St Cloud Attorneys

In recent months the Minnesota insurance community has been buzzing about the changes to Rule 68 and the recent enactment of Minnesota’s "Good Faith" law. With all of the talk and speculation, many of our clients have commented that they are left without clear direction as to how these changes will impact their day-to-day handling of claims files. So, in response, we present to you this "Top 10" list of things you need to know about Rule 68 and Minnesota’s Good Faith Law. This primer is designed to "hit the high points" and offer some digestible, practical, and hopefully useful information to help you navigate through these new and constantly changing areas of the law. While this reference is intended to be informative, it should not be seen as a replacement for case-specific legal guidance. If you have any questions about how either of these changes affects you or your claims, we encourage you to call us. And now, without further ado…

Rule 68 is designed to motivate litigants to make reasonable demands and offers for settlement prior to trial by offering monetary "incentives" to settle a claim. If a party refuses an offer or demand for settlement that is ultimately more favorable than the trial result, the rejecting party will be forced to pay the offering party’s costs and disbursements as a "penalty" for forcing the matter through the expense of litigation and trial. For example, assume a defendant makes a "Rule 68" offer of settlement for $10,000.00, and the plaintiff rejects this offer and proceeds to trial. At trial, the jury awards the plaintiff $8,000.00. The defendant’s offer was "better" than the jury’s award. Under Rule 68, the plaintiff will be required to pay some of defendant’s costs and disbursements, as described in # 3 below. Likewise, if a plaintiff demands $10,000.00 to settle a claim and a defendant rejects this offer, only to have a jury award $15,000.00, the defendant will be required to pay plaintiff and amount equal to plaintiff’s costs and disbursements, as described in # 4 below. The purported goal of this Rule is to encourage reasonable settlement negotiations and honest evaluation of a case prior to trial.

Under the "old" Rule 68, a Rule 68 offer was considered an offer to settle a plaintiff’s entire claim, including costs, disbursements, prejudgment interests and attorney fees. If a defendant offered to pay $10,000.00 to settle a claim and the plaintiff accepted, the most a defendant would have to pay is $10,000.00. This has changed. Now, if you want to make an offer to settle a plaintiff’s entire claim, you must indicate in your Rule 68 offer that it is a "total obligation" offer. You must use the phrase "total obligation." If you do not use the phrase "total obligation" your offer automatically defaults to what the new Rule 68 refers to as a "damages only" offer. A damages only offer does not include a plaintiff’s costs, disbursements, pre-judgment interest and attorney fees. If you make a damages only offer and a plaintiff accepts, the plaintiff will bring a motion before the court to determine what additional monies are owed. The lesson: know what you are offering and use the proper language. Likewise, if you receive a Rule 68 demand from a plaintiff that includes the phrase "total obligation," you can be assured that you can resolve the entire claim by paying the amount demanded. If the demand does not state that it is a "total obligation" demand, beware: you will end up paying more to settle the claim that what is indicated on the face of the demand.

Assume a defendant offered a plaintiff $10,000.00 to settle a case on September 1, 2008 and plaintiff rejects that offer. The matter then goes to trial and the jury awards $8,000.00. The defendant "wins" for purposes of Rule 68 because defendant offered to pay more than the jury awarded. Under this scenario, the "old" Rule 68 required the plaintiff to pay all of defendant’s costs and disbursements. The defendant also had to pay all of the plaintiff’s costs and disbursements because the plaintiff received a favorable verdict from the jury. This has changed. Under the new Rule 68, a plaintiff is now only required to pay those costs and disbursements incurred by the defendant after the date of the prevailing Rule 68 offer (under this hypothetical, after September 1, 2008) instead of paying all of the defendant’s costs. However, a defendant only has to pay plaintiff’s cost and disbursements up until the date of the rejected Rule 68 offer (under this hypothetical, before September 1, 2008) instead of paying all of plaintiff’s costs. The rule also provides that a party may make a post-trial motion seeking relief from the effects of Rule 68 if paying the other party’s costs and disbursements would result in hardship or is otherwise inequitable. This rule is more likely to be used by the plaintiff than a defendant.

Although plaintiffs have always been allowed to make Rule 68 demands, plaintiffs have rarely exercised this right because they previously had no incentive to do so. This has changed. Assume that a plaintiff made a Rule 68 demand for $10,000.00 on September 1, 2008 and that the defendant rejected this offer. The matter goes to trial and the jury awards $15,000.00. The plaintiff "wins" for the purpose of Rule 68. Plaintiff is entitled to all of his costs and disbursements as the prevailing party at trial. In addition, the new Rule 68 also provides that the plaintiff is entitled to "an amount equal to the cost and disbursements incurred after the rejected offer" (under this hypothetical, after September 1, 2008). This is an important factor to consider when assessing the value of your claims prior to mediation or trial.

