THE CREATION AND EVOLUTION OF EXCESS EXPOSURE CLAIMS IN OREGON. From Radcliffe to Georgetown. By: Dean Heiling Portland, Oregon

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1 THE CREATION AND EVOLUTION OF EXCESS EXPOSURE CLAIMS IN OREGON From Radcliffe to Georgetown By: Dean Heiling Portland, Oregon In 1948, Ruth Radcliffe was driving her car in Klamath County when it veered into the oncoming lane and collided head-on with another car carrying four occupants, the Hodges family. Legal action against Mr. and Mrs. Radcliffe for damages for personal injury to the Hodges followed, and in the course of trial the Hodges offered to settle their claims for a total of $10,000. Franklin National Insurance Company, the liability carrier for Mr. and Mrs. Radcliffe chose not to respond to the offer, and the jury ultimately awarded damages, including $20,000 for Mrs. Hodges. Mr. and Mrs. Radcliffe had carried liability insurance with limits in the amount of $10,000 per person, so Franklin National paid that amount to Mrs. Hodges, leaving the Radcliffes stuck for the remaining $10,000. Mr. and Mrs. Radcliffe ultimately paid the deficiency out of their own funds and then, through the creativity of their lawyer and a lesson from court opinions in a couple other states, came up with a theory to hold Franklin National accountable to them for that deficiency. Out of this was born the first bad faith claim in Oregon, Radcliffe v. Franklin National Insurance Company of New York Or 1, 298 P2d 1002 (1956) 1

2 1. The creation of the bad faith claim. To begin, we consider excess exposure, that is, not having adequate insurance to cover your obligation. People buy liability insurance to pick up the tab if they negligently cause damage to someone. If the wrongdoer has adequate insurance to cover the damage, there is no problem. But what happens if the wrongdoer s liability policy limits are inadequate to cover the victim s damage? If the victim s losses are $100,000, but the wrongdoer s liability policy is only $50,000, there is excess exposure of $50,000. When there is excess exposure to the wrongdoer, may the insurance company gamble on the results of a trial? May the company escape accountability for excess exposure to its insured simply by arguing that the insured could have avoided the problem by buying more coverage in the first place? If so, the insurance company can simply say: The worst that will happen is we will have to pay the policy limits. But we could get lucky and end up with a judgment for less. What do we have to lose? It s our client s risk, not ours. Prior to 1956, there was no law in Oregon preventing an insurance company from doing just that. Other states had addressed the issue of whether a liability insurer that refused to settle a claim within the policy limits was accountable to its insured if the plaintiff was ultimately awarded judgment in excess of those limits. 2 Radcliffe was the 2 Maine: Rumford Falls Paper Co. v. Fidelity & Casualty Co., 92 Me. 574, 43 A. 503 (1899), Missouri: St. Joseph Transfer & Storage Co. v. Employers Indemnity Company, 224 Mo. App. 221, 23 S.W.2d 215 (1930), New Jersey: McDonald v. Royal Indemnity Insurance Co., 109 N.J.L. 308, 162 A. 620 (1932), New York: Auerbach v. Maryland Casualty Co., 236 N.Y. 247, 140 N.E. 577, 28 A.L.R (1923), Kentucky: Georgia Casualty Company v. Mann, 242 2

3 first case of its kind in Oregon, holding that an insurance company that puts its own interest above its insured client can be found in bad faith, and thereby be held liable for the entire judgment against its insured client, even if it exceeds the amount of the liability limits afforded under the policy. Radcliffe involved an action to recover the $10,000 that Mr. and Mrs. Radcliffe had to pay to Mrs. Hodges out of their own pocket. A minority of states approved of such actions when the insurance company acted in bad faith in failing to settle the underlying claim within the liability policy limits, so Mr. and Mrs. Radcliffe brought their action against Franklin National under the same theory. On an appeal of a judgment in the trial court dismissing the claim against Franklin National, Radcliffe reversed the trial court and held that the action was proper. The Supreme Court began by analyzing the insurance policy language that required Radcliffes to give all rights of defense of any claim to Franklin National. The policy gave the company the right to investigate, negotiate, and settle any claim or suit as may be deemed expedient by the company. The Radcliffes were required by the policy to cooperate with the company in all respects, and were prohibited from obligating Ky. 447, 46 S.W.2d 777 (1932), and Pennsylvania: Schmidt & Sons Brewing Co. v. Travelers Insurance Co., 244 Pa. 286, 90 A. 653, 52 L.R.A., N.S., 126 (1914), gave the insurer the absolute right to take the chance, leaving their clients to absorb the risk. New Hampshire: Cavanaugh Bros. v. General Accident Fire & Life assurance Corp., 79 N.H. 186, 106 A. 604 (1919) and Texas: Linkenhoger v. American Fidelity & Casualty Co., 152 Tex. 534, 260 S.W.2d 884 (1953) apparently stood alone in holding the insurance carrier to the standard of reasonable care, i.e., negligence, to protect its insured client from excess exposure. 3

