A recent decision by the Louisiana Second Circuit Court of Appeal exemplifies how exceptional facts can lead to problematic legal precedent. In a case involving a rear-end collision, the court departed from established insurance law principles to impose bad faith penalties on an insurer, despite the claim being brought by a third party and the underlying issue being one of first impression.
Instead of issuing a fact-specific ruling, the court broadly held that an insurer's obligations to a third-party claimant are unaffected by the terms of its policy with the insured tortfeasor. It went further, finding bad faith under the state insurance code without properly applying the statute's plain language. This expanded interpretation of insurer liability undermines the predictability insurers rely on to assess and price risks in Louisiana's already volatile insurance market.
Auto insurance is among the most common and costly forms of coverage in the state. In 2022, Louisiana drivers paid an average of $1,558 in annual premiums- nearly 40% above the national average and the second highest in the U.S. One key driver of the high costs is litigation. Personal auto claims in Louisiana result on lawsuits at more than triple the national rate. Recognizing the need for reform, state leaders, including Insurance Commissioner Tim Temple and Governor Jeff Landry, advanced major tort reform efforts in 2024 aimed at stabilizing the insurance market and encouraging insurer participation. However, the Second Circuit's ruling undercuts these initiatives, injects uncertainty into claims handling, and threatens to further escalate litigation rates.
In its amicus brief, Wood Smith Henning & Berman argued to support market stability and ensure consistency in the interpretation of insurance law, the Second Circuit's decision should be overturned.
Factual Background
This case arises from a rear-end automobile collision in which the plaintiff, who was not at fault, sustained damage to her vehicle. The at-fault driver was insured by Old American Indemnity Company (Old American). It is undisputed that the accident rendered the plaintiff's vehicle unsafe to drive and that the total cost of repairs was $7,109. However, Old American tendered only $6, 796, withholding $313 based on a "betterment credit" applied to the valuation of the claim.
Insurers Rely on Enforceable Contract Terms to Assess and Price Risk
The foundation of risk-based insurance underwriting is predictability. When insurers issue policies, they must be able to understand and define the scope of the risks they are assuming. That understanding is governed by the terms of the insurance contract, which under longstanding Louisiana law, carry the force of law between the insurer and the insured. Louisiana courts have consistently held that insurers may include reasonable limitations, exclusions, and conditions in their policies. These provisions are critical to ensuring that policies can be processed appropriately and that coverage is offered in a financially sustainable way.
When it comes to liability insurance, an insurer's obligations are twofold: (1) to indemnify the insured for damages they are legally obligated to pay, and (2) to pay such damages within the limits and under the conditions of the policy. As the Louisiana Supreme Court explained in State Farm Mut. Auto Ins. Co. v. Bertholot, 98-1011, p.11 (La. 1999), an insurer's liability to a third party is derivative of its insured's liability, and any action by an injured person must proceed "within the terms and limits of the policy."
Against this backdrop, the Louisiana Second Circuit's blanket declaration in Troung v. Sanders and Old American Insurance Company, finding that the third-party tort claims are governed solely by Civil Code article 2315 and are not "controlled by the language of a policy between the tortfeasor and the insurer," is not only novel, but deeply problematic. By disregarding policy language in assessing third-party claims, the court effectively nullifies the very contract that defines insurer's responsibilities.
Such a rule upends core principles of insurance law and undermines the flexibility insurers and policyholders need to structure coverage in Louisiana. It replaces decades of settled doctrine with judicial uncertainty, making it more difficult for insurers to assess risk, price policies, and decide whether to enter or remain in the state market.
Without a reliable legal framework that enforces clearly written policy terms, the insurance industry in Louisiana faces serious constraints. Not only does this decision invite further litigation, but it threatens to destabilize efforts at market reform by creating a climate of legal unpredictability at odds with basic contract law and established insurance practice.
Insurers Depend on the Predictable Application of Law
Beyond disregarding policy language, the Louisiana Second Circuit's decision breaks sharply from long-established legal principles governing the duties of insurers to third-party claimants. At the heart of the issue is a fundamental principle- insurers must be able depend not only on the enforcement of their policy language but also on the consistent and correct application of Louisiana law. While contracts must conform to statutes in force at the time of the execution, insurers rightfully expect courts to apply those statutes faithfully, not to reinterpret them in ways that expand liability beyond what the Legislature clearly authorized.
In this case, there was no statutory provision prohibiting Old American Indemnity Company from applying a betterment credit in valuing a claim. Yet the Second Circuit imposed liability and assessed bad-faith penalties based on Louisiana Civil Code Article 2315, which is a general tort liability provision that governs the conduct of tortfeasors, not insurers. Old American's responsibilities arise from its insurance contract and the Louisiana Insurance Code, a separate and comprehensive body of law that defines the scope of insurer obligations across 22 chapters.
In relying exclusively on article 2315, the Second Circuit disregarded the law by conflating the legal standards applicable to tortfeasors and insurers. This blurring of roles creates a dangerous precedent. It implies that insurers can never limit their obligations to third-party claimants, even when the policy clearly contains such limitations, exclusions, or conditions. Louisiana jurisprudence has long held that an insurer's duty to a third-party claimant is determined by two things: (1) the liability of the insured tortfeasor under applicable law, and (2) the terms of the policy. State Farm Mut. Auto Ins. Co. v. Bertholot, 98-1011, p.11 (La. 1999). In its amicus brief, the American Property Casualty Insurance Association (APCIA) highlighted this departure from legal precedent..
