In a previous paper, I suggested that the Missouri Supreme Court had adopted a forfeiture penalty for insurers that breached the duty to defend. This paper revises that position based on the December 2016 Missouri Supreme Court decision of Allen v. Bryers in which the court held that to recover damages beyond the applicable liability insurance policy limits, the insured (or an assignee) would have to demonstrate the insurer had acted in bad faith. However, the court confirmed a forfeiture approach up to the liability insurance policy limits. Where an insurer breaches its the duty to defend in a liability insurance policy, the insurer is bound by the result in the underlying case up to its policy limits. The court used an analysis similar to issue preclusion, holding that the insurer is bound by all facts actually litigated and determined in the underlying case. The paper explains this decision, and points out some uncertainty created by the opinion regarding what constitutes bad faith behavior by an insurer under Missouri law with regard to the duty to defend and as to what more beyond unreasonable conduct is required to demonstrate bad faith. The paper concludes by placing the Missouri approach it in its national context by comparing it to the approach by the Restatement of the Law, Liability Insurance. Section 19 of the Restatement also imposes a forfeiture up to the policy limits but only if the breach of the duty to defend was without a reasonable basis. In addition, the Restatement recognizes a kind of "safe harbor" for insurers who defend under a reservation of rights, while in Missouri an insurer is not entitled to reserve its right while at the same time providing a defense (unless the insured specifically consents).
Jeffery E. Thomas,
Allen v. Bryers: The Missouri Supreme Court's 2016 Decision Adds Clarity (and Confusion) to Insurers' Duty and Right to Defend Their Insureds,
Available at: https://irlaw.umkc.edu/faculty_works/796