Mediation Coverage Lawyer as Captain of the Settlement

Transcription

1 Mediation Coverage Lawyer as Captain of the Settlement Jill B. Berkeley Seth D. Lamden Neal, Gerber & Eisenberg LLP 2 N La Salle St Chicago, IL (312) (312) (312) [fax] jberkeley@ngelaw.com slamden@ngelaw.com

2 Jill B. Berkeley, a partner with Neal, Gerber & Eisenberg LLP, in Chicago and chair of the firm s Insurance Policyholder Practice Group, has concentrated her insurance litigation practice on the representation of policyholders and claimants in coverage disputes involving all types of commercial and professional insurance. In 2012, Chambers USA reported that clients describe her as a breath of fresh air in litigation. Ms. Berkeley represents policyholders and claimants in insurance coverage disputes involving toxic torts and hazardous wastes, environmental pollution, construction, product liability, intellectual property, first-party property, business interruption, and excess liability matters. Seth D. Lamden is a partner with Neal, Gerber & Eisenberg LLP in Chicago and a member of the firm s Insurance Policyholder practice group. Mr. Lamden is an AV Preeminent-rated attorney with extensive experience representing policyholders in connection with coverage disputes arising out of a broad array of claims and losses, including toxic torts, environmental pollution, class actions, construction defects and delays, product liability, legal and medical malpractice, and first-party property losses.

3 Mediation Coverage Lawyer as Captain of the Settlement Table of Contents I. Introduction...43 II. Steps in the Process...43 III. Be Ready for the Insurer s Arguments Against Settlement...44 IV. Conclusion...51 Endnote...51 Mediation Coverage Lawyer as Captain of the Settlement Berkeley and Lamden 41

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5 Mediation Coverage Lawyer as Captain of the Settlement I. Introduction All too often, the insurance coverage lawyer is an afterthought in the process of settling complex, catastrophic claims, particularly in those cases in which the primary insurer defending the claim has not reserved rights. The players are familiar plaintiff s personal injury or class counsel, defense counsel retained by the primary insurer, and claims representatives for the primary and excess insurers. The periphery includes the policyholder s general counsel or risk manager and the excess insurers monitoring counsel. Why would anyone call a coverage lawyer? Mediation is a standard step in every case management playbook. What also should be standard, however, is to build in a process to establish the timing for mediation, the preparation for the mediation, and the strategy for securing a successful outcome. Unfortunately, none of the familiar players has the incentive to take charge of the process. Relying on the mediator, alone, no matter how skilled or experienced, is a recipe for disaster. The key to managing the settlement process and filling the gap in crucial pre-mediation communications among the plaintiff, the policyholder defendant, the primary and excess insurers and the mediator is to retain coverage counsel, sometimes designated as settlement counsel or special monitoring counsel. The plaintiff, the policyholder defendant, or the insurer can initiate the engagement. II. Steps in the Process 1. Communicate with defense counsel. Meet and work with defense counsel to understand what his/her prior evaluation has outlined in terms of liability and damages. Determine if the prior evaluation of liability and damages indicates an actual or potential conflict between the interests of the policyholder and the insurer. Create an alliance with defense counsel by delineating the distinct and complementary roles played by the defense lawyer and settlement counsel, explaining that the inclusion of settlement counsel means that the defense lawyer no longer has to be in the middle of the conflicting interests of the policyholder and insurer. Determine if adequate information concerning liability and damages has been provided to the insurers, especially excess insurers that may not be actively involved in the defense. 2. Communicate with plaintiff s counsel about making a settlement demand for less than remaining policy limits. Explain that laying the groundwork for a potential bad faith failure to settle action against the insurer may provide a compelling incentive for the insurer to settle a covered claim. This will require the plaintiff to make a written settlement demand that: (i) Explains why a potential jury award is reasonably likely to exceed available policy limits; (ii) Sets a reasonable deadline for a response so that the claim adjuster has sufficient time to evaluate the defense file and procure adequate settlement authority; (iii) Makes a demand for policy limits (subject to confirmation of amount of remaining limits); and Mediation Coverage Lawyer as Captain of the Settlement Berkeley and Lamden 43

