The Insurer's Duty to Settle, Bad Faith, and Verdicts in Excess of Policy Limits

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A The Insurer's Duty to Settle, Bad Faith, and Verdicts in Excess of Policy Limits Navigating the Nuances of the Insurer's Duties and Risk of Bad Faith Claims WEDNESDAY, JANUARY 7, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Richard DeNatale, Partner, Orrick Herrington & Sutcliffe, San Francisco Louis H. Kozloff, Partner, Nelson Brown Hamilton & Krekstein, Blue Bell, Pa. Terrence R. McInnis, Partner, Troutman Sanders, Irvine, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 The Insurer s Duty to Settle, Bad Faith and Verdicts in Excess of Policy Limits 5 January 7, 2015 Richard DeNatale Orrick, Herrington & Sutcliffe, LLP Terrence R. McInnis Troutman Sanders LLP Louis Kozloff Nelson Brown Hamilton & Krekstein LLC

6 Topics 6 1. The Core Duties 2. Control of Settlement 3. Nature and Scope of Duty to Settle 4. Breach of Duty to Settle 5. Remedies and Bad Faith 6. Strategies for Settlement 7. Questions/Discussion

7 7 THE CORE DUTIES

8 Three Core Duties 8 Duty to Defend Duty to Indemnify Duty to Settle

9 Duty to Defend 9 Duty to defend Duty to defend is broader than the duty to indemnify Insurer must defend any suit potentially falling within the insuring agreement of the policy Duty to defend arises immediately upon filing of underlying complaint Eight corners rule: Duty determined by comparing allegations in complaint with terms of the policy Allegations read broadly

10 Duty to Defend 10 Who controls defense, the insurer or policyholder? General rule is that if insurer reserves rights, in such a way that defense counsel has a conflict of interest, policyholder controls the defense and appoints counsel Otherwise, insurer controls defense

11 Duty to Indemnify 11 Duty to indemnify Insurer must pay damages resulting from policyholder s liability for claims covered under the policy Determined by facts established in underlying case Judgment provides evidence of policyholder s liability Coverage up to policy limits Duty to pay typically extends to Damages awarded in a judgment Settlements to which the insurer consents

12 Duty to Settle 12 Topics covered Control of settlement/insurer consent rights Source and scope of the duty to settle Settlement among multiple insurers, policyholders and claimants Breach and remedies Strategies and options for settling claims Steps to reduce an insurer s liability for bad faith

13 Duty to Settle 13 Insurers also have a duty to act reasonably with respect to settlement This duty is a critically important one For insurers and policyholders For courts and third-party claimants Yet the duty is problematic in several ways not expressly stated in most insurance policies scope and nature are poorly understood Case law is murky and inconsistent

14 14 CONTROL OF SETTLEMENT

15 Control of Settlement 15 Defending insurer controls settlement Policy language: Insurer may in [its] discretion... settle any claim or suit Provision enforceable unless insurer has denied coverage or otherwise breached policy obligations Defending insurer controls settlement even where insurer reserved rights Non-defending insurer does not control settlement Policyholder can settle claims without insurer consent

16 Control of Settlement 16 Insurer defends ABC Corp. under reservation of rights. Plaintiff offers to settle, but ABC Corp. objects to settlement. Can insurer accept settlement over its policyholder s objection and then sue policyholder to establish lack of coverage and obtain reimbursement?

17 Control of Settlement 17 Insurer may choose to settle over policyholder s objection In many states, insurer can reserve rights and file suit against policyholder for reimbursement of settlement amount Blue Ridge Ins. Co. v. Jacobsen, 22 P.3d 313 (Cal. 2001) But not in all states Utica Mut. Ins. Co. v. Rohm and Haas Co., 683 F.Supp.2d 363 (E.D. Pa. 2010) (under Pennsylvania and Illinois law, insurer not entitled to reimbursement of settlement amount absent policy provision providing for reimbursement)

18 Control of Settlement 18 Does policyholder have to seek insurer consent for a settlement? Consent requirement may appear in various policy provisions Definitions (e.g., Loss or Indemnity ) Cooperation/Defense/Voluntary Payments clause The insured shall not, except at his own cost, voluntarily make any payment, assume any obligation or incur any expense other than for first aid to others at the time of accident. No Action/Loss Payable clauses No action shall lie against the [insurer] unless... the insured s obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the [insurer].

