... THE SETTLEMENT CONDUCT OF A LIABILITY INSURER 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 TWO OF TWO PARTS.
Yesterday's article focused on an unsubstantiated standard vs. the prevailing standard of extracontractual liability in a specific context. Yesterday's article, and this article which is the second of two parts begun here yesterday, focuses on Liability Insurance Companies and their settlement conduct with respect to claims against their commercial Insureds and noncommercial Insureds.
As noted, 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 in any case. 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.
The prevailing standard of extracontractual liability in this context, i.e., in the arena of Liability Insurers' settlement conduct concerning claims against any of their Insureds, is different. Courts have said in concrete cases, if you will, that it is so clearly established that the Liability Insurer's settlement conduct is subject to the standard of liability of a Fiduciary in all cases, that no citation of authority is required to establish that legal proposition.
The prevailing legal standard is thus to measure a Liability Insurance Company's settlement decisions by whether it has acted as a Fiduciary, i.e., whether the 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. 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).
The difference in the standards has the inherent capacity of deciding the outcomes of the cases. Which standard to apply is clearly a matter of interest to Policyholders and Insurance Companies and their Counsel alike.
In particular, the judicial system's 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. Take for example the recent case of Cincinnati Insurance Co. v. Amerisure Insurance Co., 2012 WL 4033724 (S.D. Ala. September 12, 2012), Download Cincinnati Ins. Co. v. Amerisure Ins. Co. (S.D. Ala. No. 11.0271, Order Filed September 12, 2012) PUBLIC ACCESS. Cincinnati Insurance "paid the sum of $168,842.06 in [defense] attorney's fees and expenses, as well as a $25,000 settlement payment" on behalf of a common Insured of Amerisure. The common Insured is a corporate General Contractor.
Cincinnati sued Amerisure to get all that money back, alleging legal theories of breach of contract and negligence, and seeking damages as equitable remedies under claims for contribution among insurers, unjust enrichment, and equitable subrogation. Cincinnati Insurance Co. v. Amerisure Insurance Co., 2012 WL 4033724 *1 (S.D. Ala. September 12, 2012). For reasons which need not be addressed here, Cincinnati lost.
Suppose, however, that the case had involved the General Contractor's Bad Faith claims against Cincinnati, the CGL carrier which expended $169,000.00 in defense of the underlying case against the Insured. Under the new but unfollowed "reasonableness" standard, Cincinnati would have been authorized to include the costs of defense in its settlement calculations. If Cincinnati had never settled that underlying case, and had the underlying case gone to an excess verdict and judgment above the Insured's policy limits, then it seems that the reasonableness standard would likely have insulated Cincinnati from a Bad Faith claim by the Insured General Contractor, even though in that hypothetical the Liability Insurance Company and clearly not the Insured would have caused the excess verdict and judgment. This is so because the above-summarized new and baseless "reasonableness" standard will inoculate Liability Insurance Companies which calculate the costs of defense in making settlment decisions.
In short, even though the Liability Insurance Company might have preferred its own interests to the settlement interests of its Insured in that scenario, it would have been immunized from extracontractual liability for failure to settle the claim against its Insured.
To say again as was said in yesterday's article as well, the cost of defending a 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 commercial and noncommercial 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.
Dennis Wall is a featured speaker at this year's National Forum on Bad Faith Litigation in Orlando, Florida on November 28 and 29, 2012. I am told that if you mention my name if you register to attend this Forum through September 28, 2012, you can receive a discount on registration. The American Conference Institute's website address is www.americanconference.com/badfaith.
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