Opinion ID: 1173054
Heading Depth: 1
Heading Rank: 1

Heading: the insurer's liability to the insured

Text: It is first appropriate to consider the nature of the relationship between a liability insurer and an insured. A liability insurance policy is a contract between the insurer and the insured containing promises by the insurer to perform specific duties. [3] Centennial's policy is typical. Among its other provisions, it contains agreements to pay and to defend. The policy provides: The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of A. bodily injury or B. property damage to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage   . (Emphasis added.) The policy also contains a limits of liability clause, which limits Centennial's duty to pay to the limit of property damage liability stated in the declarations as applicable to `each occurrence'. As stated, Centennial's property damage limit is $100,000. Centennial's policy also gives it the right to control the defense of litigation against its insured and to settle any claim or suit as it deems expedient. The right of the insurer to control the defense of the litigation carries with it the duty to exercise diligence and care toward the insured. Radcliffe v. Franklin Nat'l Ins. Co., 208 Or. 1, 21, 298 P.2d 1002, 1011 (1956). In previous cases, we have held insurers liable to their insureds for failing to exercise due diligence in the defense of claims against insureds. Most claims by insureds against liability insurers involve claims that the insurer failed to exercise good faith or due care in defending claims above the limits of liability. The common situation is one in which the policy has a limited amount available to pay claims, the claim or claims exceed the policy limits, and a judgment is returned against the insured in excess of the policy limits. On this point, Kuzmanich v. United Fire and Casualty, 242 Or. 529, 532, 410 P.2d 812, 813 (1966), states this rule: An insurer owes to its insured the duty of due diligence and good faith. In determining whether to settle claims against the insured, the insurer must act as if it were liable for the entire judgment that might eventually be entered against the insured. In addition, only a decision made by an insurer who exercises due diligence in apprising itself of the material facts is entitled to be considered as made in good faith. To the same effect is Eastham v. Oregon Auto Ins. Co., 273 Or. 600, 607, 540 P.2d 364, 367 (1975):    Good faith requires the insurer, in handling negotiations for settlement, to treat the conflicting interests of itself and the insured with impartiality, giving equal consideration to both interests. With respect to settlement and trial, an insurance company must, in the exercise of good faith, act as if there were no policy limits applicable to the claim and as if the risk of loss was entirely its own. Bad faith is normally demonstrated by proving that the risks of unfavorable results were out of proportion to the chances of a favorable outcome.    Although our previous decisions have referred to concepts of good faith, bad faith and due care in stating the duty, the insurer's duty to the insured comes down to this: In conducting the defense of a claim against an insured, including the investigation, negotiation, and litigation of the claim, the insurer must use such care as would have been used by an ordinarily prudent insurer with no policy limit applicable to the claim. The insurer is negligent in failing to settle, where an opportunity to settle exists, if in choosing not to settle it would be taking an unreasonable risk  that is, a risk that would involve chances of unfavorable results out of reasonable proportion to the chances of favorable results. Stating the rule in terms of good faith or bad faith tends to inject an inappropriate subjective element  the insurer's state of mind  into the formula. The insurer's duty is best expressed by an objective test: Did the insurer exercise due care under the circumstances. The duty to defend is independent of and not limited by the duty to pay. The duty to defend requires that the insurer exercise reasonable care to protect its insured's interests, in addition to its own. This obligation may require that the insurer negotiate with a view to settling the case within the policy limits. Eastham v. Oregon Auto Ins. Co., supra, 273 Or. at 608, 540 P.2d at 368. Due care may require that an insurer make inquiries to determine if settlement is possible within the policy limits. Of course, an insurer cannot be held liable for failure to settle within the policy limits when no reasonable opportunity to settle exists. Problems rarely arise when all claims, in the aggregate, do not exceed policy limits, because the interests of the insured and insurer are, for the most part, congruent. However, when the amount of a claim exceeds the policy limit, the interests of the insured and insurer begin to diverge because the insured alone has the responsibility to pay claims above the limits of liability. Generally, the greater the potential exposure above the policy limits, the greater the divergence between the interests of the insured and the insurer. The duties of an insurer toward its insured are fairly well established and are not in dispute in this case. This case requires us to consider the nature of the relationship between the excess and primary insurer to determine what duty, if any, is owed by the primary liability insurer to the excess liability insurer. We turn to that question.