The vast majority of civil litigation in America ends with a settlement rather than a judgment. As the most likely endgame for any given claim, policyholders should understand their rights during the settlement process. It is almost important to know how those rights are affected both by an insurer’s acceptance of its duty to defend and by a denial of coverage.
Defending Insurer’s Right of Approval for Settlement Terms
The rights of an insurer to control the defense and negotiate any settlements are standard provisions in policies.[1] The insurer has a duty of good faith and fair dealing that mandates it act in the best interest of the policyholder and accept reasonable settlement offers.[2] Refusal to settle can open the door for a lawsuit by the policyholder against the insurer for reimbursement.[3] There can be recovery, however, if the defending insurer fails to agree to a settlement because the policyholder did not provide notice of the offer.[4] While providing notice may seem trivial, a new statute in California places stringent requirements on the exact form that such communications must take,[5] and failure to adhere to them may provide grounds for insurers to argue notice was insufficient even though its focus is only claims for automotive accidents and related events..
Insurer Recoupment Following Settlement
Because the insurer is obligated to accept reasonable settlements, which must take into consideration whether the insurance agreement is a “burning limits”[6] policy,[7] nearly all states will allow insurers to seek proportional recovery of settlement fees paid if they can prove some claims were not covered by the policy.[8] This facilitates expediency in that the insurer can consider the claims as a whole while negotiating the resolution of the underlying matter and parse out which are covered and uncovered afterward when it seeks reimbursement.
In the majority of states, the insurer must provide notice of this right in the insuring agreement.[9] In others, however, the insurer need only alert the policyholder of its intent to seek reimbursement in its reservation of rights (“ROR”) letter.[10] Only Alaska and Arkansas have determined that, as a matter of law, insurers are unable to recover money paid in settlement, regardless of whether all claims were covered.[11]
A Denying Insurer Loses Its Approval Rights
In Roman v. Unigard Ins. Grp.,[12] the alleged negligence of the ownership and management group of a building led to four deaths and numerous injuries when the building was set on fire. Unigard subsequently denied coverage for all claims and refused to provide a defense or participate in settlement discussions. The policyholder proceeded to reach a settlement with the victims that included assignment all of his rights as against Unigard to the victims and a covenant not to execute as against the policyholder personally. Unigard argued against the validity of the settlement terms, but the court determined that, absent collusion, the insurer had forfeited the opportunity to be heard by denying a defense.[13]
This principle applies even to settlement of claims that were not proven but, had they been proven at trial, would have been covered.[14] In some states, that can mean a nondefending insurer must reimburse the policyholder for the full settlement amount as long as any of the settled claims were covered.
Conclusion
Many times settlement is viewed as the finish line of litigation. In reality, where insurance coverage is involved, it is more of an entirely separate endeavor. Navigating that warren of entangled rights and obligations can be nearly impossible even for most defense attorneys, much less the average layperson. For this reason, it is best to seek the assistance of expert coverage counsel to ensure the insurance company neither oversteps its authority nor falls short of its obligations.
*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] See, e.g., Navigators Insurance Company CGL Policy Form NAV NP3 + Cyber (07/16) (“[W]e will have the right and duty to defend the insured . . . [and], at our discretion, investigate any occurrence and settle any claim or suit that may result.”). Policies also often contain “Voluntary Payment” provisions which state “[n]o insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”
[2] Apollo Educ. Grp., Inc. v. Nat'l Union Fire Ins. Co., 250 Ariz. 408, 414–15 (2021) (“To carry out this responsibility, the insurer ‘evaluates the claim, determines whether it falls within the coverage provided, assesses its monetary value, decides on its validity and passes on payment.’ [Rawlings v. Apodaca, 151 Ariz. 149, 154 (1986)]. The company may not refuse to pay the settlement simply because the settlement amount is at or near the policy limits. Rather, the insurer must fairly value the claim.”)
[3] Ha 2003, Inc. v. Fed. Ins. Co. (In re HA 2003, Inc.), 310 B.R. 710, 723–24 (Bankr. N.D. Ill. 2004) (Insurer that failed to defend while reserving its right to contest coverage lost the right to consent to a settlement); see also Hartford Cas. Ins. Co. v. N.H. Ins. Co., 417 Mass. 115, 121 (1994) (“[The insured] . . . must prove that the plaintiff in the underlying action would have settled the claim within the policy limits and that . . . no reasonable insurer would have refused the settlement offer or would have refused to respond to the offer.”)
[4] Low v. Golden Eagle Ins., 110 Cal. App. 4th 1532, 1547 (2003) (The insured was barred from seeking reimbursement from a defending insurer where it failed to apprize it of the settlement, even if its terms were reasonable and noncollusive.)
[5] Cal. Civ. Proc. Code § 999, et seq.
[6] Ordinarily, a policy’s limit is only for indemnification payments, but these policies provide that money spent on defense fees will erode the policy limit, thereby decreasing the amount available for settlement as a dispute drags on. They are also known as “self-liquidating,” “self-consuming,” and a variety of other names.
[7] Weber v. Indem. Ins. Co. of N. Am., 345 F. Supp. 2d 1139, 1145 (D. Haw. 2004) (noting that the existence of a burning limits policy must be considered in determining the reasonableness of a settlement offer).
[8] See David A. Gauntlett, Insurance Coverage of Intellectual Property Assets (Appendix O), Second Edition (2023).
[9] See, e.g., Holyoke Mut. Ins. Co. v. Vibram USA, Inc., 2017 Mass. Super. LEXIS 12, at *17 (2017) (“[W]hen an insurer provides payments that benefit the insured, but also avoid a perceived risk of exposure to even greater loss to the insurer, the reservation of rights letter does not support a claim for reimbursement. A right to reimbursement must be found in a contract.”)
[10] Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 658–59 (2005) (Insurer can recoup costs whenever the insurer “acting under a reservation of rights, defended an action in which, as it turns out, no claim was ever potentially covered.” In a “mixed” action involving both covered and uncovered claims, the insurer must defend them all, but it can recoup its costs of defense “attributable to the claims for which there was no potential coverage.”)
[11] Attys. Liab. Prot. Soc'y, Inc. v. Ingaldson Fitzgerald, P.C., 370 P.3d 1101, 1106 (Alaska 2016) (“First, does Alaska law generally require insurers to pay defense costs, without reimbursement, when they reserve rights? And second, if so, does Alaska law bar attempts to contract around this requirement? The answer to both questions is yes, even in circumstances where (1) an insurer explicitly reserved the right to seek such reimbursement in its offer to tender a defense provided by independent counsel, (2) the insured accepted the defense subject to the reservation of rights, and (3) the claims are later determined to be excluded from coverage under the policy.”); Med. Liab. Mut. Ins. Co. v. Alan Curtis Enters., 373 Ark. 525, 532A (2008) (“[U]nder Arkansas law, an insurer may not recoup attorney's fees under a unilateral reservation of rights without statutory or rule authority.”)
[12] Roman v. Unigard Ins. Grp., 26 Cal. App. 4th 177, 179 (1994).
[13] Id. at 184; see also Samson v. Transamerica Ins. Co., 30 Cal. 3d 220, 240 (1981) (“‘[Where] the insurer has repudiated its obligation to defend[,] a defendant in the absence of fraud may, without forfeiture of his right to indemnity, settle with the plaintiff upon the best terms possible, taking a covenant not to execute.’”) (quoting Zander v. Texaco, Inc., 259 Cal. App. 2d 793, 802 (1968)).
[14] Watts Indus., Inc. v. Zurich Am. Ins. Co., 2002 WL 31840924 (Cal. Super. Ct. Nov. 22, 2002).
