Requiring Insurers to Protect Policyholders in "Mixed Action" Cases as They Head to Trial
Requiring Insurers to Protect Policyholders in “Mixed Action” Cases as They Head to Trial
By David A. Gauntlett*
RESISTING THE ALLOCATION INSURANCE CLAIMS
Issues Arise with “Mixed Action” Claims
Allocation issues involving “mixed actions” have emerged as a potent source of controversy. “Mixed Action” cases[1] involve concurrent covered and uncovered claims within the same action which can address various elements that call into question the extent of an insurer’s duty to defend and/or indemnify.
· Covered vs. Uncovered Theories of Liability: a civil suit that alleges theories of condition for liability that demonstrate covered and uncovered counts
· Covered vs. Uncovered Defendants: when common counsel is used to provide a consolidated defense to multiple parties which include insured and uninsured persons or entities.
· Covered vs. Uncovered Damages: the alleged damages fall partially out of the scope of an insurer’s obligation to indemnify.
“Mixed Action” cases can trigger coverage disputes about the distribution of monies policyholders are entitled to receive. Where a policyholder agrees to pay $1 million over the insurer’s objections to settle a “Mixed Action”, who must demonstrate the portion applicable to covered claims? So too, where a verdict in a “Mixed Action” case does not reflect what claims are the basis for the monetary award that an insurer is defending under reservation of rights, raises issues as to whose burden is it to allocate the verdict between covered and uncovered claims? Lastly, who has the burden of proving “reasonableness” in a case where the insured enters into a consent judgement with the underlying plaintiff?
Many courts have ruled on these allocation dispute issues setting up the scope of this controversy and establishing possible resolutions. Questions arise as to what rules and procedures should courts follow in assessing whether an undifferentiated verdict may be passed by primary or excess insurers to limit their obligation to the payment of the covered part of the judgement?
Allocating Between Insured and Uninsured Entities
Allocation may also arise in cases involving insured and uninsured entities, although the dispute in such cases typically address only whether insures may prorate defense costs to reflect the involvement of an uninsured defendant. In these cases, the insurers often argue that the uninsured entity should not receive a windfall. The insured, by contrast, typically argues that the insurer can refuse to pay defense costs that are solely attributed to the uninsured party.
A developing body of case law addressing directors and officers (D&O) liability policy limits the right of insurers to prorate their defense payment where the policies don’t allocate 100% of defense fees to the insurers. They reflect the fact that insurer funded defense is benefitting both insureds (the directors) and uninsured (the corporations).
For example, the Eighth Circuit ruled in Brand v. National Union Fire Insurance Co. of Pittsburgh held that a D&O insurer on the issue of allocating defense costs between insured and uninsured parties. The court emphasized that the directors had taken an “all or nothing” approach by asserting that they were entitled to be reimbursed for 100 percent of the defense costs and could not now make an intermediate demand alleging that they should be reimbursed for 40 percent or 82 percent based upon alternative theories of allocation. In Nordstrom, Inc. v. Chubb & Son, Inc.[2], the Ninth Circuit allocated all indemnity payment to the insurer as the liability of the corporate entity arose because the corporation’s liability was “wholly concurrent with D&O liability.”
