The American Law Institute is at work on a Restatement of the Law of Liability Insurance. At this time, the ALI’s drafts do not apparently include any reference to the Powell rule, or if there is one, at least one that is easily found. The thrust of this article is to show why it should. An explicit statement of the Powell rule in the Restatement would do much to protect liability insurers from frivolous setups and to protect policyholders from unreasonable insurer settlement conduct.
The Powell rule addresses situations in which an injured or damaged claimant does not make a settlement demand. The Powell rule is so important and pervasive in the experience of settlement negotiations that the responsibilities of a liability insurer in this situation should be addressed in the Restatement:
A liability insurance company has a duty to initiate settlement negotiations when:
- Liability of the policyholder is clear, and
- The injuries of the claimant are so serious that a judgment in excess of the policy limits is likely.
This provision mandates that a liability insurer initiate settlement negotiations in such a situation if the insurer is going to be held to make a reasonable settlement decision. What constitutes the initiation of settlement negotiations will depend on what is already set out in the draft Restatement’s current requirement of reasonable settlement decisions.
This rule is most commonly called the “Powell rule,” named after the case which is best known for stating it: Powell v. Prudential Prop. & Cas. Ins. Co., 584 So. 2d 12, 14 (Fla. 3d DCA 1991), review denied, 598 So. 2d 77 (Fla. 1992). The so-called Powell rule was not announced in a vacuum, however; other Courts enunciated it in other cases and applied it there. Many of these cases are cited in Powell itself. In addition, Powell has been followed by Courts in other jurisdictions. Nonetheless, the Powell rule is a minority rule, although for the reasons submitted below, it represents the better rule in cases in which the policyholder’s liability is probable, and damages are great meaning that damages are likely to exceed the policy limits.
Among the advantages which ought to recommend it to liability insurers and their lawyers, is that the Powell rule provides a clear statement of the limits of the liability insurer’s extracontractual exposure or risk. Opposing counsel frequently argue to Courts and, when allowed by Courts, argue to juries that the liability insurer has a duty to actually settle the case because the policyholder’s liability is probable and the claimant’s damages are great. The liability insurer does not have to settle in such a case, it only has to initiate settlement negotiations. No Court has ever held otherwise to my knowledge.
Claimants certainly do not have to make a settlement demand in any case. Sometimes claimants not only refuse to make a settlement demand, but they refuse to settle. It takes more than a liability insurer to settle a claim against its policyholder; the claimant’s willingness to settle is required too.
The Powell rule makes it clear that the liability insurer is not going to be held strictly or absolutely liable if a given case is not settled, but that it is exposed to extracontractual liability if it does not initiate settlement negotiations in a case in which liability is probable and damages are great.
A specific provision declaring the Powell rule as a part of the Restatement will also address the situation of the so-called “bad faith setup.” This concept is frequently raised in some of the legal literature, but when it is raised in litigated cases it is a failure as a defense. I am aware of no case in which a “bad faith setup” by the injured claimant was ever recognized as a defense to extracontractual, bad faith liability in excess of policy limits. Courts have always viewed settlement duties as duties which belong exclusively to the insurance carrier.
Further, Courts have abandoned the old rule which required a judgment in excess of the carrier’s policy limits (the “judgment rule”) in favor of a rule of liability allowing the carrier to be held responsible to pay sums in excess of its policy limits when the carrier could have acted reasonably and attempted to settle the underlying case even in the absence of a judgment against the policyholder, such as where the underlying case has settled.
The Powell rule reaches the corollary situation in which the carrier could have acted reasonably and taken steps in an effort to attempt to settle the underlying case even in the absence of a demand from the injured claimant. This provision reinforces the concept prevailing in the Restatement that the standard of liability to be applied to the liability insurer’s conduct is reasonableness.
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