Insurer Between a Rock and a Hard Case: Limits Demand That Does Not Release All Insureds

Insurer Between a Rock and a Hard Case: Limits Demand That Does Not Release All Insureds

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 calling the issue a Hobson’s choice -- was addressed by a Kansas District Court in Kemp v. Hudgins, No. 12-2739 (D. Kansas Sept. 22, 2015), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance].

Kemp is a very long and detailed opinion. It would take forever to describe it here. Plus, doing so would distract from the point I’m trying to make – which is simply how one court addressed the issue. So I’ll take the easy way out – which is also the best way to describe the case. I’ll quote the court’s conclusion:

“Dairyland [Insurance Company] insists that it would have breached its duty of good faith to Kelley, had it accepted Kemp’s initial settlement demand to release only Hudgins in exchange for the policy limits. Kemp contends that Dairyland would not have breached any duty to Kelley by settling because the policy did not cover negligent entrustment claims, and suggests that Dairyland failed to reasonably investigate its potential liability on such a claim under Kansas law. . .

The Court agrees with Dairyland that its rejection of Kemp’s initial offer to settle without a release of both insureds was not in bad faith because Dairyland reasonably believed it owed a duty of good faith toward both insureds—Hudgins and Kelley—to obtain a release of both. [I]n this case the uncontroverted facts establish that Dairyland quickly offered to pay its policy limits to Kemp to settle the claim. The only point of contention between the parties was whether the policy limits settlement would be in exchange for a release of Hudgins, or of Hudgins and Kelley. Although Kemp did not ask to explicitly reserve his right to pursue a negligent entrustment claim against Kelley, the Court finds that this is a distinction without consequence. Whether or not Kemp explicitly reserved his right to pursue a claim against Kelley, under a negligent entrustment theory or otherwise, his refusal to release Kelley left her open to liability after Dairyland exhausted its policy limits in settling the claims against Hudgins. For the same reasons explained by Judge Marten in Brummett [v. American Standard Insurance Co., No. 04–1114–JTM, 2005 U.S. Dist. LEXIS 15300 (D. Kan. July 18, 2005)], [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], the Court finds that Dairyland’s rejection or repudiation of the initial settlement offer was within the bounds of good faith because it did not include a release of both insureds.”

There are not a ton of cases addressing this issue, but it’s not a barren wasteland either. The cases to do so go both ways. And the arguments on both sides are easy to see. Here’s another to add to the mix.

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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