4 the company to any costs associated with the claim. 3 These provisions in insurance policies, the court explained, placed the company in a superior position to furnish the protection to the insured. Thus the insurer, not the insured, assumed charge the moment an accident occurred. 4 Of historical importance in Radcliffe was the speculation, even during the Hodges v. Radcliffe trial, of what the jury s verdict would be. Negligence and damages were both strongly contested. During trial, the attorney for the Hodges family offered to settle all claims for a total of $10,000. The defense attorney for Radcliffes did not believe they were negligent, and he expected there might be a small verdict in favor of the plaintiffs based purely on sympathy, perhaps as high as $7,500 or $8,000. Franklin National did not respond to the offer because of its earlier evaluation. However, the company had not been to the accident scene, and the claims person was not aware that Mrs. Radcliffe s doctor had recently testified in his deposition that her injuries were permanent. 5 In the course of an extended analysis of decisions from other states, the court focused on the fact that the defense of the Hodges case against Radcliffes was exclusively in the hands of Franklin National. Having exclusive control of the defense of the claims put Franklin National in a fiduciary relationship with Radcliffes and required the company to consider Radcliffes financial interests, not just its own interests. On that Or at 7. 4 Id. at 8. 5 Id. at

5 basis, the court said: The minimum which is expected of an insurer is that it employ good faith when it disposes of settlement matters. 6 In discussing what constitutes good faith and bad faith, the court said: An insurance company must exercise good faith and act as if there were no policy limits applicable to the claim and as if the risk of loss was entirely its own. When the risk of an unfavorable result is out of proportion to a favorable outcome, bad faith is demonstrated. 7 The court quoted with favor from the New Hampshire case of Dumas v. Hartford Accident & Indemnity Co. 8 In settlement matters, an insurance company must be as quick to compromise and dispose of the claim as if the company itself were liable for any excess verdict. The court analyzed the facts in detail and determined that bad faith had been shown. Even though the policy did not require Franklin National to settle claims made against its insured clients, the court refused to construe the language so as to require an abuse of power before the company could be liable for the excess exposure. We think that an automobile owner who secures a policy of liability insurance believes that his protection goes beyond the rights suggested by the insurer. Keeton, in his aforementioned treatise (67 Harv. L. Rev. 1136) suggests that the controlling rule should balance the risks involved and thereby cause the insurer in settlement matters to behave as if it were liable for the entire judgment that may eventually be entered. There is manifest merit in that suggestion. Keeton s recommendation has found acceptance in decisions such as Dumas v. Hartford Accident & Indemnity Co., supra, 6 Id. at Id. at N.H. 484, 56 A.2d 57, 60 (1947). 5

6 which require the insurer to be as quick to compromise and dispose of the claim as if it itself were liable for any excess verdict. Plainly, an automobile owner who procures a policy of limited liability insurance understands that the company is in business and that unless it looks after its own interests it cannot expect to survive. The insurer, obviously, has a right to give heed to its own interests when it considers settlement offers, but when it does so it must give at least as much attention to those of the insured. The latter were intrusted to it for protection. When an accident occurs, followed by a claim asserted by the injured person, the common interests of the insured and the insurer are in jeopardy. Although the company, in dealing with the situation, has a right to consider its own interests, it has no right to sacrifice those of the insured. The decision made in such a situation must be an honest one, it must be made in good faith and with due consideration for the interests of the insured. 9 Having carved out a bad faith rule, the court considered the facts which it felt established Franklin National s liability under that standard. If Franklin National had been correct in its belief that Mrs. Radcliffe was not at fault in entering the oncoming lane, and that Mrs. Hodges would have a complete recovery from her injury, the company would not have been found in bad faith. But, by having failed to visit the accident scene, failed to discover that the Hodges had evidence that Mrs. Radcliffe was negligent, and failed to have any evidence to contradict the deposition testimony of Mrs. Hodges physician, it was bad faith for Franklin National to not accept the settlement offer by the Hodges family. The mere rejection of a settlement offer does not suffice to save the insurer harmless, nor is it sufficient to show that the insurer, in rejecting a settlement offer, had no evil purposes. Negative elements do not meet the 9 Id. at 47 6

