Opinion ID: 2193379
Heading Depth: 2
Heading Rank: 3

Heading: Patrons's Opportunity to be Heard

Text: [¶ 12] Patrons next argues that it should not be liable for Luce's damages award pursuant to 24-A M.R.S. § 2904 because it did not have a meaningful opportunity to litigate either Harris's liability or Luce's damages, resulting in an impermissible denial of due process. Luce argues that the judgment is binding on Patrons through section 2904 because Patrons had the opportunity to be heard but lost that opportunity by defending Harris under a reservation of rights, and because the terms of section 2904 have otherwise been met. [¶ 13] We have not previously addressed the tensions that exist between an insurer that reserves the right to deny coverage under the policy and the impact of that decision on the insured. We take this opportunity to do so. We have long recognized that [t]he essence of due process is notice and an opportunity to be heard. Michaud v. Mut. Fire, Marine & Inland Ins. Co., 505 A.2d 786, 789 (Me. 1986) (citing Mutton Hill Estates v. Town of Oakland, 468 A.2d 989, 992 (Me.1983)). In the context of section 2904, due process requires that an insurer be given notice of a claim such that it has a meaningful opportunity to defend its interests. Jacques v. Am. Home Assurance Co., 609 A.2d 719, 721 (Me.1992). [¶ 14] Patrons does not argue that it did not receive notice of the underlying suit. Patrons does, however, argue that it did not have a meaningful opportunity to defend its interests because Harris settled the case without its permission. We disagree with Patrons's position, however, because Patrons did have the opportunity to litigate Harris's liability under the Ferguson policy in the underlying suit between Luce and Harris, but it lost that opportunity when it elected to defend Harris under a reservation of rights. [¶ 15] We start from the premise that an insurer does not breach the insurance agreement by electing to defend its insured under a reservation of rights. See Gates Formed Fibre Prods., Inc. v. Imperial Cas. & Indem. Co., 702 F.Supp. 343, 346 (D.Me.1988). Furthermore, we agree with those courts that have held that an insurer who reserves the right to deny coverage cannot control the defense of a lawsuit brought against its insured by an injured party. Travelers Indem. Co. v. Dingwell, 884 F.2d 629, 638-39 (1st Cir. 1989); see also Cay Divers, Inc. v. Raven, 812 F.2d 866, 870 (3d. Cir.1987); United Servs. Auto. Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246, 252 (1987) (stating that [t]he insurer's reservation of the privilege to deny the duty to pay relinquishes to the insured control of the litigation); Ins. Co. of N. Am. v. Spangler, 881 F.Supp. 539, 543-44 (D.Wyo.1995); 22 ERIC MILLS HOLMES, HOLMES' APPLEMAN ON INSURANCE 2d § 136.7, at 49 (2003) (stating that, if the insurer has reserved its right to deny coverage, the insurer cannot compel the insured to surrender control of the litigation). This position strikes a fair balance between the insurer and the insured. If the insurer could continue to control the insured's defense despite reserving its rights to later deny coverage, it could assert a liability defense and insist on fully litigating the insured's case, thus exposing the insured to personal liability if there is a verdict favorable to the claimant. If the verdict is favorable to the claimant, the insurer still has another opportunity to avoid liability by doing exactly as Patrons did here, litigating coverage in a declaratory judgment action. Thus, we agree with the Arizona Supreme Court that the insured risk[s] financial catastrophe if [he is] held liable, while the insurer may save itself by litigating both issuesthe insured's liability and the coverage defenseand winning either. Morris, 741 P.2d at 251. [¶ 16] By allowing the insured to control his own case when the insurer issues a reservation of rights, the insured can protect himself from the sharp thrust of personal liability, id. (quotation marks omitted), and the insurer still has a meaningful opportunity to protect its own interests in a declaratory judgment action where it may assert, among other things, a coverage defense. Because Patrons chose to defend Harris under a reservation of rights, it gave up the ability to control Harris's defense. Therefore, Patrons cannot now assert that it was denied the opportunity in the personal injury action to litigate Harris's liability to Luce because it was an opportunity Patrons possessed and relinquished when it proceeded under the reservation of rights. See Miller v. Shugart, 316 N.W.2d 729, 733-34 (Minn.1982) (concluding that an insurer who disputes coverage cannot compel the insureds to forego a settlement which is in their best interests). [¶ 17] Although Patrons may have lost the opportunity to control the tort litigation when it decided to proceed under the reservation of rights, it was not left without the ability to contest its liability under the policy. Patrons had, and in fact availed itself of, the opportunity to litigate coverage by undertaking this declaratory judgment action at an appropriate point relative to Luce v. Harris. See Patrons Oxford Mut. Ins. Co. v. Garcia, 1998 ME 38, ¶ 6, 707 A.2d 384, 385 (Except in limited circumstances, an insurer cannot avoid its duty to defend by establishing, before the underlying action has concluded, that ultimately there will be no duty to indemnify.) (quotation marks omitted). Therefore, we find that Patrons was not denied a meaningful opportunity to contest liability under the insurance policy. See Michaud, 505 A.2d at 790. [¶ 18] Patrons further asserts that it should not be bound by the terms of the Luce-Harris settlement agreement and subsequent judgment simply because it chose to proceed under a reservation of rights. In other words, Patrons argues that principles of collateral estoppel and res judicata prevent it from being bound by a judgment to which it was not a party. Other courts have held, in a similar context, that an insurer is bound by a reasonable settlement entered into by its insured being defended under a reservation of rights. See Morris, 741 P.2d at 253-54. The Arizona Supreme Court, after holding that such a settlement did not violate the insurance policy, turned to the issue of whether the insurer could `relitigate' any aspect of the original tort claim. Id. at 253. In the face of the insurer's argument that it possessed an absolute right to relitigate all aspects of the liability case, including liability and the amount of damages, the court rejected this position as an end-run on the permissibility of the agreement. Id. The court noted, however: an insured being defended under a reservation might settle for an inflated amount or capitulate to a frivolous case merely to escape exposure or further annoyance. Id. To balance the competing interests, the court held that neither the fact nor amount of liability to the claimant is binding on the insurer unless the insured or claimant can show that the settlement was reasonable and prudent. Id. (citing Miller, 316 N.W.2d at 735). The court determined that the proper test for examining whether a settlement is reasonable and prudent is what a reasonably prudent person in the insureds' position would have settled for on the merits of the claimant's case, taking into account the possibility of the insured's liability, risk of an adverse verdict, and the damages portion of the claimant's case. Id. at 254; see also Cambridge Mut. Fire Ins. Co. v. Perry, ¶ 11, 197 Me. 94, 692 A.2d 1388, 1391. We agree with this approach. [¶ 19] Making settlements such as this one binding on the insurer prevents the insurer from circumventing such settlements when it has already ceded control of the litigation to its insured. We conclude, however, that the insurer should not be liable for an unchallenged amount judicially determined after an uncontested hearing on damages, or an amount not judicially determined to which its insured agrees because the insured could agree to settle for an inflated amount in exchange for a release from liability. Thus, the damages arising from a settlement such as the one seen here is binding on the insurer only to the extent that the insured or the claimant can show that it is reasonable, and only after coverage is deemed to exist. [6] Because we herein affirm the declaratory judgment court's finding that coverage exists, and because Luce has not yet shown the reasonableness of the settlement and the damages awarded, we remand to the Superior Court for Luce to make this showing. In addition to assessing the reasonableness of damages, the court, on remand, must determine whether the settlement entered into by Harris was reasonable, taking into account Harris's potential liability, the amount of damages, and his potential personal risk in the face of an adverse verdict. [7]