Opinion ID: 1718972
Heading Depth: 1
Heading Rank: 6

Heading: Iowa Mutual's Refusal to Consent to the Proposed Settlement.

Text: When an insurer defends an insured, it has control over the defense and over settlement. See Kooyman v. Farm Bureau Mut. Ins. Co., 315 N.W.2d 30, 32 (Iowa 1982). We have recognized that in this situation a covenant of good faith and fair dealing is implied. See id. at 33. This covenant includes a duty to settle claims without litigation in appropriate cases. [4] Id.; accord 1 Windt § 5.01, at 295 (One of an insurer's obligations under a contract of liability insurance, arising out of its implied duty of good faith and fair dealing, is to settle a claim that has been brought against the insured when it is appropriate to do so.). Our court has considered several cases in which it was alleged that the insurance company breached its duty of good faith by failing to settle a claim within policy limits. See Dolan v. Aid Ins. Co., 431 N.W.2d 790, 792 (Iowa 1988); Kooyman, 315 N.W.2d at 33-34; Koppie v. Allied Mut. Ins. Co., 210 N.W.2d 844, 846 (Iowa 1973); Henke v. Iowa Home Mut. Cas. Co., 250 Iowa 1123, 1127, 97 N.W.2d 168, 171 (1959). We have summarized the legal principles developed in these cases as follows: We begin with the simple assumption that an insured buys an agreed amount of liability protection for a set premium. The insured, in the first instance, is at risk for the amounts in excess of the protection which has been purchased. The policy limits, however, set a boundary which the insurer cannot misuse to the detriment of the insured. It is bad faith for an insurance company to act irresponsibly in settlement negotiations with respect to the insured's risk in that part of the claim in excess of coverage. It is bad faith for the company to factor in its consideration of settlement offers the limited amount between an offer and the policy limits. The best standard for good faith in a specific negotiation is to ignore the policy limits. If, but for the policy limits, the insurer would settle for an offered amount, it is obliged to do so (and pay toward settlement up to the policy limits). But the insurer is free to reject the offer if it would have rejected the same offer under policy limits covering the whole claim. Wierck v. Grinnell Mut. Reins. Co., 456 N.W.2d 191, 194-95 (Iowa 1990). Thus, the test in Iowa for excess liability has been clearly established as one of bad faith, not negligence. See Ferris v. Employers Mut. Cas. Co., 255 Iowa 511, 516, 122 N.W.2d 263, 266 (1963). We have not had an occasion to consider the insurer's duty to settle under circumstances such as those before us, where the insurer has reserved its right to deny coverage for any judgment entered against the insured. Certainly under these circumstances, where the insured may ultimately be responsible for a judgment if coverage is found not to exist, it is extremely important that the insurance company, who is controlling the defense, fulfill its contractual obligation to settle where appropriate. One commentator has observed that an insurer may breach the contract by failing to settle an appropriate case, even though its failure to settle is attributable solely to the company's negligence. See 1 Windt § 5.14, at 329. This commentator suggests that, recognizing that the company has, despite the absence of bad faith, breached the insurance contract, the company should be precluded from enforcing the provisions in the policy inuring to its benefit, such as the one prohibiting unauthorized settlements by the insured. Id. We agree. An insurance company cannot use its erroneous belief that it has no coverage to justify a refusal to settle. See 1 Windt § 5.05, at 310 & n. 56, at 310-11 (citing cases). [5] At the point in time that the insurer is faced with a fair and reasonable settlement demand that a reasonable and prudent insurer would pay, the insurer must either abandon its coverage defense and pay the demand or lose its right to control the conditions of settlement. [6] If the insurer prefers to debate coverage and, accordingly, refuses to pay the settlement demand, the insured is free to either pay the settlement demand or stipulate to the entry of judgment in the amount of the demand. The insurer, if found to have coverage, will be liable for the insured's settlement if the settlement is found to be fair and reasonable. Although our holding bears some similarity to the legal principles set forth in Wierck with respect to an insurer's liability for an excess judgment, we do not impose a bad faith standard for failure to settle a case where the defense is provided under a reservation of rights. The bad faith standard is simply not appropriate here, where the issue is one of contractual liability as opposed to extra-contractual liability. We hold, therefore, that when an insurer provides a defense under a reservation of rights and rejects a fair and reasonable settlement demand that a reasonable and prudent insurer would pay, the insured is free to consummate the settlement on terms that protect the insured from any personal exposure. [7] Applying these principles to the case before us, we think that summary judgment was premature. The record before the district court showed that settlement negotiations occurred, but the exact course of these negotiations and Iowa Mutual's involvement in them were not made clear. Therefore, we think Iowa Mutual has failed to demonstrate the absence of a genuine issue of material fact that would permit summary judgment. We recognize that the parties and the court did not have the benefit of any Iowa decision setting forth the applicable law under the circumstances of this case. Therefore, we do not mean to imply by our reversal of the summary judgment that the parties, on remand, will not be able to file properly supported motions for summary judgment that demonstrate one or the other party is entitled to judgment as a matter of law based on the legal principles set forth in this opinion. We merely hold that the information needed to test the insurer's conduct under the law we announce today is lacking in the record before us. Consequently, we reverse the district court's summary judgment ruling in favor of Iowa Mutual and remand for further proceedings. REVERSED AND REMANDED. McGIVERIN, S.J., [] participates in place of NEUMAN, J., who takes no part.