Damned If You Settle and Damned If You Don’t
A mediator in Texas has a motto…A closed file is a happy file. The purpose of claim representatives and legal professionals is to effectively resolve disputes in a reasonable and cost efficient manner. Ordinarily, the anxiety level rises when a decision is made not to settle a case, but instead proceed to trial. This paper focuses on the conflicts of settlement that a liability insurance company might face. The discussion will involve both first party, third party and subrogation claims.
Is There a Duty to Settle?
In a third party liability context, there is ordinarily no duty on the part of an insurance company to settle. However, most states impose a duty to reasonably consider settlement when there is an unconditional demand that is within the policy liability limits. In other words, a liability insurance carrier may be held liable for any excess judgment if it unreasonably declines a settlement demand that is within policy limits.
While there is ordinarily no duty on the part of an insurance company to settle a subrogation claim, in a first party context, there is generally an affirmative duty on behalf of the insurance carrier to settle with the policyholder for the insured amount of loss. A failure to settle a first party property claim can form the basis of statutory and common law liability.
Moreover, there can be an affirmative duty to settle in the third party context as well. The question then arises as to whether an insurance company can be exposed to liability when it proceeds to settle a third party, first party or subrogation claim. If the insurance company settles, it generally wipes out the counter-claim. However, the policyholder might insist that a settlement demand not be accepted and instead force the liability insurance carrier to trial in hopes that there will be a no liability verdict on the direct action and a recovery on the counter-claim.
Professional liability claims are especially difficult because the professional reputation of the insured is at stake, so they will insist a settlement demand not be accepted. Anything short of a defense verdict harms the professional’s reputation in the community and affects his/her insurability in the future. Many medical liability policies contain a “consent to settle” clause that gives the insured the right to refuse a settlement demand and proceed to trial. Outside of medical liability policies, it is rare to see consent to settle clauses. The question arises as to whether the liability insurance carrier exposes itself to suit if it settles a professional liability claim without the consent of the policyholder.
Can the Insurance Carrier Insist that the Settlement Offer be Accepted?
Another interesting scenario arises when a claimant extends a reasonable offer to settle that is above the policy limits. Can the insurance carrier insist that the settlement be accepted and that the policyholder pay the excess amount? Some liability policies provide that the insurance carrier can, under these circumstances, tender its limits and then withdraw its defense.
A real dilemma arises if the policy does not give the insurance company the right to tender its limits and then withdraw its defense. The general rule is that the duty to defend is separate and independent from the duty to indemnify. Therefore, even if there is a small liability limit, an insurance company may end up spending more in defense than it has in liability exposure. Under that scenario, the question arises as to whether the insurance company can force a settlement that is in excess of the policy limits.
Subrogation cases present their own unique brand of misery. Often, there is a significant uninsured interest. When a settlement offer is made that is less than the total amount of the damages, a conflict will arise as to whether to accept the settlement proposal. The insurance company may wish to settle and the policyholder may insist upon going to trial in an effort to obtain a judgment for the entire amount of the damages, both insured and uninsured. Typically, the insured is entitled to reimbursement of his uninsured damages before any monies are distributed to the insurance company. However, significant disputes arise as to the amount of uninsured damages. This is especially true when there could be a recovery for intangible items such as mental anguish, pain and suffering, etc.
Disputes as to subrogation settlements can be resolved if, prior to filing a lawsuit, the insured and the company reach a “pro rata” agreement. Under a pro rata agreement, a ratio is agreed to that reflects the percentage of insured loss and the percentage of uninsured loss. Then, any recovery is divided accordingly. Of course, if the recovery is 100 percent of the claim, the insured and the insurance company will have a 100 percent recovery. However, if the recovery is less than the amount of the claim, the pro rata agreement will dictate the percentage that each party is entitled to.
The pro rata agreement should also specify how disagreements are handled as to whether to settle for less than the total amount of the claim. Of course, it is preferable that the process for making that decision is not structured so as to leave the possibility of a stalemate. With a pro rata agreement in place, the likelihood of disputes as to settlement of subrogation cases is greatly reduced.
Many clomid online
plaintiff attorneys believe that making an offer within policy limits forces the liability insurance carrier to either accept a demand that would otherwise be unreasonable to possible exposure that exceeds the policy limits. Many claim representatives also have this same impression.
The question arises as to whether there ever is a scenario where a liability insurance carrier can decline a policy limits settlement demand and not create exposure above the liability limits. Typically, an insurance company is exposed to excess liability limits if it unreasonably declines a demand that is within policy limits. Of course, this question never arises until a policy limit demand is rejected; the case goes to trial and there is a judgment in excess of the policy limits.
The following is a suggestion as to an analysis of reasonably evaluating a demand within policy limits
- The likelihood of a liability finding;
- An evaluation of damages claimed, including economic damages and intangible damages;
- The possibility/likelihood of contributions by co-defendants or responsible third parties;
- Other verdicts involving similar cases in the same jurisdiction; and
- Whether the insured believes that he/she was responsible for the claimed damages.
After this evaluation is conducted, we suggest that the evaluation be provided to the insured in order to receive his/her comments. The best result is if the insured directs the insurance company not to accept the settlement demand. Second best would be if the insured concurred in the decision not to accept the settlement demand. After trial, the company would have a defense predicated upon the reasonableness of its decision to decline the demand as well as the agreement/concurrence of the insured in that decision.
Of course, the situation becomes more difficult if the insured does not agree/concur with the decision to deny the demand. However, if the insured does not provide any basis for a reasonable expectation that exposure would exceed the policy limits, the insurance company still has a viable argument that its refusal to accept the settlement demand was reasonable.
Sometimes there can be disagreements among insurance companies as to whether to accept a settlement. These disagreements can arise whenever there are multiple liability insurance policies that cover the same occurrence. Also, disputes can arise among primary and excess liability carriers. The most difficult scenario is when there are multiple liability carriers involved in the same suit. This is complicated even further when there are different liability limits and different policy periods. The most rational solution is for all of the carriers to enter into a Joint Defense Agreement that, to the extent possible, sets forth how the claim will be defended and how decisions as to settlement will be handled. Joint Defense Agreements should also specify the attorney to defend the case and how defense costs will be allocated.
In circumstances involving primary and excess carriers, typically the primary carrier provides the defense and the excess carrier monitors the case. The challenge arises whenever there is a settlement demand that exceeds the primary limits, but which is within the excess limits. The primary carrier and the insured may wish to accept the demand and the excess carrier may wish to decline it. It is also conceivable that the excess carrier would like to accept the demand and the primary carrier and insured do not. Is it possible for the excess carrier to take over the case, accept the settlement and then sue the primary carrier and the insured? By the same token, when the primary carrier and the insured wish to accept a settlement, can the primary carrier and the insured agree to the settlement without the consent of the excess carrier?
Scenarios similar to the one presented by this paper occur many times in the litigation world. In the vast majority of those cases, all of the parties involved are in agreement as to the course of action to be taken in response to a last minute settlement offer. However, the conflict looms in the background and, presents a recipe for disaster for those cases where it boils to the surface. Hopefully this paper and presentation can help focus tension and begin the discussions on solutions.>
by Michael Johnston
Johnston Legal Group PC