... IS MORE THAN REASONABLY GOVERNED BY A FIDUCIARY STANDARD, "DID THE LIABILITY INSURANCE COMPANY PREFER ITS OWN INTERESTS TO ITS INSURED'S INTERESTS" WHEN THE LIABILITY INSURER DID NOT ACT TO SETTLE THE CASE AGAINST THE INSURED.
PART ONE OF TWO PARTS.
There is a view which has recently begun popping up in some of the academic literature, which would provide a new standard of extracontractual liability, a new test for measuring a Liability Insurance Company's settlement conduct. It is a view, without any case law to support it, which goes something like this:
A liability insurance company with a duty to settle claims against its insureds is not liable for damages in excess of its policy limits if it acts reasonably when it fails to settle such claims. A reasonable settlement decision includes taking account of the costs of defending the claim.
Courts have said that the liability insurer is so clearly subject to the standard of liability of a fiduciary, that it requires no citation of authority to say so. The prevailing standard by far, is to measure a liability insurers' settlement decisions by whether it has acted as a fiduciary.
To put it another way, the law now is that a liability insurer must give at least equal consideration to the insured's interests as to its own in determining whether and how to settle the underlying claim against its insureds. This is the rule followed in States including:
1. Florida.
2. New York.
3. California.
4. New Mexico.
5. Oklahoma, and
6. Wisconsin, for 6 of many examples that have earned attention. See generally 1 Dennis J. Wall, Litigation and Prevention of Insurer Bad Faith ยงยง 3:31 - 3:35 (3d Edition 2011; 2012 Supplement West Publishing Company).
This fiduciary standard of liability is not necessarily satisfied, if it ever is, simply by asking whether the liability insurer's settlement decisions were "reasonable".
The goal of promoting workable standards of conduct in the settlement of cases by liability insurance companies, is not achieved if approval is given to including the costs of defending the claim as even a part of the reason to settle the claim or not to settle it. Further, the interests in avoiding the costs of defending the claim are almost always the interests of one or more primary carriers and they are not often the interests of a policyholder or its excess carriers.
The real weight to be given to considering the costs of defending the claim should be on the types of liability policies involved, specifically, on whether the defense expenses are within or outside of the policy limits, and what effects those policy provisions have on the liability insurance company's settlement conduct. Liability insurance policies are not all the same in how they treat the costs of defending the claim. It is a stretch to make the standard of extracontractual liability for a Liability Insurer deciding not to settle claims filed against its Insureds, or for the Liability Insurance Company's liability beyond its policy limits for deciding not to settle claims against its Insureds, depend on authorizing "reasonable" decisions to keep a lid on their 'costs of defense' as a permissible factor in deciding whether to settle claims against their Policyholders and other Insureds.
The cost of defending the claim against a Policyholder is certainly one factor which can and will be taken into account in the defense of claims. However, while the reality is that Liability Insurance Companies will consider the costs of defending the claim, the law does not now and should not in the future authorize Liability Insurance Companies to prefer their own interests in not spending money for the costs of defending the claim, against the interests of their Insureds in settling those claims simply because a decision not to pay lawyers and others is defensible as "reasonable" in some or all of the cases filed against the Insureds.
The interests in holding down defense costs usually belong exclusively to a Liability Insurance Company under standard Liability Insurance Policies now in use, and which have been in use for a long time. When claims are filed against Policyholders and other Insureds, it is ordinarily in their interests to settle those claims.
NEXT: PART TWO OF TWO.
Please Read The Disclaimer.
Comments