Plaintiffs now have an incentive to make Rule 68 demands, and to make them as early as possible. However, a plaintiff may only collect "double costs and disbursements" if the jury’s verdict exceeds their Rule 68 demand, and therefore have an incentive to make a demand for damages that is actually likely to be the same or less than what a jury would award. As a result, we may begin to see more reasonable settlement demands from plaintiffs earlier in the litigation process.

· Expect Rule 68 Demands to be served along with the Summons and Complaint in many cases;

· Expect defendants to ask plaintiffs to disclose their costs and disbursements to date during discovery so defendants may adequately evaluate whether a Rule 68 demand is reasonable. Also expect some plaintiffs to object to providing this information, possibly requiring additional motion practice;

· When assigning a value to your claims, be sure to take into account any Rule 68 demands made by a plaintiff, the possibility that a jury may award more than the amount demanded, and the amount of costs and disbursements incurred by the plaintiff after the Rule 68 demand which may be doubled if a plaintiff receives a verdict in excess of its Rule 68 demand at trial.

· Expect increased post-trial motions by plaintiffs seeking relief from paying defendant’s costs and disbursements because of "hardship."

The Minnesota Good Faith law went into effect on August 1, 2008. It is codified in Minnesota Statute § 604.18. This law only applies to first party claims. Third party claims are still subject to common-law claims of bad faith. An allegation of bad faith must be separately pled, much like a claim for punitive damages. A plaintiff must submit affidavits establishing a claim of bad faith. A defendant may submit affidavits in opposition to plaintiff’s evidence. A judge makes a determination as to whether a claim of bad faith may move forward as a matter of law. A judge will determine whether a defendant has acted in bad faith e in a separate proceeding after trial.

In order to bring a claim of bad faith, a Plaintiff must show that an insurance company had:

(1) no reasonable basis for denying a claim, and

(2) either knew that it lacked a reasonable basis for denial; or

(3) acted in reckless disregard of a lack of a reasonable basis for denial.

Minn. Stat. 604.18. This is a high burden for a plaintiff to meet. A plaintiff must meet this standard of proof. This standard is an objective standard. A mere disagreement over the merits of the case does not qualify as acting in bad faith.

If the Court finds that an insurance company has acted in bad faith, the plaintiff is entitled to:

· ½ of the proceeds awarded that are in excess of an amount offered by the insurer at least 10 days before trial begins or $250,000.00 whichever is less; and

· Attorney fees actually incurred to establish insurers violation (not exceeding $100,000).

There is some dispute over the meaning of "proceeds." Plaintiff’s attorneys will argue that "proceeds" means the amount of the jury verdict. Defense attorneys will argue that "proceeds" refers to the insured’s policy limits. This issue has not been addressed by the courts, and remains a debatable question which may materially effect the amount of an insurance company’s exposure due to a bad faith claim. In any event, damages for bad faith are capped at $250,000.00.

An insured is also entitled to recover attorney fees in connection with a claim of bad faith. However, a plaintiff must demonstrate that the fees claimed were incurred exclusively in connection with the bad faith claim and cannot be duplicative of fees incurred in connection with the underlying first party claim. Therefore, to collect attorney fees, the plaintiff’s attorney must separately account for all time expended in connection with the bad faith claim. An award of attorney fees is capped at $100,000.00.

Minnesota’s Good Faith law does not apply to matters resolved through arbitration, and therefore most no-fault claims will be exempt from the good faith law, unless the matter is filed in district court. The Good Faith law also does not apply to:

· workers compensation insurance under chapter 176;

· health insurance;

· dental plans;

· surplus lines;

· fraternal life insurance plans;

· self-insurance plans.

In the long run, the new good faith law presumably should not have a large impact on the way you handle your claims. In practice, insurers who deny first party claims overwhelmingly have at least a reasonable basis to do so. However, the contours of this law are still being formed, and the first few cases alleging bad faith are going to be supremely important in determining how Minnesota’s courts will apply this law. In the meantime, you may expect:

· Plaintiffs may request copies of your claim file during discovery. Plaintiffs may argue that the claims file is relevant to determining whether their claim of bad faith. Defendants will likely oppose these requests, in large part because the claim file contains privileged information regarding the underlying claim. You should always document your claims file to reflect the basis for your denial of benefits.