19 Control of Settlement Insurer Consent 19 Insurer defends ABC Corp. under reservation of rights. Plaintiff offers to settle, but insurer is not interested. ABC Corp. then proceeds to negotiate and sign a favorable settlement and asks its insurer to fund it. Is insurer obligated to do so? Failure to seek consent may violate the policy and may forfeit coverage In some states without a showing of prejudice

20 20 THE DUTY TO SETTLE

21 Duty to Settle - Source 21 Insurer s discretion regarding settlement decisions is constrained by its duties to policyholders Sources of the duty to settle include: Duty not to unreasonably withhold consent to settlement; Duty to defend; and Covenant of good faith and fair dealing.

22 Duty to Settle - Scope 22 Insurer must assess settlement offers and respond to them fairly and in good faith Must evaluate claims on their merits - no consideration of coverage defenses If a settlement offer is reasonable, insurer has duty to accept it In some jurisdictions, insurer has a duty to effect a settlement once liability becomes reasonably clear

23 Duty to Settle - Scope 23 How do you assess reasonableness? Is it likely that trial will result in an award of damages greater than the settlement offer? [likelihood of adverse judgment] x [likely damages] > offer? Non-covered claims are included in the analysis

24 Duty to Settle 24 ABC Corp. is being defended by three different insurers. Each insurer s policy covers the claims and each policy has $1,000,000 in policy limits. Plaintiff makes a reasonable settlement offer in the amount of $1.8 million higher than the limit of each policy. Do any of the insurers have a duty to settle?

25 Duty to Settle Multiple Insurers 25 Settlement by multiple insurers Where multiple insurers cover claim, and a reasonable settlement amount is received for an amount greater than the limits of any one policy, but less than all available limits, each insurer has obligation to accept settlement up to its policy limits Howard v. Am. Nat l Fire Ins. Co., 115 Cal. Rptr. 3d 42 (Cal. App. 2010)

26 Duty to Settle Multiple Insureds 26 Where claims are asserted against multiple insureds, most jurisdictions allow insurers to settle piecemeal if settlements are reasonable and reflect relative liability of insureds In some jurisdictions, piecemeal settlements that exhaust the policy limits would also terminate defense obligations Some jurisdictions do not allow piecemeal settlements Insurers cannot prefer the interests of one insured over interests of other insureds

27 Duty to Settle Multiple Claimants 27 Most jurisdictions allow insurers to settle claims piecemeal if settlements are reasonable, even if doing so will exhaust the policy limits The first to judgment rule The pro rata rule The first to settle rule Insurer can interplead the policy limits May insulate insurer from bad faith liability But does not relieve insurer from duty to defend

28 Duty to Settle Recoupment 28 In many jurisdictions, insurer is allowed to settle with claimants subject to its right to recover amount from policyholder Prerequisites to obtaining reimbursement: Timely and expressly reserve the right to recoup Notify the insured of the insurer s intent to accept a settlement Give the insured the option to assume the defense (at its own expense) E.g., Travelers Prop. & Cas. Co. of Am. v. Hillerich & Bradsby Co., Inc., 598 F.3d 257, 268 (6th Cir. 2010); Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4th 489, 502 (2001)

29 29 BREACH OF DUTY TO SETTLE

30 Breach of Duty 30 Elements for breach of the duty to settle An opportunity arises to settle case for reasonable amount Settlement offer must be within policy limits Clean offer that can be accepted to create a binding agreement Release of insured Insurer unreasonably rejects settlement Is the amount of offer reasonable? Do other circumstances justify rejection of offer? Insufficient time to evaluate offer The claim is covered under the policy

31 Breach of Duty 31 Is an insurer duty-bound to initiate settlement discussions? Some states hold that an insurer has a duty to initiate settlement discussions (at least under some circumstances) E.g., Roehl Transp., Inc. v. Liberty Mut. Ins. Co., 784 N.W.2d 542, 554 (Wis. 2010) While others do not impose an obligation to initiate settlement discussions E.g., Rocor Int l v. Nat l Union Fire Ins. Co., 77 S.W.3d 253, 261 (Tex. 2002); Haddick v. Valor Ins., 763 N.E.2d 299, (Ill. 2001)

32 Breach of Duty 32 Circumstances that may support imposing a duty on insurer to initiate settlement discussions When liability is clear and excess judgment likely Spray v. Continental Casualty Co., 739 P.2d 40, 44 (Or. Ct. App. 1987); Powell v. Prudential Property & Casualty Ins. Co., 584 So. 2d 12, 14 (Fla. Dist. Ct. App. 1991) When Insurer defends under burning limits policy Claimant s express desire to settle within limits Gibbs v. State Farm Mut. Ins. Co., 544 F.2d 423, 427 (9th Cir. 1976)

33 Breach of Duty 33 Conduct that may expose insurer to bad faith breach of duty to settle May the insurer consider coverage defenses when evaluating whether to accept a settlement? May the insurer insist on a contribution from the insured as part of a settlement?

