Bad Faith and Vexatious Refusal in Missouri
The concept of vexatious refusal to pay is a critical safeguard for Missouri policyholders. It ensures that insurance companies fulfill their obligations promptly and fairly. The case of Academy Bank NA v. AmGuard Insurance Company 1 provides a compelling example of how Missouri courts handle bad faith and vexatious refusal claims, not just for residential and commercial property owners but also for banks as additional insureds.
The dispute arose after a fire damaged a hotel owned by Shri Ganesai, LLC, which was insured by AmGuard Insurance Company. Academy Bank, the hotel’s mortgagee, was an additional insured under the policy. Following the fire, AmGuard suspected arson and delayed payment of the insurance claim while assuming control of the property during the investigation. This delay led to further damage to the property from vandalism and frozen pipes, exacerbating the loss and damages.
Throughout the claim, it was undisputed that AmGuard was required to pay Academy Bank’s claim even if it denied Shri Ganesai’s claim because the policy stated:
2. Mortgage holders
. . .
If we deny your claim because of your acts or because you have failed to comply with the terms of this policy, the mortgage holder will still have the right to receive loss payment if the mortgage holder:
(1) Pays any premium due under this policy at our request if you have failed to do so;
(2) Submits a signed, sworn proof of loss within 60 days after receiving notice from us of your failure to do so; and
(3) Has notified us of any change in ownership, occupancy or substantial change in risk known to the mortgage holder.
All of the terms of this policy will then apply directly to the mortgage holder.
Academy Bank and Shri Ganesai sued AmGuard for breach of contract and vexatious refusal to pay. Both argued that AmGuard’s delay in processing the claim and making payments was unreasonable and without just cause. The trial court granted summary judgment to AmGuard on Shri Ganesai’s vexatious refusal claim because there was evidence its principal owner had set the fire, and Academy Bank dismissed its breach of contract claim before trial after settling that claim. Shri Ganesai’s remaining claim for breach of contract and Academy Bank’s claim for vexatious refusal went to trial and the jury found in favor of the plaintiffs on all counts.
Key Issues
Academy Bank’s Vexatious Refusal Claim: Under Missouri law, a claim for vexatious refusal to pay is derivative of a breach of contract claim, and there can be no recovery where there is no judgment for the plaintiff on the insurance policy. This means that if an insured prevails on the breach of contract claim and if an insurer unreasonably delays or refuses to pay a valid claim, then the insured can seek additional damages, including statutory penalties and attorney’s fees. The Eighth Circuit Court of Appeals upheld Academy Bank’s vexatious refusal claim, holding that while a vexatious refusal claim must fail when an insured losesa breach of contract claim, the same is not true when the insured settles a breach of contract claim, or the insurer pays an insurance claim after appraisal. The court went on to find there was ample evidence that AmGuard breached the policy by failing to pay Academy Bank even the undisputed portion of its claim for over a year and a half. The fact that AmGuard made eventual payment after the appraisal process did not cure its pre-appraisal vexatious delay.
Shri Ganesai’s Breach of Contract Claim: The court held that AmGuard breached its contract by failing to pay Shri Ganesai all damages owed as a result of the loss even after the jury was able to consider evidence that its principal, Alex Patel, had something to do with setting the fire.
Academy Bank and Shri Ganesai’s Claims for Vandalism and Freeze Damage: The public adjuster, William Cox, testified at trial that damages exceeded $86,000.00 for vandalism and $407,000 from frozen pipes. It was also noted that a few weeks after the fire, Mr. Cox notified AmGuard that the hotel power was off and with cold weather coming, he asked if mitigation efforts could begin to avoid further damage to the property. AmGuard told Mr. Cox not to perform any remediation that would interfere with the ongoing investigation. AmGuard’s independent adjuster also expressed concern that plumbing damage was likely, but his request to hire a plumbing contractor was never authorized, and later, during a freeze, the pipes burst.
The timely and fair claim processing by insurance companies is a key element of good faith claims conduct. Missouri statute §375.296 requires an insurance company to make payment within 30 days after receiving the demand, and if it fails or refuses to do so and the refusal is vexatious and without reasonable cause, the court or jury may, in addition to the amount due under the contract of insurance and interest thereon, allow damages for vexatious refusal to pay and attorney fees.
For policyholders, this case highlights the legal recourse available when an insurance company unreasonably delays or refuses to pay a claim. Insurers, on the other hand, must be diligent in their claim handling practices to avoid the risk of additional penalties for vexatious refusal. For banks as additional insureds, the case affirms their ability to recover damages for breach of contract and vexatious refusal, separate and apart from the property owner/borrower.
The Academy Bank v. AmGuard Insurance Company case serves as a reminder of the protections afforded to policyholders under Missouri law when an insurer acts in bad faith. It reinforces the principle that insurers must act promptly and in good faith when handling claims, ensuring that policyholders receive the benefits they are entitled to without undue delay.
1 Academy Bank v. AmGuard Ins. Co., 116 F.4th 768 (8th Cir. 2024).
