Insurers' Bad Faith Refusals

The Supreme Court of Georgia recently held in Trinity Outdoor, LLC v. Central Mut. Ins. Co., No. S09Q0605, (Ga. June 1, 2009) that an insured for which the insurer is providing a defense does not have a claim for an alleged bad faith failure to settle prior to the entry of an excess judgment.

The Case

The underlying action arose from the death of two individuals killed by a falling billboard. The billboard was owned by, and was being installed on, Trinity's property. Trinity had a $2 million general liability policy with Central Mutual Insurance Company.

The family of the deceased individuals filed suit against Trinity and the billboard's manufacturer, and Trinity cross-claimed against the manufacturer for contribution and indemnification. Trinity reported the accident to Central Mutual, which hired separate counsel for itself and for Trinity.

Although both sets of outside defense counsel agreed that the manufacturer was liable for an improperly installed bolt that had caused the billboard to fall, Trinity's counsel believed that the plaintiffs also had a viable premises liability claim against the insured. Accordingly, when the plaintiffs offered to settle with Trinity for an amount equal to the policy limits of $2 million, Trinity demanded that Central Mutual accept the settlement to avoid a potential verdict over policy limits. Central Mutual refused the settlement demand and moved for summary judgment on behalf of Trinity. The court then ordered the parties to mediate.

During mediation, the claimants demanded $14 million from all defendants. Central Mutual offered $200,000 on behalf of Trinity in response to a $1.37 million demand by the plaintiffs to Trinity alone. Ultimately, the litigation settled for $12 million, and without Central Mutual's consent, Trinity agreed to contribute $954,530. That amount represented the $200,000 previously offered by Central Mutual plus $754,530. Trinity then sought to recover the additional $754,530 from Central Mutual.

The court ruled in favor of Central Mutual, holding that it was not liable for the amount of Trinity's settlement within the policy limits, because it was providing Trinity with a defense. Moreover, the policy specifically barred Trinity from making unilateral settlements or voluntary payments to third parties without Central Mutual's permission.

Other States

The court's ruling is consistent with the law in other states. As recognized by the United States District Court for the Western District of Missouri, “courts in other jurisdictions squarely faced with a 'bad faith' failure to settle claims in which a judgment was entered or a settlement reached for an amount less than the policy limits have repeatedly held that an excess judgment or settlement is a prerequisite to the action.” Amoco Oil Co. v. Reliance Ins. Co., No. 96-0011-CV-W-6, 1998 WL 187336, at *5 (W.D. Mo. Apr. 14, 1998). See also Romstadt v. Allstate Ins. Co., 59 F.3d 608, 615 (6th Cir. 1995) (applying Ohio law); Mathies v. Blanchard, 959 So.2d 986, 988-89 (La. App. 2007); Safeco Ins. Co. v. Superior Court, 84 Cal.Rptr.2d 43, 46 (Cal. Ct. App. 1999).

