Opinion ID: 2590298
Heading Depth: 2
Heading Rank: 2

Heading: The implied covenant of good faith and fair dealing includes a duty to adequately inform as part of the duty to defend

Text: Allstate argues that Miller's failure-to-inform theory, which he bases upon the allegation that Allstate failed to advise Miller about the interpleader offer, is inapplicable to this case because the issue was whether Allstate would agree to be the plaintiff in an interpleader action. We disagree. We conclude that under the facts of this case, Miller's failure-to-inform theory is a viable basis for an allegation of bad faith against Allstate. One of the issues in this appeal is Allstate's obligations under the implied covenant of good faith and fair dealing. The law, not the insurance contract, imposes this covenant on insurers. United States Fidelity v. Peterson, 91 Nev. 617, 620, 540 P.2d 1070, 1071 (1975). A violation of the covenant gives rise to a bad-faith tort claim. Id. This court has defined bad faith as an actual or implied awareness of the absence of a reasonable basis for denying benefits of the [insurance] policy. Am. Excess Ins. Co. v. MGM, 102 Nev. 601, 605, 729 P.2d 1352, 1354-55 (1986). We first discuss the relationship between an insurer's duty to defend and the implied covenant of good faith and fair dealing. Then we discuss an insurer's duty to inform its insured of a settlement offer. Afterwards, we apply the duty to inform to the facts of this case.
Primary liability insurance policies create a cascading hierarchy of duties between the insurer and the insured. At the top of this hierarchy are two general duties: the duty to defend and the duty to indemnify. The obligation of the insurer in the duty to indemnify is narrower than the insurer's duty to defend. Crawford v. Weather Shield Mfg. Inc., 44 Cal.4th 541, 79 Cal.Rptr.3d 721, 187 P.3d 424, 427 (2008). But we do not address the duty to indemnify in this case. Instead, this case implicates the scope of an insurer's duty to defend. The duty to defend contains two potentially conflicting rights: the insurer's right to control settlement discussions and its right to control litigation against the insured. 14 Couch on Insurance 3d §§ 200:1, 203:1 (2005). Each of these contractual rights creates additional duties for the insurer. The right to control settlement discussions creates the duty of good faith and fair dealing during negotiations. See Couch, supra, at § 203:1 (stating that the insurer's right to control settlement negotiations may create a conflict of interest between the insurer and the insured, and therefore, the insurer must act in good faith and give the insured's interests equal consideration with its own). The right to control litigation creates the duty to defend the insured from lawsuits within the insurance policy's coverage. Couch, supra, at § 200:1. A primary insurer's duty to defend attaches upon notice of a demand against its insured. Thus, an insurer's duty to adequately inform the insured begins upon receipt of a settlement demand and continues through litigation to final resolution of that claim. As a result, if an insurer fails to adequately inform an insured of a known reasonable settlement opportunity prior to the filing of a claimant's lawsuit, the insurer may breach its duty of good faith and fair dealing. If the insurer fails to adequately inform an insured of such an opportunity after the filing of a claimant's lawsuit, then the insurer has breached its duty to defend the insured against lawsuits.
