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©2015-2016 by Dennis J. Wall, Esquire
Dennis J. Wall, Attorney at Law, A Professional Association
P.O. Box 195200
Winter Springs, Florida 32719-5200
www.lenderforceplacedinsurance.com
Member of the American Law Institute and of the ALI's Members Consultative Group on the Restatement Project drafting the Law of Liability Insurance. Author of numerous books and articles on insurance and bad faith law, including “Litigation and Prevention of Insurer Bad Faith" (Third Edition Thomson Reuters West, in Two Volumes, with 2016 Supplements in process).
*I updated the following copyrighted article for Insurance Claims and Bad Faith Law Blog, from a Response I submitted by invitation to the Rutgers University Law Review on December 30, 2015. ©2015-2016 by Dennis J. Wall. All rights reserved.
Kim Marrkand, Esquire's article on the RLLI's Section 24 "Duty to Make Reasonable Settlement Decisions" brings the refreshing perspective of a practicing lawyer to the subject. The title of Ms. Marrkand's article says it all so far as I am concerned, and I agree with her perspective entirely: "Duty to Settle: Why Proposed Sections 24 and 27 Have No Place In A Restatement of the Law of Liability Insurance." To her credit, Ms. Marrkand puts her article's text at the service of her article's title, starting with her observation that the RLLI's "duty to make settlement decisions" is known to practicing lawyers as the liability carrier's "duty to settle." She fleshes out her very welcome article with a fine sense of accuracy, except perhaps in one particular. There is so much good in her article that I hesitate to point out the inaccuracy, except that it is an important one.
In the course of critiquing the Restatement's treatment of situations where the claimant does not make a settlement demand, Ms. Marrkand goes off the rails a little with a suggestion that "[t]he argument that insurers have a duty to initiate settlement offers has been rejected by courts …."[6] Actually, judicial recognition of a duty to initiate settlement offers under certain circumstances even where the claimant has not made a settlement demand, is a well-documented majority view.
In a forthcoming article in Insurance Litigation Reporter,[7] I have provided the results of a forensic examination of every case I found in which the issue has arisen of whether a liability carrier either has an affirmative legal duty to initiate settlement negotiations in the absence of a settlement demand from the claimant, or in which the issue of extracontractual or "bad faith" liability to go to the jury even though the claimant has not made a settlement demand.
The results are clear. When the additional factors are also present in any case that the insured's liability is probable and that the damages likely to be recovered by the claimant are "great" in the sense that they exceed the liability insurance policy limit, 16 Courts are in favor of submitting the issue to a jury of whether a liability carrier should be held liable in any given case for "bad faith" on account of the carrier's failure to even initiate settlement negotiations, and even though the claimant did not make a settlement demand.
In these 16 cases, and they represent the decided majority view on the subject, the Courts have made clear that the issue of a liability carrier's extracontractual, "bad faith" liability would be a jury question under such circumstances even though the claimant never made a settlement demand. It is also important to the outcomes in these cases that the carrier must have had a reasonable opportunity to settle the underlying claim before the carrier can be exposed to bad faith liability.[8]
Three other cases were found apparently holding to the contrary, but these authorities are what may be described as "soft" on the issue, each for its own reasons.[9] Out of a total of 19 cases, then, 16 rather "hard" authorities support the idea of a liability carrier affirmatively initiating settlement negotiations even in the absence of a settlement demand from the claimant, while only the remaining 3 rather "soft" authorities would not support the idea.
In the context of this special issue of the Rutgers University Law Review devoted to the RLLI, Ms. Marrkand is not alone in her erroneous alignment of case law on the issue of a liability carrier's exposure to bad faith liability when a claimant does not make a settlement demand. She quickly accepted the notion in one case in a 5-to-4 decision[10] which treated the Courts' imposition of an affirmative legal duty to initiate settlement negotiations more or less as the equivalent of a summary judgment or a directed verdict determining the carrier's exposure when it is really a jury issue under the circumstances outlined above.
Ms. Marrkand's article, however, ultimately does not go any farther down this rabbit trail. To her credit, she addresses the gist of the settlement issue in her 28 pages, whereas the four professors collectively spent 200 pages in their descriptions of it. Ms. Marrkand's article focuses attention on the central question of the reason for existence of Section 24 in the RLLI: How does the four-factor test in Section 24, even when buttressed by its numerous supporting comments offered by the Reporters, improve upon the one-factor test employed by the vast majority of Courts called upon to determine the appropriate measure of bad faith liability for a liability carrier's failure to settle the underlying case against its insured, to wit:
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.[11]
This is the test which is most often employed by the Courts. To the degree that it is not the test employed in the Restatement -- and it pretty clearly is not the same test as things stand now -- the Restatement is not a Restatement of the law at all but, as Ms. Marrkand so eloquently suggests, it is instead an unauthorized revision of the law and a "Restatement" in name only.
