Author's Note: The original article republished here was encoded in a software program that just did not transfer well. Page numbers have been re-inserted by hand here, in a way that avoids breaking up paragraphs.
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3. Con
In my article, I noted cases from a total of three jurisdictions which I placed in the “Con” camp. Two jurisdictions should be firmly placed in that category, and the third is likely, I said:
a. Alaska, in a case in which the Alaska Supreme Court said that the presence of “a policy limits demand” in a case where “there is a substantial likelihood of an excess verdict” against the policyholder “places a duty on an insurer to tender maximum policy limits” and also that it requires the insurer to settle the claim, statements which together probably go beyond anything any other Court has ever said about the consequences of a settlement demand in such a case, Jackson v. American Equity Ins. Co., 90 P.3d 136, 142 (Alaska 2004) (emphasis added). Parenthetically, perhaps reflecting the lack of precedential value inherent in the broad statements which have just been quoted from the opinion in this case, this decision has only been cited by other Alaska courts;
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b. Perhaps Mississippi, in a Federal Circuit Court case, Hemphill v. State Farm Mut. Auto. Ins. Co., 805 F.3d 535, 542 (5th Cir. 2015), cert. denied, __ U.S. __, 136 S. Ct. 1715 (2016) (in this case, the Federal Fifth Circuit Court of Appeals ventured a guess that the Mississippi Supreme Court would not hold that the defendant liability insurer in the case at bar should have made a settlement offer earlier than it actually did; while the liability carrier in the Hemphill case actually made a settlement offer, the dispute was about whether it should have made the offer sooner than it did),
c Texas. As I noted earlier several times, “Texas addressed this issue seemingly head-on in its 5-2-2 decision in Rocor Int'l, Inc. v. National U. Fire Ins. Co., 77 S.W.3d 253, 261-62 (Tex. 2002).” Wall, “The American Law Institute and Good Faith Settlement Duties of Liability Carriers,” 37 Ins. Lit. Rptr. at 603 n.34.
and
d. Kentucky. To these three cases from three different States, I would now add a probable fourth case and State, Kentucky, because the Supreme Court of Kentucky wrote that “[a]n insurer is liable for a judgment against its insured in excess of the policy limits only if it refused in ‘bad faith’ to pay a settlement demand within its policy limits.” American Physicians Assur. Corp. v. Schmidt, 187 S.W.3d 313, 318 (Ky. 2006). However, that decision actually stands for the separate proposition that unless the liability carrier has a reasonable opportunity to settle within policy limits, it cannot be held liable for bad faith in settlement. In American Physicians, the policyholder controlled the settlement decisions under the policy and although the claimant “was willing to settle for the policy limits,” the policyholder refused to consent to settlement and so the liability carrier could not be held liable for bad faith in settlement. American Physicians Assurance Corp., 187 S.W.3d at 317 (emphasis added).
I have been invited to include two cases decided in the 1990’s in the “Con” column. That is, to include two cases for the ostensible reason that the Courts involved in those cases also take a contrary position on the proposition that there can be extracontractual exposure for a liability insurance company’s failure to initiate settlement negotiations in the absence of a settlement demand. Again, I appreciate the opportunity. This time, however, I must completely decline the opportunity. The reason is that in these cases the facts do not support that citation: Iowa, in Wierck v. Grinnell Mut. Reins. Co., 456 N.W.2d 191, 194 (Iowa 1990) (liability insurance company in that case did offer policy limits, even without a demand for a sum certain), and New York, in Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 454-55, 626 N.E.2d 24, 28, 605 N.Y.S.2d 208, 212 (1993) (policy limits demand was made in that case during insurance company's investigation of insureds' liability; no bad-faith-in-settlement claim could be established, the Court held, because it was not bad faith not to accept the demand while the carrier was still in the course of investigating whether its insured would likely be held liable at trial).
4. Submitting the lineup
The lineup of the Courts in these decided cases is 9 or perhaps 10 cases decided in as many Courts under the laws of just as many States, in which the Courts recognized that claims of bad faith in settlement alleged against liability carriers would ordinarily be allowed to go to the jury when the carriers involved did not initiate settlement negotiations and there was no settlement demand from the claimant within policy limits.
Four Courts in the United States take even arguably a contrary position.
That ratio is decidedly and clearly in favor of recognizing that claims of bad faith in settlement alleged against liability carriers are ordinarily allowed to go to the jury when the carriers involved did not initiate settlement negotiations and there was no settlement demand from the claimant within policy limits.
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5. The Conclusion Regarding Initiating
Clearly, the “majority view” in this slice of case law is that a settlement demand is not required and that a jury question was nonetheless presented in a case of alleged bad faith in settlement including whether a liability carrier should have initiated settlement negotiations to protect its insureds, particularly where the insured’s liability is probable and the claimant’s likely damages are great.
Still, I choose not to relitigate the issue of whether the Restatement should explicitly state this clear majority view. It is enough that the Restatement, as written, is supported by the clearly emerging majority view from all of the available case law on this issue.
III. THE REQUIREMENT OF A SETTLEMENT DEMAND, OR NOT, UNDER
RESTATEMENT SECTION 24 AND THE DECIDED CASES.
The same cases previously examined here, which support extracontractual liability when the liability carrier fails or refuses to initiate settlement negotiations in the absence of a demand for settlement within policy limits, necessarily also simultaneously support the view that a settlement demand is not required in order for extracontractual liability to attach. Since none of those cases, which I have listed in the “Pro” column, required a demand within policy limits and still recognized that the issue of extracontractual liability was a jury question in a bad-faith-in-settlement case which included the carrier’s failure to initiate settlement negotiations, the determinative fact in the liability carriers' extracontractual exposure was not the claimants' demand but the carriers' own settlement conduct. The proposed Restatement characterizes this conduct as a duty to make reasonable settlement decisions.
Not only would the Courts that decided all the cases which I have broken out into the “Pro” column let extracontractual claims go to the jury in the absence of any settlement demand, but so do many of the other Courts regardless of whether they are “Pro” or “Con,” and even including for this purpose those Courts which are just “Maybe.”
“To be clear, there should not be an absolute rule that an insurer can never be liable for failure to settle if the claimant never made a within-limits offer. Such arguments have sometimes been made by insurers, but have properly been rejected. Insurers have other duties regarding defense or settlement which, if breached, can subject them to liability for failure to settle.” William Barker, “Insurers Ought Not to be Required to Initiate Settlement Negotiations,” 38 Ins. Lit. Rptr. 77, 78 (March 3, 2016).
IV. CONCLUSION.
To be clear, it is proper to recognize that a liability carrier sometimes will have a duty to initiate settlement negotiations even when the claimant does not make a settlement demand, particularly but not only when the insured’s liability is probable and the claimant’s likely recoverable damages are greater than the liability policy limits. Whether and how the liability insurer fulfills that duty in any given case will ordinarily depend on all the facts including whether the carrier had a reasonable opportunity to settle within policy limits.
As the Courts in several of these cases have pointed out, the fact that in most cases claimants make settlement demands does not mean that a settlement demand is necessary before the liability carrier must act in good faith or bear the consequences. The risk of bad faith, extracontractual liability may exist in cases where there has been a demand within policy limits, but that risk can also be present in cases when there has been no such demand. In the end, the liability insurer’s risk of exposure to bad faith, extracontractual liability depends on whether its settlement conduct was reasonable under all the circumstances.
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