6 (iv) Would provide a full release for the policyholder or sufficient consideration to support the amount of the payment. The worst result for plaintiff is that limits may be paid. Plaintiff must be willing to participate in mediation with neutral, in order to provide insurer with opportunity to explore potential to settle for less than policy limits. 3. Work with the defense attorney, the plaintiff s attorney, and the insurers to select the mediator. 4. Convince the policyholder that it must be willing to acknowledge there is a reasonable probability that damages will exceed policy limits and have it demand that the insurer(s) pay full policy limits, if necessary, to settle the claim. 5. Take charge of communicating with the insurers. (a) Provide the insurers with sufficient information regarding liability and damages to support the demand and an opinion to support potential for excess liability. (b) Plot out a timeline setting forth when information will be provided to insurers, when the insurers should be responding, and when the mediation will occur. 6. Understand what the insurers response to the plaintiff s demand will be prior to the mediation. 7. Share the information with the mediator in advance of the mediation. 8. Meet with the other defendants and their counsel to work out a strategy for making offers before and during the mediation. In some cases, not all these steps will be necessary. In other cases, the settlement counsel may have to come up with creative ideas for how to make an end run around other arguments. For instance, settlement negotiations may be complicated by multiple layers of policies that may have to be exhausted, one by one, before being able to dismiss the litigation in its entirety. The plaintiff may include demands that the policyholder offer non-insurance assets as part of a settlement. Whatever the issue, settlement counsel with a background in coverage litigation should have the experience to maneuver around the insurance issues. III. Be Ready for the Insurer s Arguments Against Settlement All too often, insurers will create obstacles to the mediation and settlement timing and process. Settlement counsel needs to be prepared to respond quickly to whatever issues are raised so that the negotiations and mediation remain on track. By no means exhaustive, the following are examples of typical insurer positions and bad outcomes for insurers who rely on these arguments. Excess Insurer: I have no exposure until the primary policy is exhausted by actual payment. In Schmitz v. Great American Assurance Company, 337 S.W.3d 700 (Mo. 2011), Christine Ewing died as a result of injuries she suffered when she fell from a portable rock climbing wall at a minor league baseball game. The climbing wall was owned and operated by Marcus Floyd, pursuant to a contract with Columbia Professional Baseball, LLC ( CPB ). Christine Ewing s parents brought a wrongful death action against Floyd and CPB. They settled with Floyd for $700,000, leaving CPB as the sole remaining defendant. Virginia Surety Company provided primary liability insurance coverage to CPB in the amount of $1 million, and Great American provided excess liability insurance to CPB in the amount of $4 million. After Floyd settled, CPB repeatedly contacted Virginia Surety and Great American requesting a defense for the wrongful death lawsuit, but neither insurer agreed to defend CPB. Virginia Surety subsequently denied coverage, stating the claim fell under an exclusion barring coverage for accidents involving 44 Insurance Coverage and Claims April 2013

7 amusement rides. Great American notified CPB that because Virginia Surety had denied coverage, Great American had no contractual obligation to provide excess coverage because its duty to indemnify arises only after Virginia Surety pays the full amount of its policy. CPB and plaintiffs entered into an agreement, authorized under Missouri law, whereby plaintiffs agreed to limit execution of any judgment against CPB to the proceeds available under the Virginia Surety and Great American insurance policies. The trial court conducted an evidentiary hearing and entered a wrongful death judgment in the amount of $4,580,076. The parents then brought an equitable garnishment action against Virginia Surety and Great American to enforce the wrongful death judgment against the insurers. In that action, the trial court held that the exclusion did not apply to a rock-climbing wall and, therefore, Virginia Surety was required to indemnify CPB for the wrongful death judgment. Virginia Surety paid $700,000 and the parents executed a partial