Minnesota Supreme Court Finds That The “Proceeds Awarded” In A First-Party Claim For Benefits As Described By Minnesota’s Bad Faith Statute Are Unambiguously Capped By The Insurance Policy.

Wilbur v. State Farm Mutual Automobile Insurance Company
Minnesota Supreme Court

The Minnesota Supreme Court’s decision in Wilbur v. State Farm Mutual Automobile Insurance Company addressed a question of first impression regarding the imposition of damages against an insurance company for a bad faith denial of a first-party underinsured motorist (UIM) claim.  Minnesota Statutes Section 604.18 authorizes an award of “taxable costs” against an insurer who has denied a claim for insurance benefits without a reasonable basis; those costs are calculated based upon the amount of the “proceeds awarded” to a claimant following successful claims for breach of contract and bad faith.   The Supreme Court was asked whether the proceeds awarded could constitute the full amount of the damages calculated and awarded or whether the proceeds awarded are capped at the insurance policy limits.  In a decision which is favorable to insurance companies, the Court found that Section 604.18 unambiguously caps the proceeds awarded at the policy limits.

Plaintiff Wilbur was injured in a rear-end collision, and suffered significant injuries including a need for neck surgery and permanent nerve damage.   He received payment of the $100,000 limits from the at-fault party’s liability policy.  He then demanded $100,000 in UIM benefits from his insurer State Farm.    State Farm paid $1,200, and then offered an additional $26,800.  Wilbur denied the settlement offer and filed suit for breach of contract.

After a jury trial, Wilbur was awarded damages of $412,764.63.  The Court reduced the verdict to $255,956.59 after accounting for all collateral sources including the underlying liability policy limits.  The Court then entered judgment of $98,800 consisting of the full UIM limits of $100,000 minus the already paid $1,200.

After a finding that the insurance company unreasonably denied Wilbur benefits, Wilbur moved for an award of taxable costs per Minnesota 604.18, which permits an insured to recover, in addition to all other taxable fees and costs, a punitive remedy of “one-half the proceeds awarded that are in excess of an amount offered by the insurer at least ten days before the trial begins or $250,000, whichever is less.”  Minn. Stat. Section 604.18, subd. 3(a)(1).   The question, then, was whether Wilbur was entitled to recover one half of the difference between State Farm’s offer and the verdict (an additional $114,578.30) or one half of the difference between State Farm’s offer and the judgment entered by the court based on the policy limits (an additional $36,000).   After a statutory analysis, the Supreme Court found that Section 604.18 unambiguously caps the “proceeds awarded” at the policy limits.  The Court acknowledged Wilbur’s argument that this interpretation of Section 604.18 may sometimes to lead to an inadequate remedy for a claimant who has been unreasonably denied full policy benefits; however, the Court was clear that any revision to the unambiguous language in Section 604.18 must come from the legislature, not the judicial branch.

The Court’s decision provides some of the first clear guidance on the interpretation of the damages provisions of Section 604.18, which was first enacted in 2008 and does not yet have a wealth of case law to guide insurers and attorneys in parsing its provisions.  This decision strikes a balance between the Section 604.18 goal of penalizing insurers for unreasonable denials of benefits, and the reality that insurers must not be so concerned with the possibility of a bad-faith claim that they overpay on  non-meritorious claims.   Even with this limitation, Minnesota law including Section 608.14 still provides for significant non-policy payments following a claimant’s successful first-party claim including pre and post-judgment interest, ordinary taxable costs and disbursements, and an additional right to recovery of attorney fees of up to $100,000.  In a standard automobile UM/UIM context, this decision significantly decreases the exposure which an insurer could face for additional non-policy damages by capping the high end portion of the taxable cost calculation formula at the policy limits, while still leaving in place significant penalties for insurers if there is a finding that a denial of benefits was unreasonable.