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If an insurer is determined to have breached the duty to defend, consequences will attach. It may be that the insurer must pay for the defense costs that it otherwise owed. Or the consequences may be much harsher – the insurer may lose the right to assert otherwise applicable defenses to indemnity, as well as owing, besides the defense costs, a host of other costs, including attorney’s fees. And the consequences can go still further. They vary widely by state. In general, it seems that courts have been stepping-up the consequences imposed on insurers that breach the duty to defend. In Tidyman's Management Services Inc. v. Davis, 330 P.3d 1139 (Mont. 2014), [enhanced version available to lexis.com subscribers], the Supreme Court of Montana demonstrated just how harsh those consequences can be. Tidyman’s may involve the harshest consequences possible for an insurer that breaches the duty to defend.
In Tidyman’s the Montana high court concluded that National Union breached its duty to defend directors, Davis and Maxwell, under a corporate liability insurance policy, for claims alleging breach of corporate duties arising out of a merger. [The case is lengthy and complex. The point of this summary is not to address the specifics of the underlying facts. Rather, it is to demonstrate how the court dealt with the consequences for an insurer’s breach of the duty to defend. Thus, I address just enough of the facts to provide context.]
National Union originally defended Davis and Maxwell, but then determined that, following a change in circumstances, a defense would no longer be provided. In response, Davis’s counsel, “filed a ‘stipulation resulting from insurer’s refusal to provide coverage’ with the court, recognizing his client’s inability to pay for a defense and need to protect himself. The stipulation provides that Davis is an insured under the Policy; that 29 million dollars in damages is sought for Davis’s alleged breach of fiduciary duties as an officer and/or director; that NUFI has wrongfully denied a defense to Davis and Davis lacks the funds to defend himself; that Davis assigns all rights, claims and causes of action against NUFI to the plaintiffs; and that the plaintiffs will not seek to execute judgment against Davis’s personal assets.”
The Montana trial court approved the stipulations for entry of judgment. “Notably, the District Court concluded that Montana case law did not impose any duty upon the court to consider the reasonableness of the amount of the stipulated agreement, and that NUFI’s collusion argument was speculative.”
On appeal to the Montana Supreme Court the court made the following determinations:
National Union breached its duty to defend. The court was particularly troubled by this: “Finally, the insurer’s recognition that the Policy was potentially implicated was cemented when, after the first stipulated settlement had been filed, it receded from its coverage position and agreed to defend under a reservation of rights. These facts show that NUFI saw that the Policy was implicated, but refused to provide a defense and thereby breached its duty to defend.”
Here’s the real sting in the decision. Consider these consequences for the insurer’s breach of the duty to defend: “Montana case law clearly provides that where the insurer refuses to defend a claim and does so unjustifiably, that insurer becomes liable for defense costs and judgments. Moreover, ‘[an insurer] cannot escape liability by declaring in advance of trial that the claim for damages is not one covered by the policy.’ Rather, an insurer who breaches the duty to defend is liable for the full amount of the judgment, including amounts in excess of policy limits.” (citations omitted).
In other words, the consequences for the insurer’s breach of the duty to defend is the loss of coverage defenses and liability for amounts in excess of the policy limit.
But surely $29 million may not have been a reasonable settlement amount? After all, it was simply the result of an agreement between parties in a dispute -- with no risk for personal liability. While the trial court concluded that, under Montana law, it had no duty to consider the reasonableness of the amount of the stipulated agreement, the Montana Supreme Court put its foot down there. The court held that, based on issues that National Union had raised, a remand to the trial court was appropriate for a hearing on the reasonableness of the settlement. The burden is to be on National Union to prove that the stipulated judgment was unreasonable.
National Union also argued that the parties “had no incentive to minimize the settlement amount, and, consequently, the settlement was per se unreasonable because it was improperly collusive.” The Montana Supreme Court did not agree, holding as follows: “Neither Montana authority, nor the facts to which NUFI directs our attention, persuade us that the District Court improperly disposed of NUFI’s collusion argument. Montana precedent does not require a court to consider whether a stipulated settlement is collusive where the insurer has breached the duty to defend.” The court suggested that, perhaps in a different case a collusion inquiry might be permissible, but this was not it. [I direct your attention to a highly thoughtful (and scathing) dissent.] To recap, following Tidyman’s, an insurer that breaches the duty to defend under Montana law is confronting this situation: waiver of any coverage defenses; liability for the amount of a stipulated judgment -- even the portion in excess of policy limits; probably the right (but with the burden) to prove that the stipulated judgment was unreasonable; and probably not the right to prove that the settlement was the result of collusion.
The waiver of coverage defenses for breach of the duty to defend is very harsh. But it is not unheard of. Some states apply such rule. But for an insurer to then also be liable for the portion of a stipulated judgment in excess of policy limits goes too far. An insurer that issues a $1 million primary policy could be liable for a judgment that is many multiples of that. That is simply punitive, for conduct that may not, and likely does not, satisfy the standard for an award of punitive damages. Maybe that’s the next battleground for this issue – due process arguments.
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
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