satisfaction of judgment for the wrongful death judgment, but in the sum of $1 million the Virginia Surety policy limits - not the amount of the $700,000 settlement payment. The trial court further held that Virginia Surety s payment of less than the full amount of Virginia Surety s limits of liability coverage, in exchange for a full release of liability from any obligation to pay the remainder of its primary limits of liability coverage, did not constitute exhaustion as contemplated by the terms of the Great American insurance contract. Consequently, the trial court held Great American had no obligation to make any payment of excess liability insurance coverage to Ewing for the wrongful death judgment. On appeal, the Missouri Court of Appeals held that the Great American exhaustion clause was a condition precedent that had not been met, and thus Great American was not obligated to make any payments to appellants under its policy for the wrongful death judgment. The Supreme Court of Missouri reversed both courts and held that the excess insurance policy did not require the primary insurance policy to be exhausted in the form of a cash payment. Citing Handleman v. U.S. Fidelity & Guaranty Co., 18 S.W.2d 532, 534 (Mo. Ct. App. 1929), the court noted it has long been recognized that parties to an insurance contract are free to define what constitutes exhaustion of an underlying insurance policy for purposes of triggering the payment obligations of the excess carrier. Accordingly, the court examined the When Loss is Payable provision in the Great American policy, which stated: Coverage under this policy will not apply unless and until the Insured or the Insured s underlying insurance is obligated to pay the full amount of the Underlying Limits of Insurance. When the amount of loss has finally been determined, we will promptly pay on behalf of the insured the amount of loss falling within the terms of the policy. The court reasoned that this language obligated the insurer to promptly pay the amount of loss falling within the terms of the policy if: (1) the insured or the insured s underlying coverage is obligated to pay the full amount of its underlying limits of insurance; and (2) the amount of loss is finally determined. It found that the equitable garnishment court erred in finding that the primary policy was not exhausted, given the excess policy s promise to pay when the underlying insurance was obligated to pay its full limits. The court noted, [o]bligated to pay has a different meaning than has already paid. The court also rejected Great American s reliance on cases from other jurisdictions that have rejected settlements that stipulate exhaustion without paying the full underlying limits, including Comerica Inc. v. Zurich American Insurance Co., 498 F. Supp. 2d 1019 (E.D. Mich. 2007), Citigroup, Inc. v. National Union Fire Ins. Co., No. H , 2010 WL (S.D. Tex., May 28, 2010), and Trinity Homes LLC v. Ohio Cas. Ins. Mediation Coverage Lawyer as Captain of the Settlement Berkeley and Lamden 45

8 Co., No. 1:04 cv 1920 SEB DML, 2009 WL (S.D. Ind., Sept. 25, 2009), rev d 629 F.3d 653 (7th Cir. 2010). The court noted that each of these cases involved distinguishable policy language expressly requiring actual payment as a condition of exhaustion. Concluding that [c]ourts must interpret an insurance policy as written, not as the insurance company wishes it were written, the court held that the Great American policy was triggered because the policy did not expressly require exhaustion of the underlying limits by actual payment. Insurer: We do not have enough information. The court in Rhodes v. AIG Domestic Claims, Inc., 961 N.E.2d 1067 (Mass. 2012), held that an excess insurer was liable to its insured for statutory damages totaling double the amount of the judgment entered against the insured in the underlying action. The insurer made inadequate settlement offers, delayed mediation by stating that it needed additional discovery, and failed to make an initial settlement offer until a few weeks before trial after liability and damages in the underlying action had become reasonably clear. The court held that the insurer s improper settlement conduct constituted unfair claims settlement practices in violation of the Massachusetts Insurance Code, G.L. c. 93A, 9 and G.L. c. 176D, 3(9)(f). The underlying claim, which resulted in an $11.3 million judgment against the insured trucking company, arose out of a collision between a passenger car and one of the insured s trucks. The defendants filed an appeal of the judgment and, while the appeal was pending, the plaintiff sued the excess insurer for failing to effectuate a prompt, fair, and equitable settlement of its claim under G.L. c. 176D, 3(9)(f). In post-trial settlement