By William T. Barker, Partner, SNR Denton
In Roehl Transport, Inc. v. Liberty Mutual Insurance Co., the Wisconsin Supreme Court has recognized a new form of bad faith failure to settle: failing to minimize use of the insured’s deductible. This commentary critically examines that decision in light of other cases addressing an insurer’s duties regarding deductibles and retrospective premiums.
One of Roehl Transport’s trucks rear-ended a car driven by Arthur Groth, who sued. Roehl’s policy had a $2 million limit, but a $500,000 deductible. Liberty Mutual was entitled to control settlement, though Roehl was entitled to be consulted. A jury awarded Groth $830,400 in damages, fully consuming Roehl’s deductible. Roehl claimed that Liberty Mutual could and should have settled for $100,000, and sued for bad faith. The bad faith jury found “(1) that Liberty Mutual breached duties owed to Roehl Transport in the handling of the Groth claim; [and] (2) that Liberty Mutual’s failure to perform its duties to Roehl Transport ‘demonstrated a significant disregard of Roehl Transport’s interests such that Liberty Mutual’s failure to settle Groth’s claim was done in bad faith.’” It awarded $127,000 in damages. Liberty Mutual appealed. The Wisconsin Supreme Court affirmed.
The court reasoned that the duty to act in good faith regarding settlement “is implied by the terms of the insurance policy that give the insurance company exclusive power to settle claims.” While mishandling a claim within the deductible presents different risks, it involves the same concern with putting the insured’s interests in the hands of the insurer when the insurer’s own interests are not fully aligned with those of the insured. Accordingly, recognition of a cause of action was supported by the cases involving exposure of the insured to liability beyond policy limits.
The insurer’s interests were adequately protected by imposing on the insured a heavy burden of showing, by clear and convincing evidence, that the insurer’s decisions regarding the claim “demonstrated a significant disregard of Roehl Transport's rights and economic interests" and "were not honest and reasonable decisions.” It found that the evidence here was sufficient to support such findings.
This commentary notes that “under fixed-cost policies, where the insured’s only exposure is to liability exceeding the policy limit, and in the absence of contractual language to the contrary, the insurer’s right to settle with its own funds is virtually absolute, though it may not sacrifice the insured’s affirmative claims or commit the insured’s assets to settlement.” However,
some policies, like that in Roehl Transport, have features providing for sharing of the risk within policy limits by the insured. That may take the form of a deductible, which the insured must reimburse, or a retrospective premium, adjusted from time to time based on the loss experience under the policy. As Roehl Transport illustrates, such loss-sharing features generate different types of tension between insurer and insured than those found in traditional duty-to-settle cases. Prior to Roehl Transport, courts have considered these issues in connection with challenges by insureds to insurer decisions to settle, when the insurer sought reimbursement of amounts within the deductible or to collect a retrospective premium based on the settlement.
The commentary reviews the caselaw on insurer rights to collect reimbursement or retrospective premiums after a settlement to which the insured now objects. It notes that the supposed conflict in Roehl Transport does not apply to the actual settlement decision (in that case, the decision not to settle, or at least not to initiate settlement negotiations). Liberty Mutual had no reason to refuse a reasonable settlement that would be fully reimbursed by Roehl. After all, failure to settle might expose Liberty Mutual to liability above the deductible (as it actually did). To the extent that there is a conflict, it concerns handling of the defense: Liberty Mutual’s claim handlers might have thought that they could skimp on defense efforts, so long as they believed--mistakenly--that the claim would ultimately be resolved within the deductible.
The commentary concludes:
But even [regarding the defense], Liberty Mutual had an incentive to avoid any risk of liability beyond the deductible, so its interests were largely (though not completely) aligned with those of Roehl. Thus, as in the cases where the insurer settled and sought reimbursement or a retrospective premium, considerable deference should be accorded the insurer’s decisions. That implies a high threshold for any bad faith claim by the insured. Roehl Transport applies such a threshold and reaches what appears to be a sound result.
Lexis.com subscribers can access the complete commentary, SNR Denton on Roehl Transport, Inc. v. Liberty Mutual Insurance Co.: Wisconsin Recognizes New Form of Bad Faith. Additional fees may be incurred. (approx. 15 pages)
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William Barker is the co- author of New Appleman Insurance Bad Faith Litigation, Second Edition.
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