Source: http://www.butler.legal/do-liability-insurers-have-a-duty-to-make-an-offer-where-there-is-no-claim-against-the-insured
Timestamp: 2019-04-20 09:17:13+00:00

Document:
January 21, 2004 | Publication| Do Liability Insurers Have A Duty To Make An Offer Where There Is No Claim Against The Insured?
This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 17, #18, p. 18 (January 21, 2004). © Copyright Butler 2004.
Some courts have imposed this duty, requiring an insurer to make a settlement offer when there is no claim against the insured. These courts sometimes observe that there is an inherent conflict of interest between the insurer and the insured whenever the claim value is approximately policy limits. If the insurer were not required to initiate settlement negotiations in such cases, the insurer would presumably have nothing to lose by proceeding to trial, while the insured would face a potential excess judgment. Courts finding this duty often do so in cases involving affirmative misconduct by the insurer in disregarding a settlement opportunity. Some states have statutorily imposed duties requiring an insurer to settle where liability is clear. For instance, Oregon's Insurance Code creates such an duty once liability becomes “reasonably clear.” Most courts that impose this duty do so only where liability is clear and damages clearly exceed the limits.
Other courts have refused to impose this duty upon insurers. These courts have observed that the potential claimant is in the best position to evaluate her own claim and make the first offer. If courts impose a duty to make a settlement offer when there is no claim against the insured, potential plaintiffs have an incentive to delay settlement in hope of perfecting a potential bad faith claim which is contrary to the policy of encouraging settlement. Additionally, a potential claimant receiving an initial settlement offer from an insurer usually has no incentive to settle immediately because the claimant bears little risk of losing the opportunity to settle for the policy limits. Moreover, a claimant has no incentive to settle until she determines whether the defendant's assets other than liability insurance would make an excess judgment worth trying to collect.
Some courts have found that insurers have a good faith duty to make a settlement offer when there is no claim against the insured. These courts often impose this duty in light of other insurer misconduct.
In Rova Farms Resort Incorporated v. Investors Insurance Company, the insured-operator of a resort property was sued for injuries sustained by a guest during a diving accident that rendered him “almost a total quadriplegic.”(6) Despite the urging of the insured's attorney that the insurer offer its policy limits of $50,000, the insurer offered only $12,500 and solicited a contribution to the settlement from its insured.(7) The Rova Farms court was troubled by the insurer's solicitation of a contribution to the settlement from its insured without committing its own policy limits.(8) Under such circumstances, the Supreme Court of New Jersey held that a settlement demand by the plaintiff is not an absolute “prerequisite for finding the insurer to have acted other than in good faith.”(9) The Supreme Court of New Jersey held that, where injuries for which recovery against an insurer were sought were very substantial, and where the potential liability of the insured should have been reasonably obvious to the insurer irrespective of advice of counsel, the insurer's failure of insurer to offer its $50,000 policy limits without qualification constituted sufficient lack of good faith, thereby making the insurer responsible for the entire subsequent verdict of $225,000.
In Florida, one appellate court held that an insurer has an affirmative duty to initiate settlement negotiations if the insured's liability is clear and the injuries are so serious that judgment in excess of policy limits is likely. In Powell v. Prudential Property & Casualty Insurance Company,(24) the insured struck two pedestrians from behind as they walked along the road. One of the pedestrians, Goldner, suffered serious injuries. The insurer evaluated Powell's liability as 80-100% and, in acknowledgment of the severity of the victim's injuries, placed the $10,000 policy limits in reserve to pay Goldner's claim. Nine days after the accident, Goldner's attorney sent the insurer a letter describing the injuries, informing the insurer that his client would be hospitalized for an extended period, and requesting that the insurer disclose the policy limits. The insurer did not respond. The claimant's attorney then sent a follow-up letter on February 3. The attorney informed the insurer that his client was in need of immediate funds because the medical bills had already exceeded $20,000, and his client had no other insurance. The attorney again requested the policy limits.
