By William T. Barker and Ronald D. Kent
In Allstate Insurance Co. v. Miller, the Nevada Supreme Court held that the jury could properly have found Allstate liable for an excess judgment as a result of its failure to adequately inform its insured of a settlement opportunity. This commentary examines the law in Nevada and elsewhere on an insurer's duty to inform the insured of settlement opportunities and the circumstances in which failure to do so can be used to impose excess judgment liability on the insurer. It also criticizes a burden of proof rule articulated in Miller.
Miller had an auto accident in which Mark Hopkins was severely injured. Allstate promptly offered Miller's $25,000 policy limit. Allstate was notified of a hospital lien of $67,564.84 and an attorney's lien by Hopkins' initial counsel of $8325. A check payable to Hopkins, his current counsel and the two lienors was rejected. Hopkins offered to release Miller if Allstate filed an interpleader, which Allstate refused to do, without informing Miller of the offer. Hopkins obtained a verdict of $703,619.88 against Miller, who sued Allstate for bad faith, obtaining a general verdict of $1,079.784.88 against Allstate. The Nevada Supreme Court reversed and remanded for a new trial.
The case had been submitted to the jury on three theories, but the court held that the only viable theory was failure to inform Miller of the opportunity to obtain a release by an interpleader, something which Allstate had no duty to fund. Miller claimed that he could and would have funded it, but admitted that he did not know what the cost of that would have been. The court held that any doubt on this point was not sufficient to preclude liability for Allstate because it had the burden of proof on that issue: "doubts as to the insured's ability or willingness to settle should be resolved in favor of the insured 'unless the insurer can show by affirmative evidence that there was no realistic possibility' of the insured doing so."
The commentary reviews the law nationally, finding general agreement that the insurer has a duty to provide the insured with certain basic information regarding settlement opportunities. When the insured faces excess exposure and a settlement opportunity arises, the commentary concludes that:
The insurer should point out to the insured the conflict of interest between itself and the insured. When the insurer rejects a settlement offer and there is a risk that the judgment might exceed policy limits, the prudent insurer should (1) advise the insured of the risk of an excess judgment, (2) explain how this may affect the insured's rights, and (3) apprise the insured that he may secure private counsel to represent his interest in the litigation. In particular, where a demand is above policy limits, the insured must be advised and given the opportunity to make a contribution sufficient to settle the case. If there is an offer of contribution by another party which would reduce the contribution necessary from the insured, the insured should be told.
The commentary also discusses various limits on the duty to inform and points out that no liability flows from failure to inform unless harm results:
Failure to inform the insured of a settlement opportunity, standing alone, is not a basis for liability unless that failure caused harm to the insured. Generally, there is no harm unless the insured would have been able and willing to contribute an amount (in addition to what the insurer was willing to pay) sufficient to induce the plaintiff to settle. Where the insured and the claimant had a familial relationship that would have kept insured informed of settlement offers, the insurer's failure to do so was not prejudicial. But, if the plaintiff asks for information about other insurance or the insured's assets, failure to obtain that information can be a cause of failure to settle and, hence, of an excess judgment.
Finally, the commentary criticizes the burden of proof rule articulated in Miller, concluding that:
the court articulates a burden of proof rule that has crept into cases and treatises without real analysis. That rule is unsound and relieves the bad faith plaintiff of the obligation to show that harm was caused by an insurer's breach of duty to attempt settlement. Other courts should reexamine and reject that rule.
William T. Barker is a partner in the Chicago office of SNR Denton with a nationwide practice representing insurers in complex litigation, including matters relating to coverage, claims handling, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author of New Appleman Insurance Bad Faith Litigation, Second Edition. Ronald D. Kent heads the Litigation Department in SNR Denton's Los Angeles office. He is also Co-Chair of the Firm's National Insurance Litigation and Coverage Practice and is a member of the firm-wide Policy & Planning (Management) Committee. Mr. Kent is the co-author of the second edition of New Appleman Insurance Bad Faith Litigation.
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