Opinion ID: 1448289
Heading Depth: 1
Heading Rank: 16

Heading: Reasonableness of Policy Limits Settlement Offer

Text: The reasonableness of the policy limits settlement offer must be viewed through NPIC's eyes at the time the offer was rejected. See Glenn, 247 Kan. at 305. NPIC must evaluate the settlement offer without regard to policy limits. Richmond's litigation status reports to Bissell provided NPIC with damage assessments. Under the policy, NPIC had the right to review Richmond's files. Richmond offered NPIC access to them. In November and December 1993, Richmond forwarded to Bissell settlement packages from Arkwright, IRI, Safeway, Kraft, and Fleming. In his January 17, 1994, damages summary, which was prepared after Arthur Andersen & Co. had been retained to review plaintiffs' damages, Richmond reported to Bissell total claims of $66,045,987.85. Of these, $55,213,875.85 were subrogated insurer claims. Richmond also reported: Our damages experts at Arthur Andersen & Co. may be able to eliminate as much as $19,093,028.00 in extra expense claims. Richmond mentioned the possibility that if subrogation rights had been waived in the leases, the subrogated claims could possibly be disposed of. Also, exculpatory clauses in the leases might excuse Americold Services Corporation's negligence. But if gross negligence were found, there would be exposure for the full amount of all claims. In Richmond's February 8, 1994, letter to Bissell, he discussed a counteroffer in the $20-25 million range. It is possible that plaintiffs would have taken less than the policy limits to settle before March 10, 1994. Richmond had previously written to Bissell that subrogated insurers typically are willing to settle for 50%-74% of the value of their claims. As evidence to show unreasonableness of the settlement amount, NPIC references Richmond's settlement discount statement, and his January 17, 1994, damages summary to Bissell. However, NPIC's refusal to offer any amount toward settlement eliminated the opportunity to find out what amount less than the policy limits plaintiffs would have accepted. NPIC contends that if the Glenn test is applicable, there are material issues of fact as to the reasonableness and good faith of the settlement. NPIC also argues expert testimony should have been submitted on many of those issues, citing Alton M. Johnson Co. v. M.A.I. Co., 463 N.W.2d 277, 279 (Minn. 1990). At the time of settlement, the federal court had not yet ruled on summary judgment motions filed by Americold asserting that exculpatory clauses in plaintiffs' leases should have protected Americold Services Corporation (as landlord) from liability for less than gross negligence. As to those motions, Richmond commented in his January 17, 1994 damages summary: Of course, if Americold is found to be grossly negligent, the exculpatory language in the leases will be wholly and completely ineffective, resulting in a $66,045,987.85 exposure. This possibility cannot be ignored or discounted. Another difficulty with the exculpatory language in the leases was the fact that only Americold Services Corporation, not Americold Corporation, was a party to the leases. Richmond said that Americold would be faced with disaster if the judge in the federal cases ruled that the exculpatory clauses in the leases would not apply to Americold Corporation. NPIC questions how the settlement figure of $58,754,574 was arrived at and further questions why that amount should be considered reasonable if plaintiffs had tendered a settlement offer of $40,750,000. The fact that plaintiffs wanted a premium added to their initial settlement offer for taking on the risk, delay, and expense in pursuing the excess carriers is not surprising. Whether $18 million is a reasonable premium requires further inquiry by the district court on remand. Richmond described $55 million of the damages as essentially liquidated subrogated insurer claims. Plaintiffs also point out that the total settlement figure was arrived at by applying a percentage discount from the total amount claimed ($66 million), comparable to the discounting procedure used in settling the bailment claims. The discounting procedure was described only vaguely. The total bailment claims were $26,391,759.49, and the settlement paid for those claims was $19,913,940.91. One of the factors suggested in Chaussee v. Maryland Casualty Co., 60 Wash. App. 504, 512, 803 P.2d 1339 (1991), in evaluating the reasonableness of settlement is the released person's ability to pay. Our adoption of the judgment rule in Farmers Ins. Exchange v. Schropp, 222 Kan. 612, 624, 567 P.2d 1359 (1977), may place the utility of this factor in doubt. Schropp rejected an insurer's contention that a bad faith or negligence claim for failure to settle within policy limits could not be asserted against the insurer when the insured was insolvent. However, in determining whether a settlement above policy limits without the insurer's consent is reasonable, the solvency of the insured is relevant. An impecunious insured may have less incentive to keep the settlement amount reasonable than an insured with collectable assets. The claimant may seek at least partial compensation from an insured with assets, besides an assignment of rights against the insurer. Insolvency of the insured may show a lack of arms-length bargaining. In the settlement agreement, Americold represented to plaintiffs essentially that it had no assets against which plaintiffs could seek collection, although it could service its existing operating debt. Americold's weak financial status lessened the arms-length bargaining position between Americold and plaintiffs. NPIC argues that the settlement was collusive because it was kept secret from NPIC and because Americold's 1992 coverage carriers (including National Union, which provided $2 million of primary coverage, and TIG, which provided $15 million of excess coverage) were not exposed for this loss. NPIC also claims that: (1) punitive damages may have been included to inflate the settlement, and (2) Americold's ongoing customer relationships with some plaintiffs and desire to maintain goodwill may show collusion and lack of arms-length bargaining. However, we note the total settlement figure ($58 million) is approximately $8 million less than the total property damage claims ($66 million). NPIC chose not to be involved in the settlement discussions by refusing to contribute anything toward settlement. Once NPIC denied coverage and offered nothing toward settlement, the relationship with Americold became adversarial. NPIC knew the negotiations were taking place. Under those circumstances, Americold's efforts to keep the final settlement negotiations and agreement confidential from NPIC may or may not raise concerns of collusion.