In jurisdictions that impose on an insurer a common-law duty of good faith and fair dealing and a statutory duty not to act vexatiously or unreasonably, an insurer may be found to have violated one duty even if it did not violate the other. The Eighth Circuit recently handed down a ruling serving as an example of this principle. In Tripp v. Western National Mutual Insurance Co., the Court of Appeals affirmed post-judgment relief based on South Dakota’s statutory prohibition against unreasonable or vexatious behavior by an insurer. While alleged violations of the common-law duty may be decided by the jury, the alleged violations of the statutory duty are decided by the judge. Tripp, the policyholder, convinced a jury that Western National breached the policy, but not that Western National violated its duty of good faith and fair dealing. Deeming the jury’s failure to find bad faith irrelevant to applying the statute, the district court found that Western National acted vexatiously and awarded Tripp attorneys’ fees. On appeal, the Eighth Circuit affirmed.

The Eighth Circuit’s reasoning rests on the duties’ differences under the common law and the statute. Under the common law, the insurer may be liable if (1) it did not have a reasonable basis for denying, delaying, or failing to reasonably investigate the policyholder’s claim; (2) it either knew it did not have a reasonable basis or acted recklessly in determining whether it had a reasonable basis for denying, delaying, or failing to reasonably investigate the policyholder’s claim; and (3) its actions caused the policyholder to suffer harm. Under the statute, the insurer may be liable if (1) it refused to pay the full amount of the policyholder’s claim and (2) this refusal was either vexatious or without reasonable cause. Because the jury returned a general verdict, it was not clear why it rejected the policyholder’s common-law claim. Building on South Dakota caselaw that found that violating the statutory duty did not necessarily violate the common-law duty, the Eighth Circuit predicted that the South Dakota Supreme Court would rule that generally not violating the common-law duty did not mean that the insurer could not have violated the statutory duty.

The Eighth Circuit’s result in the Tripp case is logically beyond reproach because the district court found that Western National acted “vexatiously.” But if Western National were not found to have acted vexatiously, this could have been a different story. The common law bars “unreasonable” behavior, not “reasonable but vexatious” behavior. Should a jury specifically find that an insurer acted reasonably, then the judge should not be able to impose statutory liability without separately and specifically finding the insurer to have acted vexatiously. Should the judge impose statutory liability based on his finding that the insurer acted unreasonably, the judge’s finding would squarely contradict the jury’s.