In the world of insurance, a policy-limits demand triggers a checklist of tasks for both defense counsel and the insurance company providing the defense to a policyholder. Notify the policyholder of a policy-limits demand, check. Assess the reasonableness of the demand and the likelihood of a judgment in excess of the policy limits, check. Discuss with the policyholder the potential for a judgment in excess of the policy limits and what that judgment means for the policyholder, check. Weigh the insurance company’s exposure should the policy-limits demand be rejected and an excess judgment occur, check. Obtain the consent of the policyholder to settle the lawsuit … well, that depends.
In many instances, a policy-limits demand results in a discussion between defense counsel and the policyholder about the policyholder’s desire to settle the lawsuit to avoid the risk of personal exposure and/or to avoid the emotional stress of litigation. But what if the policyholder does not want to settle the lawsuit? What if the policyholder wants her day in court? What if the policyholder is willing to risk personal exposure? What should defense counsel and the insurance company do if they believe the case should be settled?
Some policies contain a consent-to-settlement provision, requiring the consent of the policyholder before settling a lawsuit. Other policies support the insurance company’s right to settle a lawsuit over the policyholder’s objection. The grant of liability coverage often states that the insurance company may “settle or defend as the insurance company considers appropriate, any claim or suit.” The covering language of a liability policy likely also includes a provision setting forth that the insurance company’s “duty to settle or defend ends when the limit of liability for this coverage has been exhausted by payment of judgments or settlements.” Most liability policies also have a cooperation clause requiring that the policyholder cooperate with the insurance company in the investigation, settlement or defense of any claim or suit.
Although Indiana has not directly addressed the potential liability of settling over the policyholder’s objection, it has addressed the liability of the insurance company for not settling a claim within policy limits. Under Indiana law, an insurance company may be liable for failing to settle a liability claim within policy limits resulting in a judgment in excess of policy limits. Economy Fire & Casualty Co. v. Collins, 643 N.E.2d 382 (Ind. Ct. App. 1995); Bennett v. Slater, 289 N.E.2d 144 (Ind. Ct. App. 1972).
Other jurisdictions have examined the potential liability of an insurance company for settling a lawsuit over the policyholder’s objection. The general trend appears to support that an insurance company has the right – even in the absence of a consent-to-settlement provision – to settle a claim without the consent of the policyholder and is not liable for doing so. See Marginian v. Allstate Ins. Co., 481 N.E.2d 600 (Ohio 1985); Roussos v. Allstate Insurance Co., 104 Md.App. 80 (Md. Ct. App. 1995); Blue Ridge Ins. Co. v. Jacobsen, 22 P.3d 313 (Cal. 2001); But see Wood Truck Leasing, Inc. v. American Auto. Ins. Co., 526 S.W.2d 223 (Tex. Civ. App. 1975). The arguments raised by policyholders alleging liability on the part of the insurance company for settling over objection are that the policyholder suffered damage to reputation, the inability to maintain liability insurance, the loss of income, an increase in premium rates, and the loss of the ability to assert a counterclaim as a result of the settlement. Again, it appears few courts have recognized liability in this context.
Couch on Insurance states the following with respect to an insurer’s duty as it relates to settlement of a third-party claim over the objection of the policyholder:
“Even where a settlement offer is well within policy limits, the interests of the parties may not be aligned. The insured may resist settling a claim within policy limits where it views settling as an admission of wrongdoing that would damage the insured’s reputation or goodwill within its community or client base, while the insurer would prefer to reach an agreement that would save the difference between the settlement amount and the policy limits and prevent any further litigation costs. In such a case, including a confidentiality agreement as part of the settlement may help to alleviate some of the insured’s concerns.
“In recognizing the potential conflict of interest between the parties, it is important to remember that the insurer must act in good faith and may not put its own interest ahead of that of the insured. In general, an insurer’s good faith discretion is broader where the insurer determines to settle within policy limits than where it decides to refuse settlement and proceed to trial.” 14 Couch on Ins. § 203.1 (citations omitted).
When running through the checklist after a policy-limits demand is made, defense counsel and the insurance company should assess whether consent to settlement is required by the policyholder and what to do if that consent is withheld. At the outset of litigation, it is good practice to include in the letter assigning defense counsel a reservation of the right to settle the lawsuit if an offer within policy limits is received. When negotiating a settlement over the policyholder’s objection, it is fair to assume that the insurance company will be required to show that the settlement decision was supported by the language of the policy, was reasonable and was made in good faith. Clear communication with the policyholder should be given about the decision to settle, the support in the policy for doing so, and the plan for obtaining a dismissal, including a release with no admission of liability and potential confidentiality. The insurance company should also assess allowing the policyholder to assume the defense through trial and/or filing a declaratory action to obtain a determination as to the insurance company’s rights under the policy. The declaratory route may be especially appropriate should the policyholder breach the cooperation clause in refusing to allow the settlement. Defense counsel should assess whether a conflict has arisen due to the objection by the policyholder to settlement and whether defense counsel or the insurance company should be the one to effect the settlement.•
• Anna Mallon is a partner at Cantrell Strenski & Mehringer and is a member of the Board of Directors of the Defense Trial Counsel of Indiana. Opinions expressed are those of the author.