By William T. Barker, Partner, SNR Denton
An insurer normally has subrogation or reimbursement rights when the losses it has paid are recoverable from a third party, but typically these rights are qualified by a requirement that its insured must be made whole before the insurer is entitled to any recovery. In Lease Crutcher Lewis WA, LLC v. National Union Fire Insurance Co., a liability insurer that failed to honor the made-whole requirement when seeking contribution from joint tortfeasors was held liable for bad faith. This commentary examines that decision.
The case grew out of a construction accident. Lease Crutcher Lewis WA, LLC (“Lease Crutcher”) was the general contractor on a construction site where a crane collapse caused a death and significant property damage. It was sued, along with various subcontractors and consultants, for claims exceeding $20 million. Defendants essentially conceded that they would be jointly and severally liable to the plaintiffs, but generally believed that a design firm, MKA, bore the greatest fault. While MKA claimed to be an additional insured on Lease Crutcher’s insurance, it had only $2-3 million in insurance of its own (a wasting policy, being depleted by defense costs). Lease Crutcher suffered its own losses (e.g., additional construction costs and delay penalties), for which it asserted a claim against MKA. Lease Crutcher had a $1 million primary policy with Arch Insurance and a $25 million excess policy with National Union; these policies appeared adequate to cover all of the third-party claims against Lease Crutcher.
MKA offered its remaining policy limits to Lease Crutcher if it would be protected against further claims. Instead, National Union got MKA to pay it, in return for protection against further claims. As the commentary notes:
The court held that National Union acted in bad faith by obtaining payment of that amount for its sole benefit, leaving Lease Crutcher with a claim against a barely solvent MKA. Had National Union waited until Lease Crutcher obtained a judgment against MKA (for both its direct losses and contribution to the liabilities against third parties), National Union would not have been able to obtain reimbursement, because Lease Crutcher’s uninsured losses exceeded the amount recoverable from MKA. But National Union delayed what was apparently a favorable settlement in order to obtain sole control of MKA’s insurance funds, to the detriment of Lease Crutcher.
Citing more detailed explanations, the commentary describes the made-whole rule as follows:
absent a contrary contractual provision, an insured who has made a recovery including both insured and uninsured losses has a right to allocate the recovery between insured and uninsured losses, to the extent that uninsured losses exist. On that basis, “the made-whole doctrine is a default rule of sorts that characterizes all recoveries from third parties as representing uninsured losses until such time that the insured is made whole.”
The commentary notes that application of this rule to complex liability insurance claims is novel, and discusses some of the implications.
Lexis.com subscribers can access the complete commentary, SNR Denton on Lease Crutcher Lewis WA, LLC v. National Union Fire Insurance Co.: Failure To Honor the Made-Whole Rule Can Be Bad Faith. Additional fees may be incurred. (approx. 5 pages)
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Download a free copy of the unenhanced lexis version of the court’s decision in Lease Crutcher Lewis WA, LLC v. National Union Fire Insurance Co.. Lexis.com subscribers can access the enhanced version of Lease Crutcher Lewis WA, LLC v. Nat'l Union Fire Ins. Co., 2010 U.S. Dist. LEXIS 110866 (W.D. Wash. Oct. 15, 2010).
William Barker is the co- author of New Appleman Insurance Bad Faith Litigation, Second Edition.
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