Indiana Supreme Court Reverses Directed Verdict for Insurer on Breach of Contract and Bad Faith Claims

Michael R. Giordano

Cosme v. Clark

2024 WL 1987694 (Ind. 2024) 

Last month, the Indiana Supreme Court issued a decision holding that, “at the directed-verdict stage, the court can review whether inferences from the evidence are reasonable, but it cannot weigh conflicting evidence or assess witness credibility.” This newsletter discusses the Court’s decision only as it relates to applying that standard to the breach of contract and bad faith claims asserted against the insurer.

The Cosmes had an auto policy with ERIE that covered their 19-year-old son as a driver. After the BMV mistakenly suspended the son’s license, ERIE notified the Cosmes in September 2017 that they had to sign a driver-exclusion form for their son by October 28, or the policy would be canceled on November 1. On October 26, Mr. Cosme called ERIE, which directed his call to his insurance agent at Churilla Insurance. Mr. Cosme and the agent gave conflicting accounts of their conversation. Mr. Cosme claims he was led to believe he could keep the policy if his son got his license reinstated, while the agent claims she told Mr. Cosme to sign the exclusion form to maintain coverage and have his son reinstated later.

After speaking with the father on October 26, the agent spoke with an ERIE underwriter and asked her not to cancel the policy because the son’s license suspension was a mistake. The ERIE underwriter responded that because the system still showed the son’s license was suspended, the only way to maintain coverage for the father and mother was to remove their son from the policy. The next day the agent spoke with the father and asked the son to provide his reinstatement papers. According to the father, the agent did not mention signing the exclusion form or obtaining other insurance.

The father did not sign the exclusion form before the deadline of October 28. On October 30, the son emailed the agent a receipt showing he paid to have his license reinstated on October 28. The agent confirmed receipt, which Mr. Cosme claimed gave him the impression that the issue with the policy was resolved. The next day, however, the underwriter told the agent that ERIE could cancel despite the reinstatement of the son’s license, and the only way the family could maintain coverage was to submit the exclusion form by 11:59 pm that day, October 31. The agent, who knew before speaking with the underwriter that ERIE had the right to cancel mid-term, left a voicemail for the father and son on October 31 and emailed the son informing them the policy would be canceled if the signed form were not received before midnight. The father and son claimed that they did not discover the voicemails or email until several days after ERIE’s cancellation date of November 1. Three days later, an uninsured motorist rear-ended the father and mother, who did not receive notice of ERIE’s cancellation until November 6.

The Cosmes sued ERIE and the agent for breach of contract, and they sought a declaration that both breached contractual and common-law duties owed under the policy. The Cosmes also brought a bad faith claim against ERIE. After the Cosmes presented their case in chief, ERIE and Churilla moved for a judgment on the evidence, which the trial court granted because the Cosmes “brought about their own lack-of-coverage injuries” when they did not sign the exclusion form before October 28. After their motion to correct error was denied, the Cosmes appealed the trial court’s order granting the motions for judgment on the evidence. The Court of Appeals affirmed the trial court’s order and held that the Cosmes did not present evidence to support their breach-of-contract and bad faith claims against ERIE.

On transfer, the Indiana Supreme Court began by emphasizing that a trial court cannot weigh evidence or assess witness credibility to decide whether “sufficient evidence” exists for purposes of a directed verdict. Though the Court acknowledged the Cosmes presented “conflicting evidence” to support their claims, the Court looked only to the evidence supporting their claims, construing all reasonable inferences in their favor, to decide whether a reasonable jury could find for them.

For the breach of contract claim, the Court noted that the Cosmes presented evidence that the policy was in effect when the accident happened. In discovery, ERIE produced a certified copy of the policy with an affidavit from an ERIE employee who affirmed the policy was in effect on the date of the accident—“from August 27, 2017 to August 17, 2018.” Although the ERIE employee claimed that was a scrivener’s error, the Court found a jury could reasonably infer from the affidavit that the policy was in effect when the accident happened on November 4, 2018.

The Court also found that “a reasonable jury could find that ERIE breached the policy and acted in bad faith first when it canceled the policy and later when it denied the Cosmes’ claim.” Under the circumstances, the Court explained, the actions of the agent were imputable to ERIE, because when Mr. Cosme first called after receiving the request to sign the named-driver exclusion form, ERIE directed Mr. Cosme to his agent. ERIE, through the agent, led the Cosmes to believe that the cancellation issue had been resolved, only to later deny coverage because the policy was no longer in effect. “Construing all reasonable inferences in the Cosmes’ favor,” the Court held, “a reasonable jury could find that this was an unfounded refusal to pay the claim and a bad-faith breach of contract for which punitive damages may be proper.”

No matter what the appropriate standard for a directed verdict, these authors believe that the Court’s decision in Cosme will likely cause confusion over what is required to prove bad faith or recover punitive damages. Though the decision lists the four categories of conduct that may qualify as bad faith, it does not mention that “[a] finding of bad faith requires evidence of a state of mind reflecting dishonest purpose, moral obliquity, furtive design, or ill will.” Monroe Guar. Ins. Co. v. Magwerks Corp., 829 N.E.2d 968, 977 (Ind. 2005) (quoting Colley v. Indiana Farmers Mut. Ins. Group, 691 N.E.2d 1259, 1261 (Ind. Ct. App. 1998)). In that way, the decision can be read to blur the lines between breach of contract and bad faith, as it seems to accept evidence of the former as sufficient to prove the latter. That aside, “proof that a tort was committed [such as bad faith] does not necessarily establish the right to punitive damages.” USA Life One Ins. Co. of Indiana v. Nuckolls, 682 N.E.2d 534, 541 (Ind. 1997). Punitive damages can be awarded “only if there is clear and convincing evidence that the defendant “acted with malice, fraud, gross negligence, or oppressiveness which was not the result of a mistake of fact or law, honest error or judgment, overzealousness, mere negligence, or other human failing[.]” Erie Ins. Co. v. Hickman by Smith, 622 N.E.2d 515, 520 (Ind. 1993) (quoting Bud Wolf Chevrolet, Inc. v. Robertson, 519 N.E.2d 135, 137 (Ind. 1988)). Though the decision implies the existence of sufficient evidence of bad faith and a culpable mind state, some may misconstrue the decision as lowering “the high hurdle imposed by a bad faith claim.” Inman v. State Farm Mut. Auto. Ins. Co., 981 N.E.2d 1202, 1207 (Ind. 2012).