negotiations, the parties eventually settled the negligence claim for $9 million. Agreeing with the trial court that the excess insurer had willfully and knowingly breached its duty to make prompt and sufficient settlement offers to the plaintiff once liability (including damages) had become reasonably clear, the Supreme Judicial Court held that the proper measure of damages under G.L. c. 93A, 9 and G.L. c. 176D, 3(9)(f), was a multiple (two or three times) of the amount of the judgment entered in favor of the plaintiff. Therefore, the court held that the excess insurer was liable to the underlying plaintiff for statutory damages of approximately $22 million. Insurer: We are not going to settle because we have a coverage defense. In Transportation Insurance Company v. Piedmont Construction Group, LLC, 686 S.E.2d 824 (Ga. Ct. App. 2009), a fire extensively damaged a building at a college while a contractor was performing renovation work in the building. A subcontractor soldering copper pipes in one of the rooms accidentally ignited a wooden wall stud, starting a fire that destroyed the roof. Transportation Insurance, the contractor s CGL insurer, denied both coverage and a defense based on a policy exclusion that provided the insurance did not apply to that particular part of real property on which the contractor or any subcontractors were performing operations, or that must be restored, repaired, or replaced because your work was incorrectly performed on it. Transportation argued that the phrase that particular part referred to the entire building that was being renovated. The contractor responded that the renovation was limited to less than one-fifth of the building, and that the damage was not due to defective workmanship resulting only in damage to the contractor s work, a contract claim, but an unforeseeable accident resulting in damage to other property, sounding in tort. The trial court rejected Transportation s argument that the business risk exclusions applied to the entire building, and entered summary judgment in the contractor s favor. Transportation appealed. In affirming the trial court s ruling, the appellate court agreed that the term that particular part in the exclusions referred not to the building as a whole, but only to the room and the plumbing on which the subcontractor was working prior to the fire starting. The damage to the rest of the building clearly resulted from an unpredictable business accident that created additional damage outside the original contractual 46 Insurance Coverage and Claims April 2013

9 scope. The appellate court reasoned that the contractor was not asking Transportation to guarantee the quality of work it already performed, but rather for damages caused by an accidental fire due to its subcontractor s negligence. Consequently, Transportation breached its contract with the contractor when it refused to indemnify it for the damages caused by the fire. The appellate court criticized Transportation for stubbornly relying on a single Georgia decision of Sapp v. State Farm & Cas. Co., 226 Ga. App. 200, 486 S.E.2d 71 (1997). In Sapp, the court held that business risk exclusion unambiguously excluded certain renovation work from coverage. However, all of the claimed damages related directly to the cost of repairing and replacing the alleged negligent work of the Sapp defendants. Unlike in Sapp, the damages in this case were not limited to repairing or replacing the work on which the subcontractor was working when it accidentally started the fire. By ignoring the obvious possibility that at least a portion of the building was covered by the policy notwithstanding the business risk exclusions, and relying on a misreading of a single Georgia decision while ignoring the substantial body of law in opposition, Transportation took the risk of not providing a defense and exposed itself to a bad faith claim. Because Transportation failed to set forth any defense to a determination of bad faith other than its meritless reliance on the business risk clauses of the policy, the appellate court concluded that the trial court s finding of bad faith as a matter of law was eminently justified. Insurer: We are going to control the defense, even though there is potential excess liability. In Transport Insurance Company, Inc. v Post Express Company, Inc., 138 F.3d 1189 (7th Cir. 1998), Frazier was injured while unloading cargo from a tractor-trailer owned by Post Express and operated by its employee, Fuller. Frazier sued his employer, Norfolk & Western Railway, under the Federal Employers Liability Act (FELA). The employer filed a third-party action against Post Express, which tendered the defense to its liability insurer, Transport Indemnity. Transport defended under a reservation of rights based on late