The state under which the court assessed penalties- La.R.S. §22:1892(A)(1) states clearly that penalties are available only to the insured. The plaintiff in this case was not an insured under the policy. The Louisiana Supreme Court previously addressed this issue in Theriot v. Midland Risk Ins. Co., 694 So.2d 184 (LA. 1997), holding that the Legislature intended to limit bad-faith penalties to insureds, not claimants. The Second Circuit's ruling in this case is directly at odds with Theriot and undermines the Legislature's clear intent to distinguish between the rights of the insureds and third parties.
Moreover, the decision proposed an inverted claims-handling process. Rather than evaluating its obligations based on policy terms, the insurer must first pay any damages found to be owed under tort law and then seek reimbursement for any portion not covered by the contract. This approach discarded the two-step analysis and invited penalties for failing to pay the sums the insurer was never legally obligated to cover.
The Second Circuit's failure to adhere to this framework places insurers in a legal gray zone. The ruling risks expanding bad-faith exposure without statutory support, ignores the difference between tort and contractual obligations, and undermines the clarity insurers need to successfully do business in Louisiana.
Insurers Must Be Free to Raise Good Faith Defense Without Facing Punitive Consequences
The Second Circuit's imposition of bad faith penalties in this case has far-reaching implications, potentially deterring insurers from asserting valid defense or disrupting damages- actions that are fundamental to the fair and lawful resolution of claims. If left unchecked, the ruling threatens to chill insurers' ability to challenge questionable claims, raise legal arguments in unsettled areas of law, or seek judicial clarification on coverage issues.
This concern is not theoretical. Louisiana has previously faced widespread fraudulent activity, such as staged trucking accidents, which came to light in part because insurers raised persistent, well-founded objections. Had those insurers been discouraged by the threat of bad faith liability, such fraud may have remained undiscovered. While the case at issue does not involve such extreme conduct or high-value claims, its precedential impact is no less significant.
The practice of applying betterment credits, which are adjustments reflecting the increased value of a repaired vehicle, is widely recognized across the country. At least seventeen states permit betterment in some form, often with detailed statutory guidelines. In contrast, Louisiana has no statutory or regulatory guidance regarding betterment.
Despite this fact, Old American introduced undisputed expert testimony showing that applying betterment is a standard industry practice, and the trial court accepted this evidence. No contrary evidence was introduced by the plaintiff. Nonetheless, the Second Circuit not only rejected the application of betterment in this third-party context, it went further, holding as a matter of first impression that betterment credits are never permissible in third-party claims under Louisiana law. It the imposed bad faith penalties for the insurers good faith reliance on a widely accepted industry norm.
This broad ruling creates a dangerous precedent. It effectively penalizes insurers for relying on standard claims-handling practices in the absence of any contrary law or guidance. Importantly, the court did not limit its holding to the facts of this case or provide a prospective rule for future claims. Instead, it announced a sweeping prohibition that retroactively applies to all third-party claims regardless of whether insurers had any notice that betterment credits were disallowed.
The potential consequences are significant. If insurers face bad-faith penalties for asserting defenses based on reasonable interpretations of policy language, or for applying standard valuation tools like betterment or depreciation, many will opt to pay questionable claims to avoid litigation exposure. That undermines not only claims-handling integrity but also Louisiana's broader efforts to stabilize the insurance market.
Key Takeaways
- Insurers must be able to rely on predictable legal frameworks. The Second Circuit's ruling undermines insurers' ability to assess and price risk by disregarding insurance policy terms and established legal standards, creating unpredictability in Louisiana's already volatile insurance market.
- The decision contradicts longstanding precedent. Louisiana courts have consistently held that an insurer's liability to a third-party clamant is determined by both (1) the tortfeasor's liability under applicable law and (2) the insurer's contractual obligations. The Second Circuit ignored the second step.
- The court erroneously applied Louisiana Civil Code Article 2315 (a tort provision) to the insurer, despite the insurer not being the tortfeasor and despite the existence of specific statutes governing insurer conduct in the Louisiana Insurance Code.
- The court improperly applied bad faith penalties under the applicable version La. R.S. §22:1892, which limited such penalties to an insured. The plaintiff was not an insured under the policy, and prior Louisiana Supreme Court precent has rejected such an extension. (Theriot v. Midland Risk)
- No Louisiana law prohibits betterment credits, Undisputed trial evidence showed betterment credits are common and accepted nationwide, yet the court declared them categorically impermissible in third party claims.
- By penalizing an insurer for asserting reasonable defense, the decision discourages insurers form raising good faith legal arguments, even in areas of unsettled law, out of fear of extra contractual liability.
- The ruling effectively opens the door for third-party claimants to pursue penalties typically reserved for insureds, which could reshape the scope of insurer liability in Louisiana and increase litigation and costs.
- The decision conflicts with recent legislative efforts to stabilize Louisiana's insurance market, including tort reform and amendments to the Direct-Action Statute. It jeopardizes those reforms by expanding insurer liability beyond what the law permits.
- To maintain legal certainty, protect insurers' rights to dispute claims in good faith, and preserve the enforceability of policy language, the Louisiana Supreme Court should reverse the second Circuit's decision or, at minimum, clarity the proper legal standard.
Conclusion
Insurers and policyholders must be able to rely on the consistent application of both statutory law and contract terms. The Louisiana Second Circuit's decision undermines that reliability by suggesting that, in certain cases, clear policy provisions may be disregarded, good-faith defenses may result in penalties, and bad-faith liability may extend to claimants despite statutory language to the contrary.
This ruling injects uncertainty into Louisiana's insurance market, contradicts long-standing precedent, and risks discouraging insurer participation in the state. To preserve legal clarity, promote fair claims handling, and support ongoing efforts to stabilize the market, the Second Circuit's decision should be reversed. The matter is set for oral argument before the Louisiana Supreme Court on October 20, 2025.