The insurer did not respond by February 9, and Goldner's attorney sent a third letter describing his client's dire financial situation and asking to be informed of the policy limits within the next three days. Finally, on March 16, a claims adjuster called Goldner's attorney and left word with his secretary that it was tendering the policy limits. Two days later, the attorney called the insurer and informed the claims adjuster that the lawsuit had already been filed and that the policy limits were rejected. The trial resulted in a jury verdict of $250,000 against Powell. Powell then sued the insurer alleging that the insurer breached its duty of good faith by not exploring settlement possibilities and by failing to advise of him of the probable outcome of the litigation.
In Minnesota, a liability insurer may become liable in excess of its undertaking under the terms of the policy if it does not exercise “good faith” in considering offers to compromise the claim for an amount within the policy limits.(39) The court explained that the insurer's duty of good faith is breached where the insured is clearly liable and the insurer refuses to settle within the policy limits not in good faith and not based upon reasonable grounds to believe that the amount demanded is excessive.(40) This case is consistent with Florida's Powell case and West Virginia's Shamblin case.
A fiduciary or quasi-fiduciary duty arises when a claim is presented in a third-party case based upon the terms of the liability insurance contract. The insurance contract imposes a duty of good faith and fair dealing upon the insurer. In many jurisdictions, an insurer has an affirmative duty to initiate settlement negotiations where liability is clear and injuries will likely exceed the policy limits. Otherwise, the insurer generally has no duty to initiate settlement negotiations. Some jurisdictions refuse to impose such a duty regardless of the liability and damage posture, and at least one jurisdiction refuses to impose such a duty when there is a coverage question.
1.Douglas R. Richmond, Trust Me: Insurers Are Not Fiduciaries To Their Insureds, 88 Ky. L. J. 1, 6 (2000).
4.Matthew D. Schultz, Bad Faith or No Faith? Finding a Place for Wrongful Refusal to Defend in Florida's Bad Faith Jurisprudence, 29 Fla. St. U. L. Rev. 1389, 1392 (Summer 2002).
5.Haddick v. Valor Insurance, 763 N.E.2d 299, 304 (Ill. 2002).
6.Rova Farms Resort Inc. v. Investors Ins. Co. of America, 323 A.2d 495, 498 n.1 (N.J. 1974).
8.Id. at 502 & n. 3; see also W.E. Shipley, Annotation, Duty of Liability Insurer to Settle or Compromise, 40 A.L.R.2d 168, 205-08 (1965).
10.427 S.W.2d 30 (Tenn. 1968).
12.Rova Farms, 232 A.2d at 505.
15.Fulton v. Woodford, 545 P.2d 979, 984 (Ariz. Ct. App. 1976).
19.Coleman v. Holecek, 542 F.2d 532 (10th Cir. 1976).
24.584 So. 2d 12 (Fla. 3d DCA 1991).
33.393 N.W.2d 161 (Mich. 1986).
39.Short v. Dairyland Ins. Co., 334 N.W.2d 384, 387 (Minn. 1983).
41.Iowa National Mutual Insurance Co. v. Auto-Owners Ins. Co., 371 N.W.2d 627 (Minn. 1985).
49.Id., quoting Hartford Casualty Ins. Co. v. New Hampshire Ins. Co., 628 N.E.2d 14 (Mass. 1994).
50.Id., quoting Bolden v. O'Connor Café, 734 N.E.2d 726 (Mass. 2000).
52.Haas v. Mid-America Fire & Marine Ins. Co., 343 N.E.2d 36 (Ill. App. Ct. 1976); Powell v. Prudence Mutual Cas. Co., 232 N.E.2d 155 (Ill. App. Ct. 1967); Adduci v. Vigilant Ins. Co., 424 N.E.2d 645 (Ill. App. Ct. 1981).
53.Adduci, 424 N.E.2d at 678.
56.385 N.W.2d 171, 178 (Wis. 1985).
68.Danner v. Iowa Mut. Ins. Co., 340 F.2d 427 (5th Cir. 1964).
69.379 So. 2d 1162 (Fla. 1st DCA 1979).

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.