Miller asserts that Allstate incorrectly informed him that Hopkins was still considering Allstate's policy-limits offer, and it failed to inform him of the possibility of his contributing to a settlement or initiating an interpleader action on his own. Miller testified that Natasha Szumilo, Allstate's claims adjuster, never mentioned the word interpleader or provided him with the opportunity to contribute additional monies to the $25,000 settlement offer or for Miller to initiate or pay for the interpleader action that Hopkins made part of his demand. Miller also testified that Allstate informed him there was a settlement offer, but [Szumilo] told me basically that Mr. Hopkins' attorney was asking her to do things that they don't do because they don't represent his client. Miller also testified that when he spoke to Szumilo, she stated that Hopkins had not rejected Allstate's policy-limits offer. However, she failed to tell him that Hopkins had conditionally rejected the offer unless Allstate agreed to file an interpleader complaint. Although not confirmed in Szumilo's testimony, there is a notation in Miller's file that Allstate advised Miller of Hopkins' settlement offer, but there are no details of what Allstate specifically told Miller. However, Allstate failed to provide testimonial evidence that there was no realistic possibility for settlement within the $25,000 policy limit or that Miller would not have filed, or made any contribution to the filing of, an interpleader complaint. Therefore, whether Allstate could have settled with Hopkins within the policy limits in conjunction with Miller is a disputed issue of material fact that the trier of fact must resolve. In addition, whether Allstate adequately informed Miller of Hopkins' settlement offer is also a question of fact. This court has previously held that a bad-faith action applies to more than just an insurer's denial or delay in paying a claim. Guaranty Nat'l Ins. Co. v. Potter, 112 Nev. 199, 206, 912 P.2d 267, 272 (1996). An insurer's failure to adequately inform an insured of a settlement offer may also constitute grounds for a bad-faith claim. Allen v. Allstate Ins. Co., 656 F.2d 487, 489 (9th Cir.1981); Miller v. Elite Ins. Co., 100 Cal.App.3d 739, 161 Cal. Rptr. 322, 332 (1980). Many jurisdictions hold that failure to inform is a factor in a bad-faith claim. Couch, supra, at § 203:16. We now join these jurisdictions and conclude that an insurer's failure to adequately inform an insured of a settlement offer is a factor for the trier of fact to consider when evaluating a bad-faith claim. This duty to adequately inform an insured arises from the special relationship between the insured and the insurer, which is similar to a fiduciary relationship. Ainsworth v. Combined Ins. Co., 104 Nev. 587, 592, 763 P.2d 673, 676 (1988) (describing the insurer-insured relationship as one of special confidence); Love v. Fire Ins. Exchange, 221 Cal.App.3d 1136, 271 Cal.Rptr. 246, 251-52 (1990) (refusing to characterize the insurer-insured relationship as fiduciary but acknowledging it is a fiduciary-type relationship). Although this court has refused to adopt a standard where an insurance company must place the insured's interests over the company's interests, the nature of the relationship requires that the insurer adequately protect the insured's interest. Powers v. United Servs. Auto. Ass'n, 114 Nev. 690, 701-02, 962 P.2d 596, 603 (1998), modified on other grounds, Powers v. United Servs. Auto. Ass'n, 115 Nev. 38, 979 P.2d 1286 (1999). Thus, at a minimum, an insurer must equally consider the insured's interests and its own. Love, 271 Cal.Rptr. at 253. In considering an insured's interests, the insurer must realize that the elements of bad faith include more than an insurer's rejection of a settlement offer within the policy limits. See Guaranty, 112 Nev. at 206, 912 P.2d at 272 (holding that a bad-faith action applies to more than just an insurer's denial or delay in paying a claim, such as paying from an independent medical examination); Anderson v. State Farm Mut. Ins. Co., 101 Wash.App. 323, 2 P.3d 1029, 1031 (2000) (holding, as a matter of law, that bad faith includes an insurer's failure to disclose the existence of underinsured/uninsured motorist coverage to an injured insured). Allstate contends that since it offered Miller's policy limits within 13 days of the accident and it subsequently issued a check with the claimant and lienholders' names, it cannot be liable for bad faith. We disagree. A primary liability insurer's duty to its insured continues from the filing of the claim until the duty to defend has been discharged. We refuse to adopt the absolute rule that a primary liability insurer's bad-faith liability ends upon a timely offer of the insured's policy limits. While in most cases an insurer's timely policy-limit offer negates a finding of bad faith because the insurer has fulfilled its contractual obligations, the mere offering of the policy limit does not necessarily end a primary liability insurer's contractual obligations, specifically, its duty to defend the insured. See United Nat'l Ins. Co. v. Frontier Ins. Co., 120 Nev. 678, 687, 99 P.3d 1153, 1158 (2004) (stating that once the duty to defend arises, because of an insured's potential liability, the insurer's duty continues throughout the entire litigation); 22 Eric Mills Holmes, Holmes' Appleman on Insurance 2d § 137.4[B] (2003). Further, the