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Court Allows Bad Faith Claim for Insurerís Failure to Settle Within Deductible

By Effie D. Silva, Litigation News Associate Editor – September 28, 2010

In a unanimous decision, the Wisconsin Supreme Court held that an insurer was liable for its bad faith refusal to settle a claim, even though the resulting judgment entered against the insured was within the coverage limits of the insurance policy at issue. Roehl Transport, Inc. v. Liberty Mutual Insurance Co. [PDF].


High-Deductible Policies Causing Changes in Bad Faith Claims
The insured, Roehl, had a policy with Liberty for $2 million in liability coverage with a $500,000 deductible. When a personal injury lawsuit was filed against Roehl, Liberty exercised control over settlement discussions regarding the third-party claim, but did not settle the claim before trial. A jury awarded the plaintiff damages against Roehl in excess of Roehl’s $500,000 deductible, but well within the $2 million coverage limit.


Roehl subsequently filed a bad faith claim against Liberty based upon Liberty’s failure to settle the personal injury lawsuit before judgment for substantially less than Roehl’s deductible. Roehl also claimed that Liberty failed to adequately staff the case, investigate the injuries claimed, and hire the appropriate experts to defeat the claim.


A jury sided with Roehl on its bad faith claim and Liberty appealed. Liberty argued that Wisconsin law did not provide Roehl with a bad faith claim because the judgment entered against Roehl was for less than the policy’s $2 million coverage limit.


Even though it acknowledged it had “not previously addressed a bad faith claim when the judgment entered against the insured is within policy limits,” the Wisconsin Supreme Court held that such a judgment is not a prerequisite to a bad faith claim and that an insurer “may be liable for the tort of bad faith when [it] fails to act in good faith and exposes the insured to liability for sums within the deductible amount.”


The court further noted that the interests of Liberty and Roehl were “in conflict” because Liberty had “little concern” with the value of a claim settled for less than Roehl’s deductible, while Roehl had a vested interest in settling the claim for “as little as possible” below the deductible.


The court stated that only a few jurisdictions, most notably New York and Texas, have addressed and recognized this type of bad faith cause of action. However, the court also noted that: “[w]ith the increasing prevalence of high-deductible policies, cases such as the present one may become more common.”


Implications of the Wisconsin Supreme Court’s Decision
“Although this represents a departure from the categories of bad faith previously recognized under Wisconsin law, the basis of the court’s decision is a natural extension of the principle underlying bad faith claims,” says Ronald L. Kammer, Miami, cochair of the ABA Section of Litigation’s Insurance Coverage Litigation Committee. “When an insurer has control over the defense and settlement of a lawsuit, it has a good faith obligation to also protect the financial interests of its insured as if it was the insurer’s own financial interests at stake.”


“It is true, where the policyholder has a large deductible, a potential tension between policyholder and insurer interests exists because the insurer might prefer to settle for an amount within, or close to, the deductible while the policyholder might prefer to try the case in the hope of avoiding liability altogether,” says Laura A. Foggan, Washington DC, former cochair of the Section’s Insurance Coverage Litigation Committee. Foggan, however, does not necessarily believe that this type of situation will present substantial bad faith exposure to insurers.


“Fortune 500 companies and other large policyholders that choose to bear large deductibles negotiate with their insurers for specific contractual provisions that give the policyholder control over settlement of claims likely to fall within the deductible amount,” says Foggan.


Further, “it is not uncommon for insurance contracts to explicitly entitle the insurer to make any settlement it deems expedient, which allows the insurer to settle, notwithstanding its policyholder’s objection, even when the settlement will require the policyholder to pay large deductible amounts,” she says.


“Where a substantial deductible is involved, a minority of courts address the potential for conflict between the policyholder and the insurer not by creating a bad faith cause of action, but by insisting that the insurer must obtain the policyholder’s consent to settlement,” Foggan says. These courts require this step “even in the absence of policy language imposing such a requirement,” she notes.


Ultimate Duty to Insured
“This case signals a word of caution to attorneys retained by insurance companies on behalf of an insured,” says Elizabeth T. Timkovich, Charlotte, NC, cochair of the Section’s Commercial and Business Litigation Committee. “If the Roehl ruling catches on, we may see it extended by litigants and courts to malpractice actions against attorneys retained by ‘bad-faith’ insurers,” she warns.


“An attorney’s ultimate duty is to the insured—their true client. Therefore, any attorney conducting settlement negotiations under the direction of an insurer should exercise increased caution—even if the insurer has contractual authority to control the litigation and settlement process—and hesitate before agreeing to or rejecting settlements without the input or consent of the insured,” says Timkovich.


“At a minimum,” Timkovich suggests that attorneys “create a record that supports the reasonableness of the attorney’s and insurer’s settlement efforts and decisions.” “This should provide the attorney—and insurer—with some protection, especially in light of the fact-specific nature of the Roehl decision, where the insurer was found to have mishandled the claim and failed to even pursue a favorable settlement,” she says.


Keywords: Litigation, bad-faith claim, insurance coverage, high-deductible policies, Wisconsin Supreme Court


 
  • October 9, 2010 – I think this is a very odd decision and will result in bad consequences for policyholders. After all, it seems the insurer would *only* benefit if the claim settled within the deductible. The insurer would have spent: a) less for defense; b) none of its own indemnity money. [Note that even though the insurer had the right to control defense, there were Special Handling Instructions which gave some rights to the insured in controlling settlements.] So I guess the response is for the insurer to send a letter, to every policyholder, which says "Dear Policyholder: You have told us that you think there are defenses to this case. However, if it isn't settled for some portion of your deductible then you will need to pay all of your deductible. So please authorize us to settle this claim, using some or all of your money, just as soon as possible." Is that really a benefit to the insured?

 

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