notice. The jury in Frazier s FELA suit concluded that both Post Express and the railroad had been negligent. It set damages at $2.3 million, of which Post Express s share was 90 percent. Transport s policy limit was $1 million; Post Express was responsible for the remainder. Transport sought a declaratory judgment that Post Express must bear the full loss. Post Express counterclaimed and demanded that Transport cover the whole verdict. After a bench trial, the judge concluded that Post Express had satisfied the notice requirement in the policy, and a second jury trial began. The second jury concluded that Transport acted in bad faith when it defended Post Express against Frazier s claim and therefore it was required to satisfy the entire judgment. On post-trial motions, the judge ruled that an insurer with a fairly debatable defense to coverage cannot be responsible for bad-faith conduct of the defense in the underlying litigation. Both sides appealed. The court of appeals affirmed the jury s bad-faith finding, explaining that a rational jury could conclude that Transport gambled with its client s money. The court found that Transport adopted a trial strategy designed to minimize its own likely outlay. The court held the district court in error for applying the bad faith fairly debatable standard. Transport relied on Stevenson v. State Farm Fire & Cas. Co., 628 N.E.2d 810 (Ill. App. Ct. 1993), and Mowry v. Badger State Mut. Cas. Co., 385 N.W.2d 171 (Wis. 1986). Both cases involved insurers who, while attempting to determine their responsibility under their respective policies, bypassed an opportunity to settle on favorable terms. The court distinguished the cases because in both, the insured was represented by independent counsel, and neither case dealt with an insurer s strategy that shifted risk to the insured. Because Transport did not Mediation Coverage Lawyer as Captain of the Settlement Berkeley and Lamden 47

10 authorize Post Express to hire its own conflict-free lawyer and conduct its own defense, a fiduciary duty arose between Transport and Post Express. The court explained that if the insurer controls the defense, it must give the insured s exposure equal weight with its own. Insurer: We are only paying our share; other insurers must contribute. Although essentially an insurer-versus-insurer dispute, the decision in OneBeacon America Insurance Company v. American Motorists Insurance Company, No US App. LEXIS 9881 (6th Cir. May 17, 2012), illustrates the potential consequences faced by an insurer that sits on the sidelines during settlement negotiations in hopes that it will be entitled to settlement credits from early-settling insurers if it ultimately is held liable to the insured. In 1999, Goodrich filed a complaint in state court against several insurers, including OneBeacon, contending that the insurers were contractually obligated to indemnify Goodrich against claims by the federal government for soil and groundwater contamination at Goodrich s Calvert City, Kentucky, plant. Prior to the litigation, in 1995, Goodrich settled with American Motorists Insurance Company ( AMICO ), a primary insurer with which it had a $55 million policy. OneBeacon, an excess carrier that did not settle with Goodrich, had a policy that attached once AMICO s liability exceeded $20 million. A jury verdict was returned against OneBeacon and its co-defendant, Certain London Market Insurance Companies. OneBeacon received a set-off of $20 million to reflect its position as an excess insurer. Following the jury verdict, OneBeacon sought settlement credits to reflect the coverage amounts that Goodrich had already received from the settling insurers. The trial court decided, however, that the universe of claims that AMICO and other insurers settled via their agreements with Goodrich was not coextensive with the claims for which OneBeacon was found liable. The trial court noted that if OneBeacon thinks it is entitled to contribution from other insurers, let it proceed against them. OneBeacon did just that and brought an equitable contribution action AMICO, which was removed to federal court. The district court held that the equitable contribution action was an improper attempt at a second bite at the apple for OneBeacon and adopted the state trial court s logic that the jury award and AMICO s coverage were not one in the same. The district court determined that Ohio law was not clear as to whether a non-settling insurer could seek contribution from a settling insurer, but that OneBeacon failed to uphold its burden of persuasion. The district court granted AMICO s motion for summary judgment. On appeal, the Sixth Circuit held that a settlement with a policyholder can exhaust the settling insurer s policy, and that such exhaustion precludes