34 Breach of Duty 34 If insurer breaches the duty to settle, policyholder must decide: Let case proceed to trial If damages awarded are within policy limits and insurer pays the judgment, the policyholder has no damages for the insurer s breach of the duty to settle If damages awarded are greater than policy limits, insurer may be liable for entire judgment even amounts in excess of policy limits due to breach of duty to settle

35 Breach of Duty 35 Insurer defends ABC Corp. under reservation of rights. Plaintiff makes a reasonable settlement offer within policy limits. ABC Corp. asks insurer to accept settlement, but insurer declines. Can ABC Corp. pay the settlement amount itself and seek reimbursement from its insurer?

36 Breach of Duty 36 Policyholder steps in and settles case with its own funds Does an Insurer s breach of duty to settle waive any consent rights? Policyholder can pursue contract claims for insurer s breach, to recover amount of settlement Settlement must be reasonable Claims must be covered

37 37 REMEDIES FOR BREACH & BAD FAITH

38 Remedies/Bad Faith 38 When insurer breaches duty to settle, policyholder may pursue tort claims for breach of covenant of good faith and fair dealing i.e., bad faith Law in California (and elsewhere) is that insurer s conduct must be unreasonable Damages may include extra-contractual damages. Full amount of any judgment in excess of policy limits Other consequential damages proximately caused by insurer s breach Emotional distress Attorneys fees incurred to establish coverage (Brandt v. Superior Court, 693 P.2d 796 (Cal. 1985)) In cases of serious misconduct, punitive damages

39 Remedies/Bad Faith 39 New York has its own standard for tortious bad faith claims Pavia v. State Farm Mut. Auto Ins. Co., 82 N.Y.2d 445 (1993) Under NY law, bad faith conduct involves: gross disregard of the policyholder s rights; a reckless or deliberate failure to give the policyholder s interests equal weight with insurer s interests; or knowing indifference to the probability that policyholder would be held liable for a significant judgment.

40 Bad Faith 40 Factors courts consider on bad faith claims Insured s probable liability to underlying claimant Extent of the claimant s damages Whether the insurer heeded defense counsel s advice concerning settlement Whether the insurer heeded its own adjusters advice concerning settlement Whether insurer adequately investigated the claim and the insured s potential liability

41 Bad Faith 41 Factors courts consider on bad faith claims (cont.) Whether the Insurer had sufficient information to evaluate the reasonableness of the settlement offer Insurer s willingness to engage in settlement negotiations Whether the insured kept the insurer informed of settlement negotiations and offers Any other conduct by the insurer reflecting greater concern for its financial interests than for its insured s financial risk

42 42 STRATEGIES FOR SETTLEMENT

43 Policyholder Strategy Cooperate with insurer 2. Begin discussing settlement issues with the insurer early 3. Provide information needed to evaluate the claim Allow ample time for insurer to consider it Include recommendation of defense counsel 4. Seek advance consent for settlements Do not commit to a binding settlement without giving the insurer the opportunity to review and consent Offers can be made subject to insurer approval

44 Policyholder Strategy Avoid collusion with claimants Insurer may not be bound by stipulated judgment between policyholder and claimant. Hamilton v. Maryland Cas. Co., 41 P.3d 128 (Cal. 2002) 6. Where possible, negotiate resolution of coverage disputes along with the settlement of the underlying case Consider releasing coverage and bad faith claims in exchange for adequate contribution to settlement 7. Be creative and flexible where possible Consider options for narrowing the dispute Policyholder contribution to settlement

45 Insurer Strategy Cooperate with the policyholder 2. Evaluate the claim at the earliest opportunity Be sure to document basis for evaluation If evaluation is not complete, document the resaons 3. Tender full limits if it is established that the reasonable value of the claim exceeds policy limits

46 Insurer Strategy Attempt a global resolution 5. If global settlement is not possible, try to settle claims that pose the greatest risk to policyholder Some jurisdictions require a release of all insureds 6. In all cases, keep the insured fully informed of his or her potential liability all settlement communications and litigation strategy 7. Be creative and flexible where possible Consider options for narrowing the dispute Consider funding settlement subject to right to recoup

47 47 QUESTIONS? Richard DeNatale Orrick, Herrington & Sutcliffe, LLP Terrence R. McInnis Troutman Sanders LLP Louis Kozloff Nelson Brown Hamilton & Krekstein LLC