Given the design and structure of Section 24, a possible solution for improvement probably will not lie in proposed edits or revisions here and there. Instead, as the author has suggested elsewhere,[12] one solution may be to add two new subsections to the existing four subsections of RLLI Section 24, in order to clarify the text and conform Section 24 more nearly to the prevailing law:
(5) Bad faith on the part of an insurance company is failing to settle a claim when, under all the circumstances, it could[13] and should have done so, had it acted fairly and honestly toward its insured and with at least equal consideration[14] for her, his, its, or their interests.
(6) The lack of a formal settlement demand is only one factor to be considered in determining bad faith. Where liability is clear, and injuries so serious that a judgment in excess of the policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations. Whether and how a liability insurer initiates settlement negotiations, if at all, depends on the facts of each particular case.
Please Read The Disclaimer. ©2016 by Dennis J. Wall, author of Litigation and Prevention of Insurer Bad Faith (3d ed. Thomson Reuters West in 2 Volumes, with 2015 Supplements). All rights reserved.
[1] Kim V. Marrkand, "Duty to Settle: Why Proposed Sections 24 and 27 Have No Place In a Restatement of the Law of Liability Insurance," 68 Rutgers U.L. Rev. 201 (2015).
[2] Kenneth S. Abraham, "The Liability Insurer's Duty to Settle Uncertain and Mixed Claims," 68 Rutgers U.L. Rev. 337 (2015).
[3] Bruce L. Hay, "A No-Fault Approach to the Duty to Settle," 68 Rutgers U.L. Rev. 321 (2015).
[4] Leo P. Martinez, "The Restatement of the Law of Liability Insurance and the Duty to Settle," 68 Rutgers U.L. Rev. 155 (2015).
[5] Jeffrey E. Thomas, "The Standard for Breach of a Liability Insurer's Duty to Make Reasonable Settlement Decisions: Exploring the Alternatives," 68 Rutgers U.L. Rev. 229 (2015).
[6] Kim V. Marrkand, "Duty to Settle: Why Proposed Sections 24 and 27 Have No Place In a Restatement of the Law of Liability Insurance," 68 Rutgers U.L. Rev. 201, 216 n.74 (2015).
[7] Dennis J. Wall, "The American Law Institute and Good Faith Settlement Duties of Liability Carriers: The Scope of a Duty to Initiate Settlement Negotiations, What the ALI Restatement of the Law of Liability Insurance Has to Say About It, and the ALI Reporters' Notes," 21 Ins. Lit. Rptr. 597 (Dec. 23, 2015). A copy of this article is accessible at one of the author's websites: www.lenderforceplacedinsurance.com.
[8] Id. One of these jurisdictions is Arizona. The article contains citations to two cases, Safeway Insurance Co. v. Botma and Fulton v. Woodford. The full citation of Fulton is Fulton v. Woodford, 26 Ariz. App. 17, 22, 545 P.2d 979, 984 (Ariz. Ct. App. Div. 1, Dep't B, 1976).
[9] Id.
[10] American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842 (Tex. 1994). Without stating or implying any unintended disrespect for either the person or the institution, neither the author of the opinion in that 5-to-4 case nor the court that rendered that decision have made their mark on the world by demonstrating superior legal scholarship.
In addition, the cited decision was rendered only after a previous decision to the contrary in the same case was withdrawn; this 5-to-4 opinion was substituted for it on rehearing. Texas later addressed this issue in a 5-2-2 decision which appears to place Texas among the three more or less "con" jurisdictions on this subject discussed in the text of the current article: Rocor Int'l, Inc. v. National U. Fire Ins. Co., 77 S.W.3d 253, 261-62 (Tex. 2002).
[11] 1 Dennis J. Wall "Litigation and Prevention of Insurer Bad Faith" § 3:1, 2015 Supp. p. 12 (3d ed. Thomson Reuters West).
[12] Dennis J. Wall, "The American Law Institute and Good Faith Settlement Duties of Liability Carriers," supra note 7.
[13] Explicitly inserting the concept that in order to be liable for "bad faith" in settlement, it is necessary for the trier of fact to find first that the liability carrier "could" have settled the case against the insured, addresses the issue of the liability carrier confronting a "reasonable opportunity to settle within policy limits" without taking sides from among the competing cases as to which party has the burden of proof on this issue.
[14] Expressly injecting the "at least equal consideration" wording into the "without policy limits" notion already expressed in Restatement Section 24 strengthens the section's position as a Restatement of the law and not as an expression of advocacy for what the law has never been, but what it might be in the future.
Please Read The Disclaimer. ©2016 by Dennis J. Wall. All rights reserved.
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