a non-settling insurer from seeking equitable contribution from the settling insurer. As the court explained: a decision allowing OneBeacon to pursue equitable contribution from AMICO would not only fail to encourage settlements, it would actively discourage such settlements. An insurer would have no incentive to settle with a policyholder if it knew that it would be liable to another insurer down the road. And an insurer considering going to trial would be economically rational in doing so if the expected value of prevailing at all exceeds the expected cost of defending the lawsuit. Insurer: We will pay, but we are going to chase you for reimbursement. The court in United States Fidelity & Guarantee Company v. United States Sports Specialty Association, 270 P.3d 464 (Utah 2012), held that an insurer is not entitled to reimbursement for a settlement payment made on behalf of its insured unless the right to reimbursement is expressly stated in the policy. The court expressly rejected the law of those jurisdictions that allow reimbursement through an extra-contractual claim of unjust enrichment. The dispute arose under somewhat unusual circumstances, but reflects a common situation in which the insurer, having defended under a reservation of rights, offers to settle the claim against the 48 Insurance Coverage and Claims April 2013

11 insured while attempting to preserve its reservation of rights to deny that coverage and pursue coverage litigation against the insured to seek reimbursement. The underlying tort action arose out of injuries sustained by a seven-year old boy who was struck in the head with a baseball bat during an adult softball game sponsored by the United States Sports Specialty Association ( USSSA ). The boy s parents sued the USSSA, which was insured under a $2 million liability policy issued by USF&G, which assumed the defense of USSSA. The jury awarded roughly $6.1 million against USSSA. Initially, USF&G contended it was only liable up to its $2 million policy limit. USSSA, however, argued that USF&G should pay the entire judgment, alleging USF&G had conducted its defense in bad faith, as demonstrated by conflicts of interest, failure to communicate, refusal to accept settlement offers within policy limits, and other misconduct. Ultimately, USF&G paid the entire judgment under a unilateral reservation of rights. USSSA never agreed to USF&G s purported reservation of rights and refused to sign the settlement agreement. After the settlement, USF&G brought a lawsuit against USSSA to seek restitution of the amount of the settlement that exceeded the policy limits. In support of its argument that it was entitled to restitution of the amounts paid in excess of policy limits, USF&G argued that USSSA had been unjustly enriched, and asked the court to follow Blue Ridge Ins. Co. v. Jacobsen, 22 P.3d 313 (Cal. 2001), which held that an insurer may seek reimbursement from its insured for noncovered payments if: (1) the insurer timely and expressly informed its insured that the insurer is reserving its rights; (2) the insurer notifies the insured of its intent to make the potentially noncovered payment; and (3) the insurer expressly offers the insured the opportunity to assume its own defense of the underlying action if it objects to the payment. The USSSA court declined to follow Blue Ridge and, instead, followed Excess Underwriters at Lloyd s, London v. Frank s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42 (Tex. 2008). The Frank s Casing court refused to permit an insurer to seek reimbursement pursuant to the equitable theory of unjust enrichment on the basis that such equitable remedies generally are inapplicable when the dispute arises out of an express contractual agreement. As the USSSA court explained, [t]here can be no extracontractual right to restitution between the insurer and its insured, and only the express terms of a policy create an enforceable right to reimbursement. A number of other courts have held that an insurer is not entitled to reimbursement of defense costs and/or indemnity payments absent a policy provision expressly authorizing reimbursement or pursuant to a written agreement from the insured. See, e.g., Perdue Farms Inc. v. Travelers Cas. & Sur. Co., 448 F.3d 252 (4th Cir. 2006); Liberty Mut. Ins. Co. v. FAG Bearings Corp., 153 F.3d 919 (8th Cir. 1998); Utica Mut. Ins. Co. v. Rohm & Haas Co., 683 F. Supp. 2d 368 (E.D. Pa. 2010); Am. & Foreign Ins. Co. v. Jerry s Sport Ctr., Inc., 2 A.3d 526 (Pa. 2010); Shoshone First Bank v. Pac. Employers Co., 2 P.3d 510 (Wyo. 2000); and Gen. Agents Ins. Co. v. Midwest Sporting Goods Co., 828 N.E.2d 1092 (Ill. 2005). Insurer: We are not settling, and we re not telling you you re at risk. In R.C. Wegman Const. Co. v. Admiral Ins. Co., 629 