The rule precluding bad faith claims prior to entry of a default judgment has been applied, not only where the insured brings the claim, but also where the bad faith claim has been assigned to the claimant as part of a settlement with the insured. The assignee's subsequent claim for bad faith usually is barred by the lack of an excess verdict. See Romstadt, 59 F.3d at 615; Gallina v. Commerce & Indus. Ins., 2008 WL 4491543, at *7-9 (M.D. Fla. Sept. 30, 2008); Ragas v. MGA Ins. Co., 1997 WL 79357, at *2-3 (E.D. La. Feb. 21, 1997); Calich v. Allstate Ins. Co., 2004 WL 626143, 2004-Ohio-1619 (Ohio Ct. App. Mar. 31, 2004); Safeco Ins. Co., 84 Cal.Rptr.2d at 46-47. See also Nat'l Union Fire Ins. Co. of Pittsburg, Pa. v. Cont'l Ill. Corp., 673 F.Supp. 267, 274-75 (N.D. Ill. 1987) (ruling that insureds had no bad faith claim to assign where settlement withthird-party plaintiff did not subject the insureds to any possible personal liability). Some courts disagree, however, at least where the settlement proposed by a third-party plaintiff greatly exceeds the limits of the policy. See Rupp v. Transcon. Ins. Co., 2008 WL 4951071, at *17 (D. Utah Nov. 17, 2008); Fireman's Fund Ins. Co. v. Sec. Ins. Co. of Hartford, 367 A.2d 864, 872 (N.J. 1976). In such cases, the courts have allowed an assignee of the
insured to maintain a bad faith action on the basis that an insurer's refusal to settle a case that potentially could subject the insured to extensive personal liability over the policy limits is tantamount to an insurer's refusal to defend. Still other courts have created a distinction between a pre-judgment settlement containing a release and one including a covenant not to execute a consent judgment, holding that a bad faith claim is actionable and assignable where the third-party plaintiff agrees to a covenant not to execute, but is not assignable following a release. Gainsco Ins. co. v. Amoco Prod. Co., 53 P.3d 1051, 1060-61 (Wyo. 2002). The rationale behind this result is that a covenant not to execute a consent judgment still results in a judgment against the insured that might later affect its ability to obtain credit.

Insureds Settling Unilaterally

Most courts hold that an insured may settle unilaterally and sue for bad faith failure to settle where the insurer refuses to provide a defense. Southern Guar. Ins. Co. v. Dowse, 605 S.E.2d 27, 28-29 (Ga. 2004); see also Romstadt, 59 F.3d at 613 (ruling that cases in which an insurer refused to defend its insured are inapposite to the question of whether an insured receiving a defense may settle and sue for bad faith); Coblentz v. Am. Sur. of N.Y., 416 F.2d 1059 (5th Cir. 1969) (applying Florida law). The courts' reasoning in such cases is that an insurer that refuses to defend its insured breaches the policy by exposing its insured to personal liability, and since the insurer has breached the policy, it thereby waives the “no settlement” clause. Accordingly, the insurer becomes bound by the amount of any settlement made in good faith.

Courts are split as to whether an insured may settle unilaterally and bring a bad faith claim where the insurer is defending under a reservation of rights. Some courts allow a bad faith claim to proceed on the grounds that the insurer's reservation of rights subjects the insured to a potential personal loss. See Specialty Surplus Ins. Co. v. Second Chance, Inc., 412 F. Supp. 2d 1152, 1165-66 (W.D. Wash. 2006); Patrons Oxford Ins. Co. v. Harris, 905 A.2d 819, 825-26 (Me. 2006); Safeway Ins. Co., Inc. v. Guerrero, 106 P.3d 1020, 1024 (Ariz. 2005); Taylor v. Safeco Ins. Co., 361 So.2d 743, 746-47 (Fla. 1st. Dist. Ct. App. 1978). In some instances, however, the insured may not proceed with a bad faith claim, unless it rejected the insurer's offer to defend under a reservation of rights. See Zurich Amer. Ins. Co. v. Frankel Enter., Inc., 509 F. Supp. 2d 1303, 1311-12 (S.D. Fla. 2007). Other courts have held simply that an insured may not settle with a third-party plaintiff and proceed with a bad faith claim where the insurer defends under a reservation of rights. Motiva Enter., LLC v. St. Paul Fire and Marine Ins. Co., 445 F.3d 381, 385 (5th Cir. 2006) (applying Texas law); TIG Ins. Co. v. Chapman and Chapman, P.C., 436 F. Supp. 2d 1047, 1054-55 (D.N.D. 2006); Fuller-Austin Insulation Co. v. Highlands Ins. Co., 38 Cal. Rptr. 3d 716, 735-36 (Cal. Ct. App. 2006).

Excess Judgment Required?

