Indiana Court of Appeals Holds That Insurer Owes Duty of Good Faith to Non-policyholder Insured

Michael R. Giordano

Schmidt v. Allstate Prop. and Cas. Ins. Co., 2020 WL 701176 (Ind. Ct. App. 2020)

In Schmidt v. Allstate Prop. and Cas. Ins. Co., an automobile passenger was injured while riding in a car being driven by a policy’s named insured. The passenger presented an underinsured motorist (“UIM”) claim to the vehicle’s insurer, Allstate. The passenger eventually sued Allstate for breach of the policy, but later amended her Complaint to allege that Allstate engaged in bad faith in handling of her UIM claim.

Allstate filed two summary judgment motions. The first one, which the Court denied, contended that Allstate did not engage in bad faith in handling of the UIM claim. Allstate filed a second motion asserting that it did not owe the passenger a duty of good faith, as she was “not the named insured under the policy, or even a party to the contract of insurance.” The Trial Court granted this motion relying upon existing precedent, including Erie Ins. Co. v. Hickman, 622 N.E.2d 515 (Ind. 1993) (where the Indiana Supreme Court recognized a duty of good faith between an insurer and insured) and Cain v. Griffin, 849 N.E.2d 507 (Ind. 2006) (where the Supreme Court found a “special relationship” existed between the insurer and its insured in a first party claim, but that no duty of good faith existed for a third party claim to the insurance contract).1

The Court of Appeals reversed the Trial Court’s grant of summary judgment to Allstate and discounted the Supreme Court’s analysis that a “special relationship” existed between an insurer and its policyholder. In doing so, the Court of Appeals concluded that anyone who qualifies as an “insured” has a sufficient basis to present a bad faith claim:

Aside from the fact that [the passenger] did not sign the insurance contract and pay premiums on the policy, we see little difference between the nature of her contractual relationship with Allstate as an additional insured and the nature of [the policy holder’s] so called “special relationship” with Allstate as a policy holder.

The Court of Appeals found that its decision was supported by the Indiana legislature’s passage of the “Unfair Claims Practices Act,” I.C. § 27-4-1-1, et seq., which, according to the Court of Appeals, treats “all insureds equally” in addressing “unscrupulous behavior by insurers.”

The decision in Schmidt will likely have far-reaching consequences for insurers handling claims in Indiana. While the Supreme Court recognized the duty of good faith because of the “special relationship” between the insurer and the policyholder, the Court of Appeals has extended that duty to anyone who qualifies as an insured, even though they have paid no premiums and have no “special” relationship with the insurer. Because those non-policyholder insureds, named or not, are now on equal footing with the policyholder,  they may also assert claims for bad faith against the insurer.

1 Another case relied upon by the Trial Court was Martinez v. State Farm Mut. Auto Ins. Co., 2016 U.S. Dist. Lexis 42956 (N.D. Ind. 2016) (where the Northern District found no duty of good faith was owed to third party beneficiaries under an insurance policy).