AVOIDING AN UNCOVERED JUDGMENT IN A MIXED ACTION
Insurers Must Settle Cases to Avoid Harm to Policyholders
It is a “well-settled” and “enduring principle” of most case law nationwide that an insurer “may be held liable for the breach of its duty of ‘good faith’ in defending and settling claims over which is exercises exclusive control on behalf of its insured.”[3] Additionally, when an insurer violates “its implied obligation to act in good faith [by] fail[ing] to make a reasonable settlement of a claim within policy limits,” they may be liable for “compensatory damages in excess of the policy limits.”[4]
Insure Refusals to Offer The Policy Limit Exposes Them to Excess Costs Liability
Failing to authorize a reasonable settlement within policy limits as part of a global settlement constitutes a breach of the implied covenant of good faith and fair dealing. Eradicating the policy limits, the insurer will become liable for all of the insured’s damages proximately caused by the breach, including any excess judgment.[5]
In Johansen v. Cal. State Auto. Association Inter-Ins. Bureau,[6] the court clarified that an insurer is liable for an excess judgment even if its denial of coverage is well reasoned and in good faith but simply wrong. The court explained:
An insurer who denies coverage does so at its own risk, and, although its position may not have been entirely groundless, if the denial is found to be wrongful it is liable for the full amount which will compensate the insured for all the detriment caused by the insurer’s breach of the express and implied obligations of the contract. . . . [A]n insurer’s ‘good faith,” though erroneous belief in noncoverage affords no defense to liability flowing from the insurer’s refusal to accept a reasonable settlement offer. (emphasis added)
Pursuant to Archdale v. Am. Int’l Specialty Lines Ins. Co.,[7] the court made clear that if
the case proceeds to trial, and judgment is entered in excess of policy limits, the insurer will be liable for the full amount of the judgment, regardless of whether the judgment was for covered claims.[8] Additionally, in Hamilton, the law is clear that:
An insurer that breaches its duty of reasonable settlement is liable for all the insured’s damages proximately caused by the breach, regardless of policy limits. Where the underlying action has proceeded to trial and a judgment in excess of the policy limits has been entered against the insured, the insurer is ordinarily liable to its insured for the entire amount of that judgment, excluding any punitive damages awarded.[9]
Furthermore, Johansen explains that an insurer must consider the offer as though it alone were liable in making a decision as to whether to accept a settlement offer.[10]
THE REMEDY FOR INSURER INTRANSCIENCE
If the insurers do not settle the case within policy limits, the insured may request that the insurers: (1) agree to pay any verdict, including any amounts in excess of policy limits; (2) agree to appeal any judgment and pay the cost of and provide collateral for an appellate bond; and (3) agree to pay for any affirmed judgment or a judgment that results from a remand to the trial court.[11] Typically, requests that the insured settle a case within policy limits avoid potential for a verdict in excess of policy limits.
CONCLUSION
“Mixed Action” cases can raise a lot of controversy when interpreting the extent of a policyholder’s coverage raising question of who holds the burden of proving allocation and reasonableness. Many courts have analyzed these cases to set parameters and establish standards for covered liability settlements.
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* 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] “Mixed Action” cases are those that include covered and uncovered claims for Relief in the same action. See, Franklin D. Cordell, Michael A. Hamilton, James W. Bryan, Suzan I. Charlton, Navigating Disputes Over Allocation Between Covered and Uncovered Claims. Torts Insurance Practice Journal, 57 (10), p. 97-107. (Winter 2022).
[2] Nordstrom, Inc. v. Chubb & Son, Inc. 54 F.3d 1424, 1433 (9th Cir. (Wash.) 1995)
[3] Pavia v. State Farm Mut. Auto Ins. Co., 626 N.E.2d 24, 26 (N.Y. 1993)
[4] Gov’t Emples. Ins. Co. v. Diane Saco, No. 12-CV-5633 (NGG) (ST), 2018 U.S. Dist. LEXIS 209652, *12 (E.D.N.Y. Dec. 10, 2018).
[5] Hamilton v. Md. Cas. Co., 7 Cal. 4th 718, 725 (2002) (“An insurer that breaches its duty of reasonable settlement is liable for all the insured's damages proximately caused by the breach, regardless of policy limits.”)
[6] Johansen v. Cal. State Auto. Ass’n Inter-Ins. Bureau, 15 Cal. 3d 9, 15-16 (1975)
[7] Archdale v. Am. Int’l Specialty Lines Ins. Co., 154 Cal. App. 4th 446 (2007)
[8] Id. at 463 citing Crisci v. Security Ins. Co., 66 Cal. 2d 425, 429 (1967)
[9] supra, Hamilton, 27 Cal. 4th at 725 (emphasis added)
[10] supra, Johansen, 15 Cal. 3d at 16 (“Such factors as the limits imposed by the policy . . . or a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one.”)
[11] These requests are not unusual since insurers often make such payments to avoid bad faith claims after an excess judgment. See, e.g. Davis R. Anderson & John W. Dunfee, No harm, No Foul: Why a Bad Faith Claim Should Fail When an Insurer Pays the Excess Verdict, 33 Tort * INS. L.J. 1001, 1006 n. 19 (1998).