At least one court has ruled that an excess judgment is not required before an insured may maintain a bad faith claim pursuant to a liability policy under which the insurer does not provide a defense but, rather, funds defense costs as part of the policy's benefits. In N. Amer. Van Lines, Inc. v. Lexington Ins. Co., 678 So.2d 1325, 1332-33 (Fla. 4th Dist. Ct. App. 1996), the court held that the insured had an actionable bad faith claim against its primary and excess insurers, absent an excess judgment, because the insurers exposed the insured to possible personal liability by arbitrarily rejecting the settlement offers. In contrast, the insured is not exposed to liability under a standard liability policy until an excess judgment is entered.

These principles have been applied in other contexts. For example, in TIG Ins. Co. v. Professional Claims Svcs, Inc., 2009 WL 323279, at *5 (Cal. Ct. App. Feb. 10, 2009), and New Hampshire Indem. Co. v. Professional Claim Svcs, Inc., 2008 WL 5115084, at *6 (Cal. Ct. App. Dec. 5, 2008), courts in California held that an insurer's settlement of bad faith claims before entry of excess judgments barred breach of contract claims against the claims administrator handling the claims. Contra Lincoln Gen. Ins. Co. v. Access Claims Adm'rs, Inc., 596 F. Supp. 2d 1351, 1375 (E.D. Cal. 2009) (ruling that an insurer that settled a potential bad faith claim prior to an excess judgment may pursue a breach of contract action against a claims administrator).

Conclusion

In summary, the law continues to develop with respect to the circumstances under which an insured may short-circuit the underlying liability litigation and sue for bad faith. Various jurisdictions approach these issues differently and the inquiry often is fact-specific.

Lewis E. Hassett, a member of this newsletter's Board of Editors, is a partner in the Atlanta office of Morris, Manning & Martin, LLP, and is co-chair of the firm's Insurance and Reinsurance Group. His practice focuses on the litigation and arbitration of complex insurance and reinsurance matters, including coverage disputes, agency matters, product disputes, business torts and insurer insolvencies. Brian J. Levy is an associate in the firm's Insurance Litigation Group.

The Supreme Court of Georgia recently held in Trinity Outdoor, LLC v. Central Mut. Ins. Co., No. S09Q0605, (Ga. June 1, 2009) that an insured for which the insurer is providing a defense does not have a claim for an alleged bad faith failure to settle prior to the entry of an excess judgment.

The Case

The underlying action arose from the death of two individuals killed by a falling billboard. The billboard was owned by, and was being installed on, Trinity's property. Trinity had a $2 million general liability policy with Central Mutual Insurance Company.

The family of the deceased individuals filed suit against Trinity and the billboard's manufacturer, and Trinity cross-claimed against the manufacturer for contribution and indemnification. Trinity reported the accident to Central Mutual, which hired separate counsel for itself and for Trinity.

Although both sets of outside defense counsel agreed that the manufacturer was liable for an improperly installed bolt that had caused the billboard to fall, Trinity's counsel believed that the plaintiffs also had a viable premises liability claim against the insured. Accordingly, when the plaintiffs offered to settle with Trinity for an amount equal to the policy limits of $2 million, Trinity demanded that Central Mutual accept the settlement to avoid a potential verdict over policy limits. Central Mutual refused the settlement demand and moved for summary judgment on behalf of Trinity. The court then ordered the parties to mediate.

During mediation, the claimants demanded $14 million from all defendants. Central Mutual offered $200,000 on behalf of Trinity in response to a $1.37 million demand by the plaintiffs to Trinity alone. Ultimately, the litigation settled for $12 million, and without Central Mutual's consent, Trinity agreed to contribute $954,530. That amount represented the $200,000 previously offered by Central Mutual plus $754,530. Trinity then sought to recover the additional $754,530 from Central Mutual.

The court ruled in favor of Central Mutual, holding that it was not liable for the amount of Trinity's settlement within the policy limits, because it was providing Trinity with a defense. Moreover, the policy specifically barred Trinity from making unilateral settlements or voluntary payments to third parties without Central Mutual's permission.

