Opinion ID: 1198150
Heading Depth: 2
Heading Rank: 5

Heading: the settlement negotiations raise issues of material fact

Text: 56. Rummel's interpretation of Lexington's insurance contract was reasonable. However, we believe issues of material fact do exist concerning the settlement agreement. Cf. Miller v. Fairchild Indus., Inc., 797 F.2d 727, 735 (9th Cir.1986) (stating that summary judgment is inappropriate when the circumstances surrounding the agreement's formation permit conflicting factual inferences). 57. Lexington, under its contract, had no duty to Circle K to either settle or defend: Anything in the Underlying Insurance to the contrary notwithstanding, the Company shall not be obliged to assume charge of the settlement or defense of any claim or suit brought or proceeding instituted against the Insured, but the Company, at its option but not being required to, shall have the right and be given the opportunity to associate with the Insured in the defense or control of any claim, suit or proceeding which appears reasonably likely to involve the Company, in which event the Insured and the Company shall cooperate in all things in the defense or control of such claim, suit or proceeding. [22] However, some of the facts in the record suggest that, while Lexington may have had no duty to assume charge of the settlement negotiations, it may have acted improvidently, if not in bad faith, by refusing to keep abreast of the negotiations. Rummel claimed soon after the judgment that he expected recovery of damages from Lexington. Arguably, Lexington was alerted that it had an interest, if not a responsibility, to at least keep itself informed about the settlement's progress. It is not unheard of for insurance companies, even though they have refused to assume charge of litigation or settlement, to send employees to monitor such proceedings. See Allstate Ins. Co. v. United Servs. Auto. Ass'n, 249 Va. 9, 452 S.E.2d 859, 860 (1995) (mentioning employee sent to monitor litigation, even though company reasonably concluded it had no liability and employee had been given no authority to settle). Such an act might have prevented much litigious misunderstanding. 58. If Lexington acted in bad faith by refusing to participate in or at least to monitor the progress of the negotiations, then it abdicated any right to object to the final settlement and it may be liable for damages. Cf. Critz, 41 Cal.Rptr. at 408 (The insurance company's bad faith rejection of a settlement offer may effectually wipe out the policy limit on liability.). A court may find bad faith when an insurer refuses to settle after being asked to do so while at the same time demonstrating disregard for the interests of its insured. See Lujan v. Gonzales, 84 N.M. 229, 237, 501 P.2d 673, 681 (Ct.App.1972) (discussing the type of conduct that constitutes bad faith on the part of insurers); State Farm Fire & Cas. Co. v. Price, 101 N.M. 438, 446, 684 P.2d 524, 532 (Ct.App.1984) (same concept). This is because the insurer's refusal to discuss the settlement of a claim for which it may be liable can influence the final outcome of settlement negotiations. Without the participation of a potential crucial party, the participants to the settlement may be unable to accurately assess the extent of the insured's coverage. The insured may risk greater exposure to personal liability. Critz, 41 Cal. Rptr. at 408. A finding of bad faith on the part of Lexington would justify the conduct of the three parties to the settlement negotiations. It is well settled that, at least after a denial of liability by an insurer, the insured may enter into a settlement with a third party without prejudicing its rights against the insurer. Bunge Corp. v. London & Overseas Ins. Co., 394 F.2d 496, 497 (2d Cir.1968). 59. On the other hand, if Lexington, under the circumstances at the time, reasonably refused to participate in the settlement negotiations, then Rummel's bad faith claims against Lexington would fail. Refusal to settle under the bona fide belief that the judgment might be overturned or that there was no liability under the policy does not constitute bad faith. See 7C John Alan Appleman, Insurance Law and Practice § 4712, at 455 (Walter F. Berdal ed., 1979) (discussing refusal to settle before trial). However, Lexington would still be liable for the balance of compensatory damages under the terms of its contract. An insurer acts at its peril when it declines to participate in settlement negotiations on behalf of its insured. Cf. State Farm Mut. Auto. Ins. Co. v. Paynter, 122 Ariz. 198, 593 P.2d 948, 954 (Ct.App.1979) (making similar remarks about the refusal to defend). Despite the insurer's good faith belief that there was no coverage, if the court finds coverage upon construction of the insurance contract, then the insurer will be bound by the settlement. Cf. 7C Appleman, supra, § 4711, at 406-07 (discussing refusal to settle before trial). Under such circumstances, the insured is entitled to settle the claims against it in a manner that is in its best interest. Cf. Paynter, 593 P.2d at 951 ([A]n abandoned insured may enter into a reasonable agreement limiting his liability in order to avoid litigation of the claim at his own expense.). 60. The interpretation of an insurance contract is a matter of law about which the court has the final word. Even though the insurance company drafted the language in its own policy, it is not the final authority on a contract's construction. For this reason, the company should always seriously evaluate a demand or a request by its insured that it participate in negotiations. Though the company may in good faith conclude that under specific facts it owes no duty to its insured, once the matter is litigated, a court may conclude otherwise. The court may view the refusal to participate in settlement negotiations as abandonment or bad faith. In this case, the trial court should admit evidence regarding Rummel's allegations of breach of contract, bad faith, and other related claims. 61. In contrast to Rummel's allegations, Lexington claims that Rummel, Circle K, and ISLIC negotiated secretly and deviously and never invited Lexington to participate in the settlement discussions. Moreover, Lexington accuses the three of misrepresenting the nature of the negotiations, of ignoring its requests for information, and of collusively withholding information. The result was an attempt to coerce Lexington into paying when it, in good faith, believed it had no duty to do so. A settlement that is the product of fraud or collusion at the expense of a nonparticipating insurer would release that insurer from any obligation under the settlement. Cf. Paynter, 593 P.2d at 954 (suggesting, in presence of fraud or collusion, insurer has no liability under judgment). [T]he obligation to deal fairly and honestly rests equally upon the insurer and the insured. Price, 101 N.M. at 444, 684 P.2d at 530. 62. There is authority to suggest that a settlement like the one before us does not bind an insurer who is deprived of a reasonable opportunity to respond to demands that it settle. The Wisconsin case, Home Insurance Co. v. Tooke , concerned a defendant who was an underinsured motorist and a plaintiff who held an underinsured-motorist policy. The defendant, his insurer, and the plaintiff agreed that the insurer would pay its full policy limit, dividing that limit between compensatory and punitive damages. Tooke, 496 N.W.2d at 750. This division left the plaintiff's underinsured-motorist carrier liable for the balance of the compensatory damages. The plaintiff sent notice of the settlement negotiations to her carrier, demanding a response by a specific date. The carrier did not respond. Id. at 751. The court indicated that the carrier was not given a reasonable opportunity to respond and was thus not a party to the settlement. The court held that, because the underinsured carrier was not a party to the settlement agreement, it cannot be held to the terms negotiated. Id. at 752. 63. In this case, if the trial court finds bad faith on the part of Rummel, Circle K, and ISLIC, then Lexington would be released from any liability under the settlement. Therefore, the trial court should admit evidence regarding Lexington's allegations of collusion, bad faith, and other related claims.