7 demands of good faith. A decision by one who is ignorant of the controlling facts is worthless. Only a decision made by one who exercised due diligence in apprising himself of the material facts is entitled to respect as made in good faith. 10 The Oregon Supreme Court thus carved out a bad faith rule for liability insurers in Oregon. Yet, the Court ruled out the need to prove that the insurer had an evil purpose, and held that there was no need to consider the insurer s state of mind at all. Bad faith was the phrase, but something less appeared to be the standard. 2. The evolution of the excess exposure claim. Ten years after Radcliffe, the Oregon Supreme Court decided Kuzmanich v. United Fire and Casualty Company, 11 another bad faith claim against a liability insurance carrier for excess exposure from a personal injury claim. The issue in the personal injury claim was whether the insured person was driving. The claim was thoroughly investigated by the liability insurance company, and there was strong evidence that the insured person was not the driver. The ultimate judgment in the injury claim, however, was against the insured person and was for more than his policy limits. The excess exposure claim against the liability insurance company was brought under the theory that the insurance company was in bad faith, and the trial court found in favor of the company. On appeal, the supreme court affirmed the trial court because there was 10 Id. at Or 529, 410 P2d 812 (1966). 7

8 substantial evidence to sustain the trial court s judgment. Interestingly, the supreme court included the word negligence in its decision to uphold the trial court. It is the court s opinion there was sufficient substantial evidence to sustain the findings of the trial court to the effect that defendant was not negligent and did not exercise bad faith. The investigations made by defendant prior to trial appear to have been adequate and complete. Plaintiff s principal contention was that of bad faith. 12 Two years later the Oregon Supreme Court considered the case of Groce v. Fidelity General Insurance Company. 13 The underlying liability claim in Groce included an injury to one plaintiff and the death of another, and the liability insurance limits for the defendant driver were only $5,000 per person and $10,000 per accident. The adjuster stubbornly offered only $9,500 to settle the two claims, stating to his superiors, in this adjuster s experience, he has never paid a policy limit to date, and does not intend to start with the subject claim. 14 The court had no hesitation holding that the adjuster s arrogant refusal to offer the policy limits for such a worthy claim was bad faith. An important feature of Groce was that the insurance company ended up offering the full $10,000 in the course of the litigation of the liability claim, but the plaintiffs rejected the offer at that late date, and sought to see the litigation through to judgment and follow with a claim against the company for any excess exposure. 15 The stubborn Or at Or 296, 448 P2d 554 (1968) Or at Or at

9 adjuster missed his best opportunity to settle the claims for the liability policy limits, and that was sufficient for the court to hold the company liable for the excess exposure. 16 In 1975 the Oregon Supreme Court decided Eastham v. Oregon Automobile Insurance Company 17 another case brought under the theory of bad faith. The facts were more like those of Kuzmanich, where there was considerable evidence in defense of the underlying injury claim. Oregon Automobile Insurance failed to respond to an offer of settlement in the injury claim because it was more than double what would reasonably be expected from a jury verdict. The jury, according to the court, defied the odds and returned a verdict that exceeded the wildest evaluations of everyone and resulted in excess exposure to the insured. In the bad faith case, the insurance company showed that the most optimistic evaluation of the damages case was $10,000 below the amount of the liability policy limits. 18 The Court held that those facts did not establish bad faith. A comparison of the analysis in Radcliffe with the analysis in Eastham left uncertainty as to what constitutes bad faith. Interestingly, in Eastham the insured 16 A corollary issue in Groce was the claim for attorney fees under ORS , now ORS Fidelity General argued that the statute did not apply to the case because it was a tort claim rather than one for policy benefits. The court held that the statute was a remedial provision for claims involving insurance coverage, and held that attorney fees are recoverable in excess exposure claims against insurance companies. 252 Or at 310. That holding was followed in Northwest Marine Iron Works v. Western Casualty and Surety Company, 45 Or App 269, 608 P2d 199 (1980) Or 600, 540 P2d 364 (1975). 18 Id. at