Other States

The court's ruling is consistent with the law in other states. As recognized by the United States District Court for the Western District of Missouri, “courts in other jurisdictions squarely faced with a 'bad faith' failure to settle claims in which a judgment was entered or a settlement reached for an amount less than the policy limits have repeatedly held that an excess judgment or settlement is a prerequisite to the action.” Amoco Oil Co. v. Reliance Ins. Co., No. 96-0011-CV-W-6, 1998 WL 187336, at *5 (W.D. Mo. Apr. 14, 1998). See also Romstadt v. Allstate Ins. Co. , 59 F.3d 608, 615 (6th Cir. 1995) (applying Ohio law); Mathies v. Blanchard , 959 So.2d 986, 988-89 (La. App. 2007); Safeco Ins. Co. v. Superior Court , 84 Cal.Rptr.2d 43, 46 (Cal. Ct. App. 1999).

The rule precluding bad faith claims prior to entry of a default judgment has been applied, not only where the insured brings the claim, but also where the bad faith claim has been assigned to the claimant as part of a settlement with the insured. The assignee's subsequent claim for bad faith usually is barred by the lack of an excess verdict. See Romstadt, 59 F.3d at 615; Gallina v. Commerce & Indus. Ins., 2008 WL 4491543, at *7-9 (M.D. Fla. Sept. 30, 2008); Ragas v. MGA Ins. Co., 1997 WL 79357, at *2-3 (E.D. La. Feb. 21, 1997); Calich v. Allstate Ins. Co., 2004 WL 626143, 2004-Ohio-1619 (Ohio Ct. App. Mar. 31, 2004); Safeco Ins. Co., 84 Cal.Rptr.2d at 46-47. See also Nat'l Union Fire Ins. Co. of Pittsburg, Pa. v. Cont'l Ill. Corp. , 673 F.Supp. 267, 274-75 (N.D. Ill. 1987) (ruling that insureds had no bad faith claim to assign where settlement withthird-party plaintiff did not subject the insureds to any possible personal liability). Some courts disagree, however, at least where the settlement proposed by a third-party plaintiff greatly exceeds the limits of the policy. See Rupp v. Transcon. Ins. Co., 2008 WL 4951071, at *17 (D. Utah Nov. 17, 2008); Fireman's Fund Ins. Co. v. Sec. Ins. Co. of Hartford , 367 A.2d 864, 872 (N.J. 1976). In such cases, the courts have allowed an assignee of the
insured to maintain a bad faith action on the basis that an insurer's refusal to settle a case that potentially could subject the insured to extensive personal liability over the policy limits is tantamount to an insurer's refusal to defend. Still other courts have created a distinction between a pre-judgment settlement containing a release and one including a covenant not to execute a consent judgment, holding that a bad faith claim is actionable and assignable where the third-party plaintiff agrees to a covenant not to execute, but is not assignable following a release. Gainsco Ins. co. v. Amoco Prod. Co. , 53 P.3d 1051, 1060-61 (Wyo. 2002). The rationale behind this result is that a covenant not to execute a consent judgment still results in a judgment against the insured that might later affect its ability to obtain credit.

Insureds Settling Unilaterally

Most courts hold that an insured may settle unilaterally and sue for bad faith failure to settle where the insurer refuses to provide a defense. Southern Guar. Ins. Co. v. Dowse , 605 S.E.2d 27, 28-29 (Ga. 2004); s ee also Romstadt , 59 F.3d at 613 (ruling that cases in which an insurer refused to defend its insured are inapposite to the question of whether an insured receiving a defense may settle and sue for bad faith); Coblentz v. Am. Sur. of N.Y. , 416 F.2d 1059 (5th Cir. 1969) (applying Florida law). The courts' reasoning in such cases is that an insurer that refuses to defend its insured breaches the policy by exposing its insured to personal liability, and since the insurer has breached the policy, it thereby waives the “no settlement” clause. Accordingly, the insurer becomes bound by the amount of any settlement made in good faith.