law binds the insurer, through the implied covenant of good faith and fair dealing, to discharge its remaining duties in a reasonable manner. See NRS 687A.150 (immunizing all member insurers from liability for reasonable actions taken during performance of their duties). Particularly, courts have recognized that an insurer's failure to adequately inform an insured of a settlement offer is also grounds for a bad-faith claim. Allen, 656 F.2d at 489; Miller, 161 Cal.Rptr. at 332; Loudon v. State Farm Mut. Auto. Ins. Co., 360 N.W.2d 575, 579 (Iowa Ct.App.1984); Henke v. Iowa Home Mut. Cas. Co., 250 Iowa 1123, 97 N.W.2d 168, 174 (1959) (holding that failure to adequately inform insured of possible excess liability or the status of settlement negotiations may indicate bad faith); Prosser v. Leuck, 225 Wis.2d 126, 592 N.W.2d 178, 183 (1999) (holding that an insurer's fiduciary duty includes timely informing the insured of any settlement offers received). Some courts even go as far as to hold insurers liable for bad faith not only for failing to adequately inform, but also for failing to advise the insured to contribute. Oppel v. Empire Mut. Ins., 517 F.Supp. 1305, 1306 (S.D.N.Y.1981) (applying New York law). In recognizing an insurer's bad-faith liability for failing to inform an insured of a settlement offer, other courts have outlined specific factors to consider. In Archdale v. American International Specialty Lines, 154 Cal.App.4th 449, 64 Cal.Rptr.3d 632 (2007), the California Court of Appeal stated that the following considerations are relevant in determining whether an insurer's settlement actions were reasonable: (1) the insurer must give the interests of the insured at least as much consideration as it gives to its own interests, and (2) the insurer must act as a prudent insurer without policy limits.  Id. at 644-45 (emphasis added). Similarly, the Louisiana Court of Appeal has stated that the interest of the insured is paramount when considering a settlement offer, and the following factors address whether the insurer acted in bad faith when refusing to settle: (1) the probability of the insured's liability; (2) the adequacy of the insurer's investigation of the claim; (3) the extent of damages recoverable in excess of policy coverage; (4) the rejection of offers in settlement after trial; (5) the extent of the insured's exposure as compared to that of the insurer; and (6) the nondisclosure of relevant factors by the insured or insurer. Fertitta v. Allstate Ins. Co., 439 So.2d 531, 533 (La.Ct.App.1983) (emphasis added). Here, Sampson, Hopkins' attorney, testified that Hopkins would have released Miller if Allstate had filed an interpleader complaint naming Hopkins and the lienholders, or transmitted the $25,000 bodily injury limit to Sampson with an express agreement for Sampson to distribute the monies pursuant to a district court interpleader order. In other words, Allstate had two choices regarding the $25,000 policy limit: it could either issue a check to Hopkins and Sampson without naming the lienholders and allow Sampson to file the interpleader action, in which case Sampson would distribute the monies pursuant to a district court order, or it could deposit the monies with the court clerk and file the interpleader action itself. Under NRCP 22, either Allstate or Hopkins had standing to commence the interpleader action. Regardless of whether Allstate or Hopkins initiated the interpleader action, Hopkins was willing to release Miller under either of these options. If Allstate was opposed to filing the interpleader action itself and it was concerned about releasing the funds to Hopkins without the lienholders' names on the check, there was a third logical option. Allstate could have approached Miller with Hopkins' settlement offer and asked Miller to initiate the interpleader action pursuant to NRCP 22 once Allstate deposited the funds with the district court. The funds could only be distributed pursuant to a district court order. Allstate, however, never disclosed the details of Hopkins' offer to Miller. Thus, Allstate denied Miller the opportunity to contribute to Hopkins' settlement offer in exchange for Miller's release. In sum, Allstate could have obtained a release for Miller simply by initiating an interpleader action itself or by depositing the $25,000 bodily injury limit with the district court clerk and allowing either Hopkins or Miller to initiate the interpleader action. See NRCP 22 (allowing either a plaintiff or defendant to initiate an interpleader action). But Allstate never told Miller about the details of Hopkins' settlement offer. Therefore, there is a factual dispute as to whether Allstate complied with its duty to adequately inform Miller of the offer and to protect Miller's interests. As a result, we conclude that Miller's failure-to-inform theory is a viable basis for bad faith by itself, regardless of whether Allstate had a duty to file an interpleader complaint. Miller's allegation that Allstate did not adequately inform him of Hopkins' settlement offer is a question of fact. Allen, 656 F.2d at 489 (recognizing that under California law What is `good faith' or `bad faith' on an insurer's part has not yet proved susceptible to [definitive] legal definition. An insurer's `good faith' is essentially a matter of fact.). Thus, the district court did not abuse its discretion when it submitted this issue to the jury. Id.
