Insurer’s Duty to Initiate Settlement Discussion

By Thomas R. Newman

The covenant of good faith and fair dealing that is implied by law in every liability insurance policy requires the insurer to concern itself with the interests and welfare of the insured as well as its own interests and welfare, and in so doing “the insurer at the very least must itself consider and determine whether or not a settlement offer is in the best interest of the insured.” Garner v. American Mut. Liability Ins. Co., 31 Cal. App. 3d 843, 847-848, 107 Cal. Rptr. 604, 607 (3d Dist 1973). If it is, as where liability is clear and the injuries or damages are likely to result in a judgment in excess of the policy limits, some courts have held that the insurer has an affirmative duty to initiate settlement negotiations. Goheagan v. American Vehicle Ins. Co., 107 So. 3d 433, 438 (Fla. Dist. Ct. App. 1012); Noonan v. Vermont Mut. Ins. Co., 761 F. Supp. 2d 1330 (M.D. Fla. 2010)(Florida law); SRM, Inc. v. Great Am. Ins. Co., 798 F.3d 1322, 1323 (10th Cir. 2015)(Oklahoma law)(“a primary insurer owes its insured a duty to initiate settlement negotiations with a third-party claimant if the insured’s liability to the claimant is clear and the insured likely will be held liable for more than its insurance will cover”).

In Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 493, 323 A.2d 495, 505 (1974), the New Jersey Supreme Court held that the “better view is that the insurer has an affirmative duty to explore settlement possibilities.” And in Alt v. American Family Mut. Ins. Co., 71 Wis.2d 340, 349-350, 237 N.W.2d 706, 712 (1976), the court noted that “when a claimant’s attorney made overtures, though not of a binding nature, the insurance company had the duty on behalf of its insured to ‘make some more effective effort to adjust’ the claim.”

Under Kansas law, once a claim has been made “the insurer is obligated to initiate settlement negotiations regardless of the actions of the injured party.” Smith v. Blackwell, 14 Kan. App. 2d 158, 163, 791 P.2d 1343, 1346 (Kan. Ct. App. 1989); Roberts v. Printup, 422 F.3d 1211, 1215 (10th Cir. 2005)(“The duty to consider the insured’s interest arises because of a claim for damages in excess of the policy limits, not because a settlement offer had been made.”). If a claim has been made, it is not necessary that the claimant also commenced an action.

In Arizona, “in the absence of a demand or request to settle within policy limits or within the limits of the insured’s financial ability, plus policy limits, . . . a conflict of interest would give rise to a duty on behalf of the insurer to give equal consideration to the interest of its insured [and to initiate settlement negotiations] where there is a high potential of claimant recovery and a high probability that such a recovery will exceed policy limits.” Fulton v. Woodford, 545 P.2d 979, 984 (26 Ariz. App. 17, 22 (Ct. App. Div. 1, 1976).

Some courts have held that the insurer’s failure to solicit a settlement offer or initiate settlement negotiations when warranted under the circumstances” may be evidence of bad faith. Commercial Union Ins. Co. v. Liberty Mut. Ins. Co., 426 Mich. 127, 137, 393 N.W.2d 161, 164 (1986). However, “an insurance company does not have a duty to the insured to initiate negotiations prior to a claim being made. Roberts v. Printup, 422 F.3d 1211, 1216 (10th Cir. 2005). See also, Reid v. Mercury Ins. Co., 220 Cal. App. 4th 262, 266, 162 Cal. Rptr. 3d 894, 897 (2d Dist. 2013), where the court held that the insurer’s obligation to attempt to settle “is not precipitated solely by the likelihood of an excess judgment against the insured,” but requires “a settlement demand or any other manifestation [that] the injured party is interested in settlement.”

The insurer’s duty to attempt to settle a case against its insured may arise for the first time during trial. Thus, in Spray v Continental Casualty Co. 86 Ore. App. 156, 161, 739 P.2d 40, 44 (1987), review denied, 304 Ore. 185, 743 P.2d 735 (1987), a medical malpractice action where the insurer reasonably believed prior to trial that the claim against its insured was defensible and could be settled within policy limits, the “risk of an unfavorable result became increasingly apparent during the course of the trial, to the point that an ordinarily prudent insurer would have made an attempt to settle before the jury returned its verdict, that defendant had a reasonable opportunity to settle the case and that it took an unreasonable risk in choosing not to settle.”

Under Illinois law, an insurer has no duty to initiate settlement negotiations unless “the probability of an adverse finding on liability is great and the amount of probable damages would greatly exceed the coverage.” Kavanaugh v. Interstate Fire & Casualty Co., 35 Ill. App. 3d 350, 356, 342 N.E.2d 116, 121 (1st Dist. 1975). See also, State Auto. Ins. Co. v. Rowland, 221 Tenn. 421, 436, 427 S.W.2d 30, 36 (1968) (“under the proper factual situation an insurance company might decline to negotiate in the honest belief that the insured was not in fault and that there was no legal liability whatsoever. This must, however, always be done in good faith”).

In Cowden v. Aetna Casualty and Surety Co., 389 Pa. 459, 471, 134 A.2d 223, 228 (1957), the Supreme Court of Pennsylvania held that a refusal to negotiate was insufficient evidence of bad faith when there was an honest belief on the part of the insurer that the insured’s act was not the proximate cause of the accident, and that all liability could be avoided on that basis. However, the court explained that “[w]hile it is the insurer’s right under the policy to make the decision as to whether a claim against the insured should be litigated or settled, it is not a right of the insurer to hazard the insured’s financial well-being. Good faith requires that the chance of a finding of nonliability be real and substantial and that the decision to litigate be made honestly.”

In Interstate Indem. Co. v. Utica Mut. Ins. Co., 867 F. Supp. 1355 (S.D.Ill. 1994), a personal injury action settled for $2 million, with that amount shared equally by the primary insurer with a $1 million per occurrence limit and the insured’s umbrella carrier with $5 million limit. The umbrella carrier sued the primary seeking to recover the $1 million it contributed to the settlement, alleging a breach of the primary insurer’s duty to engage in reasonable settlement negotiations. The primary insurer recognized the likelihood of a verdict in excess of its policy limit but did not make any settlement offers until near the beginning of trial. The court found that “[d]efendant could have placed a dollar figure on the negotiating table at an earlier juncture, but the failure to do so is not a breach of the duty to engage in reasonable settlement negotiations” where the injured plaintiff refused to make a demand and the evidence established that the case could not have been settled for less than the $2 million that was paid.

In Cotton States Mut. Ins. Co. v Fields, 106 Ga. App. 740, 74-742, 128 S.E.2d 358, 359-360 (1962), the insured sued the defendant insurer to recover the amount plaintiff paid after the injured party obtained a judgment in excess of the policy limits. It was not alleged that the injured party had made any offer of settlement and no facts were alleged which show that the insurer could have settled the action within its policy limits, if it had attempted to do so. “Under these circumstances the allegations of the plaintiff’s petition are insufficient to state a cause of action for the reason that the claim for damages upon which the cause of action is predicated is too remote, conjectural, contingent and speculative to afford the basis for recovery.”

Thomas R. Newman is of counsel in the New York office of Duane Morris LLP. Mr. Newman practices in the areas of insurance and reinsurance law, including coverage, claims handling, contract drafting and arbitration and litigation. He has served as lead counsel in more than 60 reinsurance arbitrations, representing both cedents and reinsurers. He is often called upon to act as an expert witness in insurance cases in the United States and in London and has also served as an arbitrator in such cases.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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