10 offered three expert witnesses who testified that it was bad faith for the insurance company to fail to try to negotiate the claim, yet the court cast those opinions aside with only a passing comment that such opinions are worthless. 19 What, then, was the court s concept of bad faith, and how was that standard to be applied? The Ninth Circuit Federal Court of Appeals noted that the Oregon appellate courts equated bad faith with negligence. In Baton v. Transamerica Insurance Company and Cavalier Insurance Corporation, 20 the federal court quoted from Eastham that there is little difference between the concepts of good faith and due care in excess exposure claims. 21 The analysis and result of the federal court was squarely under the theory of negligence. Baton involved a motor vehicle negligence claim in which the negligent driver had $10,000 coverage with Cavalier Insurance, and his father, who owned the car he was driving, had a policy with Transamerica Insurance that afforded $50,000 in liability coverage. However, the Transamerica policy specifically excluded coverage for the son, the driver. The plaintiffs lawyer sent a letter to Transamerica demanding $110,000 or policy limits within ten days. Transamerica offered nothing, since there was no coverage under its policy. Cavalier received a copy of the demand letter within the tenday period, but did not interpret it as plaintiffs agreement to accept only $10,000 as 19 Ibid F2d 907 (1978) F2d at 911; Eastham, supra, 273 Or at

11 settlement in full. Cavalier eventually offered it s policy limits, and the offer was rejected by plaintiffs attorney. Suit was filed and an excess judgment was obtained. The federal court held that the demand for $110,000 or policy limits was vague and did not advise Cavalier that the plaintiffs claims could be settled for only $10,000, and the court did not believe that plaintiff would have been willing to settle the claims for $10,000 if Cavalier had offered it within the 10 day period. The Oregon courts have indicated their openness to excess judgments when the conduct of the insurance company clearly establishes a lack of concern for the interests of the insured, but we have found no Oregon case permitting an insurance company to be set up by carefully ambiguous demands coupled with sudden-death time limits. 22 The Oregon Court of Appeals had an opportunity to address a bad faith claim in 1979 with the case of Kriz v. Government Employees Insurance Company. 23 And followed the due care approach of Baton. GEICO had brought a declaratory action to determine the existence and amount of liability coverage for the defendant driver in the injury claim. The attorney for the plaintiff made an ambiguous demand for the policy limits, and GEICO advised him that a tender of the policy limits would have to await the outcome of the declaratory action. There was a verdict for the plaintiff in excess of GEICO s liability policy, and an excess exposure claim was then filed against GEICO F2d at 913. The court s reference to sudden-death time tables was not a criticism of ten-day demands. Rather, the court felt the plaintiff s counsel was, through hindsight, twisting the intent of plaintiffs demand to make it something other than it truly was. Ibid Or App 339, 600 P2d 496 (1979). 11

12 The trial court granted summary judgment in favor of GEICO, but the Court of Appeals reversed the trial court for the reason that there was substantial evidence to make a jury question of whether GEICO was liable for the excess exposure. Relying on Eastham and Radcliffe, the court of appeals stated: It is well established that an insurer may be liable to its insured for the excess of a judgment over the limits of a liability policy if the insurer has failed, negligently or in bad faith, to settle the claim against the insured. 24 * * * * * A jury could find that... had GEICO acted in good faith the claim would have been settled for the policy limit. 25 Then, in 1982, the Court of Appeals addressed the issue again in O Keefe v. Safeco Insurance Company of America 26 and spoke entirely in terms of negligence, with no suggestion of bad faith. In that case, Safeco was found to have been negligent in failing to adequately investigate and prepare the underlying injury claim against its insured. In deciding that there was sufficient evidence to hold Safeco liable for the excess exposure in the underlying claim, the court said: There was, therefore, adequate evidence of Company s negligence Or App at 347. Emphasis added Or App at 349. Emphasis added Or App 811, 639 P2d 1312 (1982). 12

13 Whether the negligence specified in the complaint could have caused the estate to pay more in settlement than would have been necessary is the principal question in this case. 27 With this history, and the emphasis seeming to evolve from bad faith to negligence, the Oregon Supreme Court considered Maine Bonding & Casualty Company v. Centennial Insurance Company. 28 The case involved a claim by an excess liability insurer against the primary liability insurer for failing to take reasonable efforts to settle a liability claim. The allegation was that the primary insurer who was in charge of defending the liability claim did not approach settlement judiciously because the settlement would have exceeded the amount of the primary carrier s coverage, thereby giving the primary carrier nothing to lose from an excess verdict. The court held that the primary insurer s duty to the excess carrier is the same as if it were a duty to the insured individual. The court then went on to apply the analyses of Radcliffe and Eastham and ultimately decided that concepts of good faith and bad faith were misnomers in excess exposure claims. The court seemed to back off its holding in Eastham. Where Eastham had absolved the insurance company from liability after the company neglected to try to settle a claim within the policy limits, the court cited Eastham for the rule that the insurance company must try to settle within the policy limits Or App at Or 514, 693 P2d 1296 (1985). 13

