It is the proverbial “damned if you do and damned if you don’t” situation for insurers. An insurer is presented with a policy limits demand to settle for one insured – and it should be accepted based on liability and damages considerations -- but the settlement offered will not secure a release for all insureds. If the insurer accepts the settlement offer, and secures a release for one insured, then the insured that is not released can be expected to allege that the insurer acted in bad faith, by exhausting the policy without consideration of its interests. If the insurer does not accept the settlement offer, because what’s proposed does not secure a release for all insureds, then the insured who did not obtain the settlement that had been offered to it, can be expected to allege that the insurer acted in bad faith. This insured will invariably argue that the insurer is liable for any resulting excess verdict because the liability and damages justified the insurer accepting the settlement offer. This conundrum for insurers -- one court addressing the issue called it a Hobson’s choice -- was addressed by the Alaska Supreme Court in Williams v. Geico Casualty Co., No. S-14089, 301 P.3d 1220 (Alaska Jan. 25, 2013) [enhanced version available to lexis.com subscribers]. In Williams, the Alaska Supreme Court addressed coverage for an intoxicated driver and passenger of a truck that ran over, and killed, a drunk individual that was lying in the middle of a road. The estate of the decedent filed suit against the driver and passenger. The driver of the truck was insured under a Geico policy that had a liability limit of $50,000 per person. Geico undertook the defense of the driver and the passenger. There were ultimately numerous settlement offers made but no settlement was achieved. The driver and passenger eventually each confessed judgment for nearly $4.7 million.
The settlement negotiations, and some other companion issues in the case, are complex – too much for the discussion here. But the gist of it, for purposes of making the point, is as follows. The estate of the decedent argued that Geico had a duty to offer a $50,000 settlement for the release of the driver only or to offer two $50,000 settlements for the release of the driver and passenger, and failure to do so was a breach of the insurance contract and was in bad faith. [Geico disputed that it owed a second $50,000 limit under the policy.]
The Alaska Supreme Court, referring to the situation as an unsettled area of the law, responded as follows: “We have not directly addressed how an insurer should handle multiple insureds. Other jurisdictions have utilized two different approaches. The first is that the insurer should seek to release all insureds, but if it cannot, then it ought to seek to settle on behalf of one. In these cases, the insurer’s obligations to other insureds are extinguished by reaching policy limits, even if the other insureds are exposed to personal liability. The second approach requires an insurer to seek release of all insureds; where a settlement cannot be reached the insurer must file a declaratory action to determine what coverage is owed.”
The Alaska Supreme Court adopted the later approach: “An insurer has a duty to defend its insureds; seeking a settlement to the benefit of one insured while leaving others open to liability could cause unfairness. Further, the latter approach avoids a potential bad faith claim by an insured who was unprotected and efficiently adjudicates the rights and duties of the insurer and the insured.” Therefore, the court held that “Geico did not have a duty to settle for [the driver’s] release while leaving [the passenger] open to liability and therefore it was not in breach of contract nor did it commit the tort of bad faith. We affirm the superior court’s holding that Geico did not breach its duties when it offered to settle for only one policy limit for the release of both [the driver and passenger].
Williams is a state high court decision, addressing an important and challenging issue, that it characterized as unsettled [it is; the decisions go both ways], and does not come with a lot of guidance, even nationally. For these reasons the decision warranted selection as one of the year’s ten most significant.
This issue also arose in 2013 in Harp v. Converium Insurance (North America), Inc. [enhanced version available to lexis.com subscribers]. The California District Court stated that, under California law – as in just about every state – there is an implied duty for liability insurers to accept a reasonable settlement offer within policy limits. If an “insurer fails to accept a reasonable settlement offer within policy limits, it may be held liable for the entire judgment, even if the judgment exceeds policy limits.” However, the Harp court also noted that, under California law, “the implied covenant of good faith and fair dealing prohibits an insurer from accepting a settlement demand that would exhaust its policy limit without obtaining releases for all its insureds.” Hence, the law protects the insureds that do not have a settlement opportunity. But see: Contreras v. U.S. Security Insurance Company, 927 So. 2d 16 (Fla. Ct. App. 2006) [enhanced version available to lexis.com subscribers], (concluding that an insurer was in bad faith for refusing to accept a limits settlement demand that would have secured a release for one insured, even though it would have left no coverage for another insured that was not included in the release).
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 J. Maniloff is an attorney in the Philadelphia office of White and Williams, LLP. He concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies. 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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