If an insurer violates its duty of good faith and fair dealing by failing to adequately inform the insured of a reasonable settlement opportunity, the insurer's actions can be a proximate cause of the insured's damages arising from a foreseeable settlement or excess judgment. See Stark Liquidation v. Florists' Mut. Ins., 243 S.W.3d 385, 399 (Mo.Ct.App.2007) (holding that an insurer who denies coverage is liable for the reasonable settlement costs incurred by the insured); Noya v. A.W. Coulter Trucking, 143 Cal.App.4th 838, 49 Cal.Rptr.3d 584, 589-90 (2006) (holding that a reasonable settlement is presumptive evidence of an insurer's liability for breach of its obligations). In Neal v. Farmers Ins. Exchange, 21 Cal.3d 910, 148 Cal.Rptr. 389, 582 P.2d 980, 986 (1978), the California Supreme Court held that once an insurer violates its duty of good faith and fair dealing, it is liable to pay all compensatory damages proximately caused by its breach; however, punitive damages require proof of motive and intent to violate a duty. The insurer may challenge the reasonableness of a damages amount, but its breach of duty is a proximate cause of the insurer's reasonable damages. Noya, 49 Cal.Rptr.3d at 589-90. Here, according to Allstate's own computerized record dated April 12, 2001, Miller never saw Hopkins approaching the intersection, and nothing prevented him from seeing Hopkins. The record also notes that Hopkins' damages, as of that date, were approximately $45,000. As a result, Allstate recognized that Miller's case was a clear limits case, meaning damages already exceeded the policy limits, and authorized resolution of the matter as soon as possible. Given Allstate's recognition of Miller's excess liability, Allstate's failure to adequately inform Miller of Hopkins' settlement offer may have prevented Miller from obtaining a release from Hopkins. The trier of fact could therefore conclude that Allstate's actions were a proximate cause of the excess verdict against Miller.
Here, Miller asserts that Allstate incorrectly informed him that Hopkins had not rejected Allstate's offer and it failed to inform him of the possibility of Miller's contributing to an interpleader action. At trial, Miller testified that he would have paid Allstate's interpleader costs and that he had the financial capability to do so, although on cross-examination Miller admitted that he did not know how much the action would cost. We conclude that regardless of whether Miller had the financial capabilities to pay for the action, Allstate should have informed him of the settlement offer. Instead, Allstate rejected Hopkins' offer and told Miller that Hopkins was still considering Allstate's policy-limit offer. Allstate breached its duty to inform when it failed to inform Miller of the offer. Miller could have chosen at that time to hire independent counsel to review the offer and pursue any available options, such as initiating an interpleader complaint at his expense or contributing additional funds to Allstate's $25,000 settlement offer in return for a release from Hopkins. At a minimum, Allstate's failure to adequately inform Miller of Hopkins' settlement offer prevented Miller from considering his available options. Thus, Miller's failure-to-inform theory is viable and applies to the facts of this case.