14 The duty to defend is independent of and not limited by the duty to pay. The duty to defend requires that the insurer exercise reasonable care to protect its insured's interests, in addition to its own. This obligation may require that the insurer negotiate with a view to settling the case within the policy limits. Eastham v. Oregon Auto Ins. Co., supra, 273 Or. at 608, 540 P.2d at 368. Due care may require that an insurer make inquiries to determine if settlement is possible within the policy limits. Of course, an insurer cannot be held liable for failure to settle within the policy limits when no reasonable opportunity to settle exists. 29 A liability insurer is not necessarily free from excess liability because the claimant made no offer to settle within the policy limits. Due care may require an insurer to institute settlement negotiations. The insurer's conduct in conducting settlement negotiations must be considered with reference to the context in which the failure or delay occurs. Eastham v. Oregon Auto Ins. Co., supra, 273 Or. at 608, 540 P.2d at Where Eastham was a reversal of a verdict in favor of the insured, with the court holding that the insurance company was not acting in bad faith by failing to engage in settlement negotiations, Main Bonding affirmed a jury verdict against the primary liability company because there was sufficient evidence for the jury to find that the case could have been settled if the company had entered into settlement negotiations. The shift in focus was from a theory of bad faith to a theory of negligence, and the court could not have been more clear. Although our previous decisions have referred to concepts of good faith, bad faith and due care in stating the duty, the insurer's duty to the insured comes down to this: In conducting the defense of a claim against an insured, including the investigation, negotiation, and litigation of the claim, the insurer must use such care as would have been used by an ordinarily prudent insurer with no policy limit applicable to the claim. The insurer is Or at Id. at

15 negligent in failing to settle, where an opportunity to settle exists, if in choosing not to settle it would be taking an unreasonable risk that is, a risk that would involve chances of unfavorable results out of reasonable proportion to the chances of favorable results. Stating the rule in terms of good faith or bad faith tends to inject an inappropriate subjective element the insurer's state of mind into the formula. The insurer's duty is best expressed by an objective test: Did the insurer exercise due care under the circumstances. 31 The trial court characterized Maine's case as weak. We agree. We nonetheless believe that there was sufficient evidence from which the jury could have found that Centennial's investigation, negotiation, or defense of the claim was inadequate. There is evidence from which the trier of fact could have found that had Centennial instituted settlement discussions, it would have learned that the case could have been settled for $227,000. The trier of fact could have found that the failure to do so was negligence. The evidence suggests that, with the passage of time, Hamilton became antagonistic by reason of the delay and lack of attention to the claim, suffered greater difficulty in running his business and came to insist upon a higher settlement figure than he would have if the claim had been handled more expeditiously. 32 The distinction between Eastham and Maine Bonding was discussed in Spray v. Continental Casualty Company 33. In Spray the Court of Appeals explained that the law had progressed from a standard of bad faith to a standard of due care under the circumstances, 34 and that the holding in Eastham was no longer a proper application of Or at Id at Or App 156, 739 P2d 40 (1987) Or App at

16 the law. The question is not whether defendant acted in good faith, but whether it acted reasonably. 35 However, in Eastham, the court was applying the pre-maine Bonding standard of bad faith. The question was whether there was evidence from which the jury could infer that the insurer acted in bad faith in failing to counteroffer. In Maine Bonding, the court clarified that the test is not one of subjective good faith or bad faith, but is an objective, ordinarily prudent insurer standard. Thus, the court s evaluation of the evidence of bad faith in Eastham provides little guidance for us here, where the facts and the standard by which they are evaluated are different. 36 Meanwhile, the Court of Appeals had followed the due care standard squarely in Bollam v. Fireman s Fund Insurance Company. 37 In a case of clear negligence of Bollam, its insured, and high damages to Ruhle, the victim, Fireman s Fund began paying Ruhle s medical expenses plus $400 per week, from a liability policy of $100,000. As the claim went on, Fireman s Fund advised Bollam to retain his own attorney to evaluate the claim. Thereafter, after about $48,000 had been paid to Ruhle, Fireman s Fund offered the balance of approximately $52,000 to him as full settlement. Ruhle rejected the offer, filed suit against Bollam, and was awarded judgment for $135,000. Bollam paid the deficiency and filed action against Fireman s Fund for that amount. Bollam said that Fireman s Fund was negligent in gradually depleting his $100,000 liability policy limits. His argument was that Fireman s Fund could have done Pr App at Or App at Or App 267, 709 P2d 1095 (1985). 16