F.3d 724 (7th Cir. 2011), the court found that an insurer that controlled the defense, but failed to notify the insured of the potential for damages to be awarded in excess of the policy limit, was liable for the entire excess judgment. The court found that the insurer had a conflict of interest due to the settlement demand exceeding the policy limits. Budrik was injured in a fall at a construction site managed by Wegman Construction Company, and sued Wegman, along with other potentially liable entities, for negligence. The case went to trial, Budrik prevailed, and a judgment for a little more than $2 million was entered against Wegman. Admiral had issued a liability insurance policy to Budrik s employer, which named Wegman as an additional insured, with a single occurrence limit of $1 million. Admiral accepted Wegman s defense and controlled the defense of the underlying personal injury suit. Mediation Coverage Lawyer as Captain of the Settlement Berkeley and Lamden 49

12 Through its defense of the underlying suit, Admiral knew that Budrik had sustained serious injuries, with long-term pain and suffering, permanent physical disabilities, and substantial loss of income and medical expenses. Admiral also knew Budrik made a settlement demand of almost $6 million, presenting a realistic possibility of a potential loss to Wegman in excess of Admiral s $1 million policy limit. Admiral failed to warn Wegman of this possibility, but if it had, then Wegman could have given notice under an excess liability insurance policy with limits of $10 million. Wegman did not realize that the Budrik suit presented a realistic possibility of a loss exceeding Admiral s policy limit until a few days before the trial. Wegman then notified its excess insurer, but the excess insurer refused coverage on the ground late notice. Wegman contended that Admiral breached the implied contractual duty of good faith that insurance companies owe their insureds, by failing to inform it promptly of the potential for damages in excess of the $1 million policy limit. Admiral argued that it had no conflict of interest concerning defense or settlement of the suit or duty to notify the insured of a potential conflict until settlement negotiations began or the insured demanded that it try to settle the case. On appeal, the court identified the fundamental issue as the emergence of a potential conflict of interest between insurer and insured in the midst of a suit in which the insured is represented by a lawyer procured and paid for by the insurer. When Admiral learned from its counsel of the extent of Budrik s injuries and the potential for a judgment in excess of policy limits, a conflict arose between the interests of Admiral and Wegman, such that Admiral s failure to inform Wegman and proceeding to trial with the hope of avoiding liability but risk of an excess judgment amounted to gambling with an insured s money and a breach of fiduciary duty. (Citing Cramer v. Ins. Exchange Agency, 174 Ill. 2d 513, 221 Ill.Dec. 473, 675 N.E.2d 897, 903 (1996)). The court reasoned that if Wegman had hired a new lawyer upon being promptly informed of the conflict back in May 2005, that lawyer would have tried to negotiate a settlement with Budrik that would not exceed the policy limit; and if the settlement was reasonable given the risk of an excess judgment, Admiral would have been obligated to pay under Myoda Computer Center, Inc. v. American Family Mutual Ins. Co., 909 N.E.2d 214, (Ill. App. Ct. 2009). Moreover, since Wegman had excess insurance, notification of the risk of an excess judgment would have enabled it to notify its excess insurer promptly. The court also cited its earlier holding in Twin City Fire Ins. Co. v. Country Mutual Ins. Co., 23 F.3d 1175, 1179 (7th Cir. 1994) (Illinois law), noting that a correlative to the standard provision that authorizes a liability insurer to control the defense of claims is the duty not to gamble with the insured s money by forgoing reasonable opportunities to settle a claim on terms that will protect the insured against an excess judgment. The Twin City decision reasoned that if not for this implied duty, the insurance company would be tempted to take cases to trial that could be settled at or near the policy limit, placing the policyholder in a Heads I win, tails you lose, position. If the policyholder lost at trial, the insurance company would be no worse off than if it settled. In either case, it would have to pay the policy limit. On the other hand, if the policyholder won, the insurance company would have saved the limit. Insurer: We are not settling until there s a demand. The court in Yan Fang Du v. Allstate Insurance Co., 681 F.3d 1118 (9th Cir. 2012), 1 held that an insurer s implied covenant of good faith and fair dealing imposes a duty to attempt to settle an underlying action when the liability of its insured has become reasonably clear, even where the underlying claimant has not made a settlement demand. The appellate court held that although the particular facts before it did not support a finding of bad faith, the trial court erred when it rejected a proposed jury instruction stating that in determining whether the insurer acted in bad faith, the jury could consider whether the defendant did not attempt in good faith to reach a prompt, fair and equitable settlement Insurance Coverage and Claims April 2013