Courts are split as to whether an insured may settle unilaterally and bring a bad faith claim where the insurer is defending under a reservation of rights. Some courts allow a bad faith claim to proceed on the grounds that the insurer's reservation of rights subjects the insured to a potential personal loss. See Specialty Surplus Ins. Co. v. Second Chance, Inc. , 412 F. Supp. 2d 1152, 1165-66 (W.D. Wash. 2006); Patrons Oxford Ins. Co. v. Harris , 905 A.2d 819, 825-26 (Me. 2006); Safeway Ins. Co., Inc. v. Guerrero , 106 P.3d 1020, 1024 (Ariz. 2005); Taylor v. Safeco Ins. Co. , 361 So.2d 743, 746-47 (Fla. 1st. Dist. Ct. App. 1978). In some instances, however, the insured may not proceed with a bad faith claim, unless it rejected the insurer's offer to defend under a reservation of rights. See Zurich Amer. Ins. Co. v. Frankel Enter., Inc. , 509 F. Supp. 2d 1303, 1311-12 (S.D. Fla. 2007). Other courts have held simply that an insured may not settle with a third-party plaintiff and proceed with a bad faith claim where the insurer defends under a reservation of rights. Motiva Enter., LLC v. St. Paul Fire and Marine Ins. Co. , 445 F.3d 381, 385 (5th Cir. 2006) (applying Texas law); TIG Ins. Co. v. Chapman and Chapman, P.C. , 436 F. Supp. 2d 1047, 1054-55 (D.N.D. 2006); Fuller-Austin Insulation Co. v. Highlands Ins. Co. , 38 Cal. Rptr. 3d 716, 735-36 (Cal. Ct. App. 2006).

Excess Judgment Required?

At least one court has ruled that an excess judgment is not required before an insured may maintain a bad faith claim pursuant to a liability policy under which the insurer does not provide a defense but, rather, funds defense costs as part of the policy's benefits. In N. Amer. Van Lines, Inc. v. Lexington Ins. Co. , 678 So.2d 1325, 1332-33 (Fla. 4th Dist. Ct. App. 1996), the court held that the insured had an actionable bad faith claim against its primary and excess insurers, absent an excess judgment, because the insurers exposed the insured to possible personal liability by arbitrarily rejecting the settlement offers. In contrast, the insured is not exposed to liability under a standard liability policy until an excess judgment is entered.

These principles have been applied in other contexts. For example, in TIG Ins. Co. v. Professional Claims Svcs, Inc., 2009 WL 323279, at *5 (Cal. Ct. App. Feb. 10, 2009), and New Hampshire Indem. Co. v. Professional Claim Svcs, Inc., 2008 WL 5115084, at *6 (Cal. Ct. App. Dec. 5, 2008), courts in California held that an insurer's settlement of bad faith claims before entry of excess judgments barred breach of contract claims against the claims administrator handling the claims. C ontra Lincoln Gen. Ins. Co. v. Access Claims Adm'rs, Inc. , 596 F. Supp. 2d 1351, 1375 (E.D. Cal. 2009) (ruling that an insurer that settled a potential bad faith claim prior to an excess judgment may pursue a breach of contract action against a claims administrator).

Conclusion

In summary, the law continues to develop with respect to the circumstances under which an insured may short-circuit the underlying liability litigation and sue for bad faith. Various jurisdictions approach these issues differently and the inquiry often is fact-specific.

Lewis E. Hassett, a member of this newsletter's Board of Editors, is a partner in the Atlanta office of Morris, Manning & Martin, LLP, and is co-chair of the firm's Insurance and Reinsurance Group. His practice focuses on the litigation and arbitration of complex insurance and reinsurance matters, including coverage disputes, agency matters, product disputes, business torts and insurer insolvencies. Brian J. Levy is an associate in the firm's Insurance Litigation Group.