Generally, [a]n insurer who has no opportunity to settle within policy limits is not liable for an excess judgment for failing to settle the claim. 14 Couch on Insurance 3d § 203:18 (2005). Other courts have held that the absence of a settlement offer within policy limits is not dispositive of the issue of the insurer's good or bad faith, but just one of the factors in determining whether an insurer acted in bad faith by failing to settle. Id. at § 203:20 (citing Berglund v. State Farm Mut. Auto. Ins. Co., 121 F.3d 1225, 1228 (8th Cir.1997); Hartford Ins. Co. v. Methodist Hosp., 785 F.Supp. 38, 40 (E.D.N.Y.1992); and State Auto. Ins. Co. of Columbus, Ohio v. Rowland, 221 Tenn. 421, 427 S.W.2d 30, 35 (1968)). Regardless, if there is a question of whether a settlement offer is within the policy limits or whether the insured has the ability or willingness to contribute to the offer's excess, then the issues should be resolved in favor of the insured, unless the insurer can show by affirmative evidence that there was no realistic possibility for settlement within [policy] limits and that the insured would not have made any contribution to a settlement above that amount.  Id. at § 203:18 (emphasis added). For example, if a claimant offers to settle for the policy limits plus court costs, then the insurer must relay that offer to the insured. Although the offer is technically beyond the policy limits, the insurer must provide the insured the opportunity to independently consider his options. In order to receive the full benefit of the special relationship between the insurer and the insured, the insurer must adequately inform the insured of the status of his case. This does not imply that the insurer must accept an excessive settlement demand; rather, it requires that the insurer adequately inform the insured so the latter can protect his interests. Therefore, whether Hopkins' offer to Allstate was one that Allstate reasonably should have communicated to its insured so that he could, with Allstate's policy limits, protect himself by seeking the lien resolution by interpleader that Hopkins was demanding, was a disputed issue of law and fact at the trial. At trial, Sampson, Hopkins' attorney, testified that Hopkins would have released Miller if Allstate had either: (1) filed an interpleader complaint naming Hopkins and the lienholders or (2) deposited the $25,000 bodily injury limit with the district court clerk and allowed Hopkins to initiate the interpleader complaint. Allstate did not refute Sampson's testimony on cross-examination or through its own witnesses. Instead, Allstate argued that the responsibility to interplead was beyond the policy obligation and it had to protect the lienholders despite its subsequent offer to file the interpleader action. Therefore, whether all the liens could be satisfied for $25,000 is not the determining factor as to Allstate's duty to Miller. If Allstate had deposited the $25,000 with the court clerk in order to facilitate an interpleader complaint, it would still have been Hopkins' responsibility to resolve his liens. However, Hopkins' lienholders would have no further claims against either Miller or Allstate. In Trustees v. Developers Surety, this court noted that when a party is exposed to different claims, an interpleader proceeding may be initiated under NRCP 22 to avoid exposure to double or multiple liability. The claims do not have to be identical or have a common origin. The court has the discretion to approve the interpleader and permit the [party] to deposit the [monies] remaining ... limits with the court. The court may then discharge the [party] from any further liability and equitably distribute the proceeds among the various claimants. 120 Nev. 56, 64, 84 P.3d 59, 63-64 (2004) (citations omitted). Therefore, we conclude that the district court's decision to submit this issue to the jury was not an abuse of discretion. The evidence presented by Miller established that Allstate could have received a release for Miller from Hopkins by either initiating the interpleader action, or in exchange for Allstate depositing the $25,000 with the district court clerk and Miller paying for the costs of the interpleader action. Other courts have held that an insurer can be liable for bad faith failure to settle even where a demand exceeds policy limits if the insured is willing and able to pay the amount of the proposed settlement that exceeds policy coverage. Couch, supra, at § 203:20 (citing Continental Cas. Co. v. United States Fid. & Guar. Co., 516 F.Supp. 384, 388 (N.D.Cal.1981)). We agree. Miller testified at trial that he would have contributed towards a settlement in excess of $25,000 by paying court costs and attorney fees to file an interpleader complaint and that he had the financial capability to do so. In rebuttal, Allstate's attorney questioned Miller about his understanding of the costs associated with an interpleader action. However, at no point during this cross-examination did Allstate ask Miller what the limit was that he could afford to contribute or demonstrate that he would not have contributed towards either the interpleader action or a settlement with Hopkins in excess of $25,000. Therefore, Miller's financial ability and willingness to contribute money to effectuate a settlement with Hopkins became an issue of fact for the jury to resolve.