17 a better job of maximizing his financial arsenal by offering Ruhle $100,000 in the beginning, rather than waiting and offering only $52,000 later. Fireman s Fund argued that its making of gradual payments to Ruhle was necessary in order to comply with ORS (1)(f) which requires insurers to try, in good faith, to promptly and equitable settle claims in which liability has become reasonably clear * * *. The court held that the insurer s statutory duties may be considered, but are not determinative, of whether the insurer is negligent. We think, however, that the existence of such a duty cannot, per se, serve as a defense to an allegation that an insurance company has negligently handled a claim. The fact that an insurance company may have a duty promptly and equitable to settle with an injured third party does not necessarily preclude the possibility that in doing so it has acted negligently toward its own insured. 38 The court noted that it was clear from the start that liability was established against Bollam and that Ruhle s damages likely exceeded the policy limits. Plaintiffs tried this case on a theory that defendant had a duty to attempt to settle the whole claim once damages were known to exceed policy limits and liability was clear. The negligence under that theory was in failing promptly to tender the limits and in stringing the claim out until too little was left to buy peace for the insured. * * * * That theory is, we think, viable and consistent with the policy of ORS (1)(f), imposing on the insurer an affirmative obligation to initiate settlement Or App at Or App at

18 In the course of this evolution of excess exposure claims came Stumpf v. Continental Casualty Co., 40 which held that an insurer may be vicariously liable for the negligence of counsel it hires to handle the defense of the insured. 41 In Stumpf, a physician brought an excess liability case against its insurer for negligent investigation, evaluation, and negotiation of a medical malpractice claim. The insurer evaluated a claim against its insured on the basis of evidence that was inadmissible, and was held liable for the excess exposure of its insured. Given CNA's contractual duty and the degree of control that it retained over [the insured's] defense, we apply what appears to be the rule in the majority of jurisdictions: An insurer may be vicariously liable for the actions of its agents, including counsel that it hires to defend its insured. 42 In 1992 the Oregon Supreme Court addressed the issue again in Georgetown Realty v. The Home Insurance Company, 43 and reiterated that the standard is negligence, not bad faith. The court referred to the case as an excess claim. rather than as a bad faith claim. 44 The court emphasized that the gravamen of the complaint Or App 302, 794 P2d 1228 (1990) 41 Stumpf also held that (1) the insured has no affirmative duties under the policy and therefore cannot be found comparatively negligent, Id at 309; (2) that the insured s right to damages will not be limited to the insured s assets, Id at ; and (3) that attorney fees were recoverable. Id at 314 and n. 10 and Or App at Or 97, 831 P2d 7 (1992) Or at 100, n

19 is that one party caused damage to the other by negligently performing its obligations under the contract. 45 [T]his court's prior cases have held that the pivotal question, in deciding whether one party to a contract may sue another party to the contract in tort for negligent performance of a term of the contract, is whether the allegedly negligent party is subject to a standard of care independent of the terms of the contract. This court has not previously answered that question in the present context. None of this court's prior cases concerning excess claims has expressly decided whether the liability insurer is subject to a standard of care that exists independent of the contract and without reference to the specific terms of the contract. We now reach the same conclusion with regard to liability insurers that this court reached in the cases concerning physicians, lawyers, architects, and others.... As in those cases, the relationship here is between contracting parties. When a liability insurer undertakes to defend, it agrees to provide legal representation and to stand in the shoes of the party that has been sued. The insured relinquishes control over the defense of the claim asserted. Its potential monetary liability is in the hands of the insurer. That kind of relationship carries with it a standard of care that exists independent of the contract and without reference to the specific terms of the contract. 46 The claim against a liability insurer for excess exposure is now, clearly, one of negligence. Bad faith, although still popular nomenclature, is a misnomer. The law remains, as first set out in Radcliffe, that the insurance company must use due diligence to ascertain the merits of a liability claim against its insured and take reasonable steps to protect its insured from excess exposure. Old notions of good faith may still apply as 45 Id. at 106 [Emphasis added.] 46 Id. at

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