Liability Insurance: Defense, Settlement, and Excess Coverage Flashcards
Duty to defend
Broader than duty to indemnify
Even if the allegations are groundless, false, or fraudulent, the duty remains.
Right to defend
Insurers have a right to defend that requires the insured to accept the defense
Insured’s duties: (1) notice to insurer, (2) file police report, (3) cooperate (including appearing in court)
Reservation of rights
Insurer retains right to deny coverage if it later determines a claim is excluded, so insured has notice of possible need to protect its interests
Beckwith Machinery Company v. Travelers Indemnity Company
Plaintiff was sued by a client for selling defective construction tractors, and the customer sought actual property damages and punitive damages. Plaintiff had a CGL through defendant, and defendant assumed defense of the case. Defendant later withdrew defense of the punitive damages and then even later withdrew its defense of the actual property damages and denied coverage. Defendant never reserved its rights to deny coverage to put plaintiff on notice of the possibility.
Once an insurer begins defending an insured against a third-party claim, the insurer is estopped from later denying coverage for resulting liability unless it makes a timely reservation of rights.
Gray v. Zurich Insurance Company
Plaintiff had a personal-liability policy with defendant that agreed to pay damages for bodily injury, excluding “bodily injury . . . caused intentionally by or at the direction of the insured.” Plaintiff was involved in a fight and was sued for assault. Defendant refused to defend plaintiff because the claim was an intentional tort, which it argued was excluded. Plaintiff raised self-defense at assault trial.
An insurance policy excluding coverage for intentional torts does not relieve the insurer of its duty to defend an action that merely alleges that the insured caused an injury intentionally.
Shoshone First Bank v. Pacific Employers Insurance Company
Plaintiff had an occurrence-based general-liability policy with defendant that covered liability for bodily injury, property damage, personal injury, and advertising injury. Plaintiff was sued by a former bank director and timely sought defense from defendant under the policy. Defendant agreed but reserved its rights pending further investigation of its obligations. After settling the case, the defendant sought to recover the portion of the costs it expended defending uncovered causes of action and for asserting a counterclaim in the case.
An insurer cannot allocate and recover costs attributable to the defense of claims not covered by the insurance policy where at least one of the claims alleged is covered by the insurance policy. Also, insurers do not have a duty to bring claims, including counterclaims.
Right to settle
Insured cannot refuse a settlement offer, only the insurer can
Exception: malpractice coverage where the insured’s professional license may be at stake
Offer of judgment in Nebraska
Defendant can offer to settle within policy limits through a court filing, and if the judgment ends up being less than the offer of judgment, the plaintiff cannot collect.
Crisci v. Security Insurance Company of New Haven
Plaintiff was a landlord who had an insurance policy with defendant for $10,000. One of plaintiff’s tenants fell through a broken step and sued plaintiff for $400,000. Defendant took on its duty to defend the case but refused an offer from the tenant to settle for the $10,000 limit. The case went to the jury, who awarded the tenant and her husband a combined $101,000.
Every insurance contract includes an implied covenant of good faith and fair dealing that requires an insurer to accept settlement offers within policy limits if there’s significant risk of recovery beyond those limits and settlement is the most reasonable way to dispose of the claim. Under the duty to defend, the insurer steps into the shoes of the insured and is thus required to protect the insured’s exposure to risk by treating the case as though there is no policy limit.
Babcock & Wilcox Co. v. American Nuclear Insurers
Defendant provided defense for plaintiff under a reservation of rights when plaintiff was sued by over 500 people regarding nuclear plant emissions. The defendant rejected a settlement within policy limits. The insured settled well under the policy limits without the insurer’s consent, but the insurer refused to pay.
Most jurisdictions require an insurer to pay a settlement obtained without the insurer’s consent if (1) the policy provided coverage, (2) the insurer defended under a reservation of rights, and (3) the insurer rejected a fair and reasonable settlement. When an insurer reserves rights and refuses a reasonable settlement, it necessarily narrows the insured’s duty to cooperate and allows the insured to protect its interests by reasonably settling, particularly when the settlement is within policy limits.