Miller asserts that Allstate had an independent duty to file an interpleader action on Miller's behalf. When there is a genuine dispute regarding an insurer's legal obligations, the district court can determine if the insurer's actions were reasonable. See Lunsford v. American Guarantee & Liability Ins. Co., 18 F.3d 653, 656 (9th Cir.1994) (interpreting California law); CalFarm Ins. Co. v. Krusiewicz, 131 Cal.App.4th 273, 31 Cal.Rptr.3d 619, 629 (2005) (holding that if an insurer's reasonableness depends on legal precedent, then the issue is reviewed de novo). This court reviews de novo the district court's decision in such cases and evaluates the insurer's actions at the time it made the decision. CalFarm Ins. Co., 31 Cal. Rptr.3d at 629. In HOA v. Associated Internat. Ins. Co., 90 Cal.App.4th 335, 108 Cal.Rptr.2d 776, 783 (2001), the California Court of Appeal held that a bad-faith claim requires a showing that the insurer acted in deliberate refusal to discharge its contractual duties. Thus, if the insurer's actions resulted from `an honest mistake, bad judgment or negligence,' then the insurer is not liable under a bad-faith theory. Id. (quoting Careau & Co. v. Security Pacific Business Credit, Inc., 222 Cal. App.3d 1371, 272 Cal.Rptr. 387 (1990)); see Pemberton v. Farmers Ins. Exchange, 109 Nev. 789, 793, 858 P.2d 380, 382 (1993) (holding that bad faith exists when an insurer acts without proper cause); Feldman v. Allstate Ins. Co., 322 F.3d 660, 669 (9th Cir.2003) (interpreting and applying California law and holding that to prove bad faith, plaintiff must show insurer unreasonably or without cause withheld benefits due under the policy). An insurer's obligations arise from the insurance contract and the law. Miller's policy did not require Allstate to file or prosecute an interpleader action to resolve a third-party claimant's liens. Further, there are some circumstances where an insurer has a contractual duty to resolve lienholder claims, but that duty does not extend to a third-party claimant and its lienholders. In other words, an insurer is not required to resolve lienholder claims unless the insurance policy names the lienholder as a loss payee, the claimant is the insured, or the insured assigns the policy to the lienholder. Allied Mut. v. Midplains Waste Management, 259 Neb. 808, 612 N.W.2d 488, 499 (2000). Thus, an insurer is not required to resolve a third-party claimant's liens when the duty is not included in the insurance policy. See Heredia v. Farmers Ins. Exchange, 228 Cal.App.3d 1345, 279 Cal.Rptr. 511, 515-16 (1991) (stating that the insurer is not required to accept an offer of settlement for more than the policy limits). Here, Allstate was not contractually obligated to file an interpleader action on Miller's behalf. However, an insurer still has obligations under the duty to defend, which is a legal duty that arises under the law, as opposed to a contractual duty arising from the policy. We conclude that under the factual circumstances presented in this case, an insurer's refusal to file an interpleader action on behalf of an insured may be a factor to consider in a bad-faith lawsuit. [2] Although interpleader actions are available in specific contextspotential liability to multiple, conflicting claimantsan insurer is under no contractual obligation to commence an interpleader action. Regardless, as set forth above, the failure to advise an insured of his or her ability to file an interpleader action may be grounds for bad faith for breach of the duty to defend. Benefit Trust Life Ins. Co. v. Union Nat. Bank, 776 F.2d 1174, 1177-78 (3d Cir.1985); Schwartz v. State Farm Fire and Cas. Co., 88 Cal. App.4th 1329, 106 Cal.Rptr.2d 523, 533 (2001). Here, Allstate rejected Hopkins' demand to file an interpleader complaint without informing Miller of the settlement offer. Thus, Allstate's refusal to file an interpleader complaint on Miller's behalf is a factor to consider in determining whether Allstate adequately informed Miller, and therefore, whether it adequately defended Miller.