13 Prior to the Yan Fang Du decision, California courts had not directly addressed the issue of whether an insurer can face bad faith liability for failing to initiate settlement negotiations before the underlying claimant has made a settlement demand within policy limits. However, California courts and a majority of courts across the country have held that an insurer is liable for the amount of a judgment or settlement against its insured in excess of policy limits if the insurer, in bad faith, refuses to accept a settlement demand made by an underlying claimant for an amount less than the remaining policy limits if, at the time the demand is made, there is a reasonable probability that the insured could be held liable at trial for damages in excess of the policy limits. The Yan Fang Du holding is consistent with this rule, which is based on an insurer s obligation to treat the interests of its insured equal to or greater than its own interests deciding whether to settle. The Yan Fang Du decision also is consistent with the nature of the protection from liability provided by the duty to defend itself. Given that the sole purpose of the duty to defend is to minimize or eliminate liability, the duty to timely negotiate a settlement when liability is clear is an integral component of the duty to defend. See, e.g., Swedish American Hospital Association of Rockford v. Illinois State Medical Inter-Insurance Exchange, 916 N.E.2d 80 (Ill. App. Ct. 2009) (observing, the good-faith duty to settle is... an extension of the duty to defend ). It is reasonable for an insured that purchases litigation insurance to expect that its insurer will take all measures to protect it from liability, including effectuating settlements of claims. Moreover, imposing an obligation on an insurer to initiate settlement negotiations when liability is reasonably clear addresses the concern that insurers have much less of an incentive to settle claims than their insureds, even when liability is clear, due to the substantially disparate financial impacts that the failure to negotiate a settlement could have on an insurer and insured. Liability that exceeds policy limits could drive an insured out of business. A liability insurer s business model, on the other hand, expressly contemplates absorbing judgments. As one court explained: [I]t is more important to an individual, who is only a casual, sporadic, and infrequent litigant, whether he wins or loses a lawsuit which may eat up his life s savings than it is to a professional litigant, such as an insurance company, which is in the business of litigation, collects premiums and sets up reserves for the purpose of paying verdicts, and can set off against each other the lean and fat verdicts, so that the wins and losses average out over the long pull. Ripepi v. American Insurance Companies, 234 F. Supp. 156, (W.D. Penn. 1964). IV. Conclusion When defendants assume that their insurers will protect them in catastrophic cases, they are often shocked when faced with potential excess or uninsured exposure. In these situations, defense lawyers are often ill-equipped to navigate the conflict between the policyholder and its insurers. The policyholder coverage lawyer can offer a unique perspective and important insights into how to maneuver the case to a successful settlement. Getting the coverage lawyer involved early, embedding the coverage lawyer into the defense team, and permitting the coverage lawyer to handle the communications with the insurers and the plaintiff attorneys, will often be the key to guarantee that the mediation will reach an amicable resolution. Endnote 1 Opinion Amended and Superseded on Denial of Rehearing en banc by Yan Fang Du v. Allstate Ins. Co., 697 F.3d 753 (9th Cir.(Cal.) Oct 05, 2012). The court omitted its discussion of the insurer s duty to settle in its amended opinion after holding that the district court did not abuse its discretion in ruling there was no factual foundation for the insured s proposed jury instruction regarding the insurer s duty to settle. Mediation Coverage Lawyer as Captain of the Settlement Berkeley and Lamden 51

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