Opinion ID: 1448289
Heading Depth: 1
Heading Rank: 11

Heading: Effect of Breach of Coverage Obligation

Text: While the insurer's good faith obligation to settle is implied, the insurer's coverage obligations are set forth in the policy. When an insurer wrongfully denies coverage, the insurer breaches an express contract provision. If the insured, exposed to a claim far over the policy limits, receives a reasonable policy limits settlement offer that the insurer rejects because the insurer wrongfully denies coverage (although the insurer is willing to defend subject to a reservation of rights), can the insured, on its own, negotiate a settlement with the claimant that will be binding on the insurer? The answer depends on the facts and may be yes. The issue was addressed in Traders & General Ins. Co. v. Rudco Oil & Gas Co., 129 F.2d 621 (10th Cir. 1942). After personal injury claimants sought damages from Rudco above policy limits, Traders & General, Rudco's insurer, denied coverage but agreed to defend subject to its reservation of rights. However, Traders & General filed a declaratory judgment action seeking a no-coverage determination and refused Rudco's request to delay the declaratory judgment action until after trial of the damage claim. Aware of its liability exposure, Rudco negotiated a settlement with the claimants within policy limits. After Traders & General refused to consent, Rudco obtained court approval of the settlement as an agreed judgment, paid its share of the settlement, and sued Traders & General to recover its payment. The trial court, affirmed on appeal, decided that coverage existed, the settlement was reasonable and in good faith, and Traders & General was liable for Rudco's payment. Traders & General was estopped to invoke the policy provision against settlement without its consent. 129 F.2d at 625. Rudco is distinguishable to the extent that plaintiffs here seek to enforce their settlement against NPIC after taking an assignment from Americold and giving Americold a covenant not to execute. Americold did not pay plaintiffs' claims and seek reimbursement from NPIC. Also, unlike Rudco, the settlement amount is above policy limits. Rudco did not involve an excess insurer. However, both cases involve settlements to which insurers did not consent. NPIC argues that its lack of consent to Americold's settlement agreement releases it from liability. NPIC attempts to distinguish AKS v. Southgate Trust Co., 844 F. Supp. 650 (D. Kan. 1994), which did not involve an excess judgment, and First Hays Banshares, Inc. v. Kansas Bankers Surety Co., 244 Kan. 576, 582-83, 769 P.2d 1184 (1989), which discussed circumstances in which an insured may enter a settlement agreement with the claimant without losing rights against the insured's policy. First Hays concerned first-party loss claims under fidelity bonds, not liability insurance coverage for third-party claims. In discussing the rule that after an insurer has wrongfully denied coverage, an insured may settle with a third party without prejudicing rights against the insurer, we cited in First Hays not only first-party fidelity bond cases but also a third-party liability case, Shelman v. Western Casualty & Surety Co., 1 Kan. App.2d 44, 562 P.2d 453, rev. denied 225 Kan. 845 (1977). First Hays, 244 Kan. at 582-83. However, Shelman involved the insurer's denial of coverage and refusal to defend. NPIC has not refused to defend here, although it reserved coverage defenses. An insured does not lose rights against the insurer by entering into a settlement after the insurer's bad faith denial of coverage and refusal of a reasonable settlement offer within policy limits. NPIC's denial of coverage was wrongful, and if the denial was in bad faith and the policy limits settlement offer was rejected either in bad faith or negligently, then lack of NPIC's consent to the Americold settlement agreement does not preclude its enforcement against NPIC, if the amount is reasonable.