National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

In R.G. Wegman Construction Co. v. Admiral Ins. Co., 09-2022 (7th Cir. January 14, 2011), a worker at a construction site managed by Wegman Construction was injured in a fall and sued Wegman as an additional insured on the subcontractor’s policy. The policy in question had a One Million Dollar limit. The claim was duly tendered to Admiral which appointed defense counsel and controlled the defense thereafter. 

On the eve of trial, the insured learned inadvertently that there was a substantial risk that the case, if it resulted in a plaintiff’s verdict, would exceed the $1 million limit.  At that point, Wegman hired his own defense counsel.  He also gave notice for the first time to his excess insurer but coverage was denied on the basis of late notice.

The case proceeded to trial and resulted in a $22 million judgment.  Worse, even though defense counsel had hoped that the insured’s liability would be 25% or less such that the plaintiff could only recover its proportional damages from the insured under Illinois’ “joint and several” rules, Wegman was held liable for 27% and thus became responsible for the entire judgment.

Reviewing this unhappy set of facts, the Seventh Circuit declared that a conflict of interest had arisen once Admiral became aware that there was a risk of an excess judgment. In this case, the court found that such facts should have become apparent by the time that the underlying plaintiff's deposition was taken, two years before trial and certainly by the date that the plaintiff demanded $6 million in settlement.

 The court refused to find that this conflict was eliminated merely because the settlement demand was inflated or because the likelihood was that the case would not result in an excess judgment.  The court observed that even if there was a 90% likelihood of the case being resolved within limits, these disparate outcomes create entirely different attitudes on the part of the insured and insurer with respect to whether to settle or not. 

The Court rejected Admiral’s argument that there was no actual conflict of interest requiring notice to the insured until actual settlement negotiations had begun. Rather, the Court held that, having controlled the defense, Admiral had a duty to warn its insured when that control created a conflict of interest. The Court also rejected Admiral’s argument that it was the obligation of its appointed defense counsel to give notice to the policyholder holding that the duty to notify of a conflict of interest is the responsibility of the insurer and cannot be contracted away without the policyholder’s consent.

In light of the existence of this conflict, it is incumbent on the insurer to give notice to its policyholder of the risk of an excess judgment once that risk becomes apparent.  Otherwise, in the view of the court, the insurer breaches its fiduciary obligations by "gambling with the insured's money."

Once notified, the insured may take appropriate steps to protect its own interests, including hiring independent counsel of the insured's own choosing, whose fees must be paid by the insurer as Peppers counsel.

The Seventh Circuit therefore found that the Illinois District Court had erred in granting summary judgment to Admiral and remanded the case back to the trial court to determine whether there was merit to Wegman's bad faith claims.   The court made clear, however, that the insured's burden of proof in this case will not be as onerous as would ordinarily be the case.  Although in most cases the policyholder would have the additional obligation of proving not only that the insurer breached its obligations but that the case could have settled within the $1 million primary limit, in this case such proof was likely not essential as the late notice that the insured gave to its umbrella carrier had resulted in a denial of coverage by that insurer.

There are some interesting takeaways from this new opinion.

The first is the suggestion that the mere risk of an excess judgment creates a right to independent counsel in Illinois.

Second, the dicta in this case places significant pressure on insurers to not take cases to trial.  If an insurer elects to try rather than settle, it should certainly document its file carefully to ensure that the risks of trial have been fully explained to the insured.

Several years ago, the Georgia Supreme Court recognized the dilemma that such cases pose for primary insurers and ruled in Cotton States Mut. Ins. Co. v. Brightman, 276 Ga. 683, 580 S.E.2d 519 (2003) that an insurer is not protected from liability merely because the plaintiff’s demand against it was conditional on a second insurer also making an offer of settlement. In such circumstances, the court ruled that even though the insurer had no control over the involvement of the second carrier, it was nonetheless obligated to give equal consideration to its policyholder’s financial interests by offering its limits.

The Supreme Court disagreed with the 2002 analysis of the intermediate appellate court (256 Ga. App. 451 (2002) that would have imposed an affirmative obligation on the part of the insurer to engage in negotiations concerning a settlement demand within policy limits. The Supreme Court ruled that it was “unwilling to ascribe a duty to insurers to make a counter-offer to every settlement demand that involves a condition beyond their control. Instead, we conclude that an insurance company faced with a demand involving multiple insurers can create a safe harbor from liability for an insured’s bad faith claim under Holt by meeting the portion of the demand over which it has control, thus doing what it can to effectuate the settlement of the claims against its insured.”

Last month, however, the Georgia Supreme Court held that a primary insurer might have been liable for a bad faith failure to settle notwithstanding the “safe harbor” recognized in Brightman. In Fortner v. Grange Mut. Ins. Co., S09G0492 (Ga. October 19, 2009), the plaintiff was injured in a car accident caused by Alan Arnsdorff. At the time, Arnsdoftf had a $50,000 policy with Grange Mutual as well as a $1 million limit with the Auto Owners policy issued to his plumbing business. Fortner offered to settle the claims for $50,000 contingent on Auto Owners’ payment of $750,000.

Although Auto Owners did not respond within the time limit set forth by Fortner, Grange responded that it would pay its $50,000 limit contingent on Fortner signing a full release within indemnification language and dismissing his claim against Arnsdorff with prejudice. Fortner considered this a rejection of his offer and took the case to trial where he won a $7 million verdict that was affirmed on appeal. As is often the case in such matters, Arnsdorff then assigned his rights to Fortner who brought a bad faith action against Grange for failing to settle.
At trial, the jury ruled in favor of Grange. On appeal, Fortner argued that the trial judge had erred in instructing the jury that it must rule for the insurer if it had offered its policy limits.

This instruction was affirmed by the Georgia Court of Appeals.  On furthe rreview, however, the Georgia Supreme Court ruled on October 19, 2009 that the instruction had precluded the jury from considering whether Grange Mutual had breached its obligations by imposing those conditions. It declared that its earlier analysis in Brightman was limited to situations in which the insurer had done everything within its power to effect a settlement. In this case, it was Grange Mutual that had elected to impose the conditions that the plaintiff enter a full dismissal with prejudice of its rights against the insured and agree to indemnify it.

Noting the fact that Fortner had eventually obtained a $7 million judgment, the court found that any such argument would have required Fortner to forfeit his access to Arnsdorff’s $1 million business policy, a condition that was entirely within Grange Mutual’s control. The Supreme Court declared, therefore, that it was not enough to instruct the jury that a liability insurer is blameless if it has tendered its limits but must also consider whether conditions are added to the offer. The case was therefore remanded to the trial court for further consideration of whether the insurer had acted in an ordinarily prudent manner in its response to Fortner’s settlement offer.