garnishment even where the claim is unliquidated. Id.
Because Kansas law applied, “Ms. Moses did not need to obtain an assignment of rights from Mr. Halstead before she acquired the right, as his judgment creditor, to bring a claim against Allstate in excess of the policy limit for a negligent or bad-faith refusal to settle.” 2009 WL 2857187, at * 6.
Turning to the merits of the claim, the court observed that “under Kansas law an insurance company has a duty to exercise reasonable care and good faith and efforts to settle a claim against its insured.” Id. “To trigger this duty, the insured need only put the insurer on notice of a claim.” Therefore, “Allstate’s duty to act with reasonable care and good faith was thus triggered when Ms. Moses’ father put the company on notice of the accident.” Id.
Because the district court had erred in its choice of law analysis, the court remanded the case to the district court to apply Kansas law to its findings of fact. 2009 WL 2857187, at * 6-7. Id.
