Bad Faith Failure to Settle and the Obligations of Excess Carriers
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I wanted to return for a moment to a decision from the Massachusetts Supreme Judicial Court from earlier this month, Allmerica Financial Corporation v. Certain Underwriters at Lloyds' London, in which the court held that an excess carrier that had issued a follow form policy to an insured was not bound by or required to follow the settlement decisions of the insured's primary carrier, to whose policy the excess carrier's policy followed form. For those of you who may not be familiar with follow form policies, they are excess policies that incorporate - or borrow or "follow form" to - the same terms and exclusions as are contained in the primary policy issued to the mutual insured of both the excess carrier and the primary carrier. There's nothing very surprising in this holding, and anyone knowledgeable about the practices of the insurance industry since the time of, oh, say the end of the civil war, would know that excess carriers who have issued following form policies do not abdicate to the primary insurer the right to decide whether to spend the excess carrier's money as part of a settlement. So nothing too surprising in the court's opinion, to that extent. But what might be surprising to some or interesting to others is the fact that, while the law may well be that excess carriers are not bound by the settlement decisions of underlying primary carriers, they may well be exposed to significant bad faith liability, in particular under Massachusetts' unfair trade practices statute, if they refuse to join in on such a settlement. As a general rule in Massachusetts, by statute insurers are obligated to agree to a reasonable settlement of a claim and, by statute, can be hit with multiple damage awards if they fail to do so. Now, think about it, and play out the scenario in which the primary carrier elects to settle, even if the amount will exceed the limits of the primary policy and require some payment by the excess carrier. Presumably, the primary carrier is doing so because settlement on those terms is reasonable. Well then, what about the excess carrier? If it refuses to go along, has it committed a breach of the obligation to reach a reasonable settlement by refusing to participate in the settlement reached by the primary carrier, which was premised on the participation of the excess carrier in the settlement?
There are a lot of ins and outs to this, and I would have to write a full blown law review article here to address them all. But for now, my point is only this. It is one thing for the state's highest court to say that an excess carrier is not obligated by the terms of a follow form policy to join in a settlement reached by the primary carrier, but it is an entirely different question whether other sources of legal obligation, such as the state's unfair trade practices act, impose an obligation to the contrary. I would argue that they don't and shouldn't, but outside of the digital confines of this blog, I certainly don't get the last word on this subject.
It should be noted, however, that the Supreme Judicial Court did nod at this issue in its opinion, and in so doing suggested both that excess carriers have a great deal of leeway in deciding whether to settle a case where the loss will be in excess of the primary policy's limits and that it should not be easy to show that an excess carrier committed bad faith by declining to participate in an arguably reasonable settlement to which the primary carrier was willing to commit. The Court, in a footnote, explained that the question of the excess carrier's bad faith obligations was not at issue, but cited Hartford Casualty Insurance Company v. New Hampshire Insurance Company, a 1994 decision, as reflecting current Massachusetts law on the duty an excess carrier “owes to its insured not to act negligently in refusing to settle a case.” Indeed, the Court then went one step further and, in a different footnote, expressly declared that the Court’s conclusion in Allmerica with regard to the follow form obligations of excess carriers with regard to settlements “should not be construed to limit the settlement responsibilities of insurers articulated in” Hartford Casualty.
The Hartford Casualty case set forth a very high standard for imposing bad faith liability on a carrier that fails to settle a case, finding that there is only a bad faith failure to settle if no reasonable insurer at all would have failed to settle the case on the terms presented to it. That's a pretty high standard. I would argue, given the Supreme Judicial Court's deliberate citation of that case in two footnotes in a case, Allmerica, that didn't require the Court to even address issues of bad faith failure to settle, that the Court was reinforcing that bad faith failure to settle claims can only be maintained against excess carriers - even ones that issued follow form policies and even where the primary carrier wants to settle - if the very high bar set forth in the 1994 Hartford Casualty case is met.
Bad Faith Failure to Settle? Maybe, Maybe Not.
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Well, this is an interesting report, and though I am not quite sure exactly what to make of it, it falls within the general rubric of this blog. As Robert Ambrogi sums the reporting and blogging on this story up here, a law firm has been hit with an eighteen million dollar malpractice verdict based on the failure of a health plan; the amount of the verdict is premised on the amount of unpaid claims outstanding under the plan. Of interest to me is the side carnival, which is the defendant law firm apparently claiming that its professional liability insurer committed bad faith by failing to settle the claim within the one million dollar limits of the firm's professional liability insurance. Anytime anyone suffers a verdict in excess of their insurance coverage, it is reasonable to look first to whether the insurer should have seen that coming and settled the case before a verdict could be taken on the case that would expose the insured to the possibility of having to pay damages greater than the amount of the existent insurance coverage. But though the law on whether an insurer can be liable for bad faith failure to settle within the policy limits under such a scenario varies from jurisdiction to jurisdiction, there are some questions that always have to be answered to consider whether the insurer should have settled the case and avoided the risk of such an excess judgment. These include whether the insurer should have seen that the case was worth the policy limits in settlement, or should have foreseen the risk of a judgment exceeding the policy limits if the case was tried to a verdict.
Beyond that, in a case such as this one where presumably the hard numbers of the loss were always obvious and so you could always know that there was a risk a verdict would exceed the insurance coverage, is that enough to require the insurer to settle the action? Probably not, since in deciding whether to settle the action or instead risk an excess verdict in that situation, one normally still has to consider how likely the case is to end up with such a large verdict. For instance, should the law really require an insurer to settle, rather than allow a trial, just because the claimed damages are sky high, if the likelihood of those damages being recovered is minimal? The likelihood of losing or winning at trial obviously always factors into the settlement negotiations of any experienced lawyer or other negotiator.
And for that matter, there is the question of why the case did not settle before a verdict came in. Was it because the plaintiff's demands were too high, or was it instead because the insurer wouldn't respond to an appropriate demand? And what role did the insured play in the matter? Did the insured always press for settlement within the limits of the coverage, and work towards it, or was a settlement within the policy limits just something the insured requested in a token manner prior to the verdict, so as to place itself in a position to sue the insurer if things went south at trial?
There are more questions in these types of cases than one can shake a stick at, and the fun of such cases is sorting out the answers.