Right to Secure Insurer Funded Settlement for Non-Suits

By David A. Gauntlett*

Introduction

A filed complaint is often preceded by several other indications that litigation is imminent. A workplace injury, terminating a disgruntled employee, and receiving a demand letter are all easily identifiable signs that a lawsuit may eventually transpire. As a result, defense attorney fees are often incurred well before an actual “suit” exists.[1] News of an imminent lawsuit may also damage a business’s reputation. Many insurers insist that these are simply necessary as they have no duty to settle a “suit” that does not exist, but that insistence is undermined by case law.

California Court Determines Suit Is Not Necessary

California courts have held that an insurer has a good faith duty to settle claims even though there has been no suit yet. United States Fire Ins. Co., v. Button Transp., Inc.[2] discussed this obligation as it affirmed a bad faith judgment against the insurer for failing to settle claims that had not matured into suits:

It is clear that, under the policy language examined by our Supreme Court in Foster-Gardner [v. Nat'l Union Fire Ins. Co., 18 Cal. 4th 857 [(1998)] and Powerine I [Certain Underwriters at Lloyd's of London v. Superior Court], 24 Cal. 4th 945 [(2001], where there is no lawsuit filed against the insured, there is no duty on the part of the insurer to defend or indemnify the insured. However, contrary to U.S. Fire's contention at oral argument, it does not follow that an insurer is never obligated to settle or attempt to settle a claim in the absence of a lawsuit. The obligation to settle claims arises both from the insurance contract, and also from the covenant of good faith and fair dealing that is implied in the contract. As Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654 . . . made clear: “There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. [Citation.] This principle is applicable to policies of insurance. [Citation.] . . . It is common knowledge that a large percentage of the claims covered by insurance are settled without litigation and that this is one of the usual methods by which the insured receives protection. [Citation.] Under these circumstances the implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty.” (Id. at pp. 658-659, see also to the same effect Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573-575 [] and Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425[].)[3]

The Button court affirmed the bad faith judgment against U.S. Fire for failing to settle claims that had not yet become “suits.” The Button court relied on Bodenhamer v. Superior Court, 192 Cal. App. 3d 1472 (1987) finding insurer bad faith for failing to settle claims against a burglarized jewelry store when customers’ property was stolen. The insurer failed to evaluate their customers' claims or failed to settle with knowledge of the validity of the claims and the injury that delay could do to the insureds’ business, deliberately delaying settlement.

The Button court also relied on Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal. App. 4th 847, 906 which noted that “an insurer may breach the implied covenant by unreasonably coercing an insured to contribute to a settlement [citation] or by delaying payment until the insured is subject to loss of business goodwill.” (emphasis in original). Here, the injury suffered was that a major client “reduced the term of Button's contract from two years to one year and reduced its hauling rates by approximately 7%” as a result of the delayed settlement payment.[4]

Damage to Business Reputation Warrants Bad Faith Judgment

More recently, the court in Planet Bingo, LLC v. Burlington Ins. Co., 62 Cal. App. 5th 44, 53–56 (4th Dist. 2021) addressed an insurer’s bad faith liability for failure to settle in the context of a prelitigation claim. The insured claimed it was damaged because the insurer failed to settle before litigation was filed damaging its business reputation, even though the insurer ultimately settled the case after litigation was filed. The court found that because there was at least a potential for coverage, and in light of the fact that the policy stated it would cover an occurrence provided the insured’s liability was determined “in a settlement [the insurer] agreed to,” the insurer could be held liable for bad faith failure to settle under those circumstances. Id. at 57.

Duty to Defend Not Required to Implicate Duty to Settle

The distinction between the duty to settle and duty to defend is further highlighted by decisions addressing an excess insurer’s duty to settle in good faith despite not having a duty to defend.[5] Nor can excess insurers rely on no action or consent conditions where they refuse to agree to a reasonable settlement and fail to offer to undertake the defense.[6]

Notably, the duty to settle, which arises from the insurer’s implied duty of good faith and fair dealing, is clearly triggered upon receipt of a policy limits demand. Under certain authority in California, however, the existence of an opportunity to settle can be shown by evidence other than a formal settlement offer.[7]

Quick Mediation Is Best for All Parties

Mediation is often preferable to formal litigation as it leads to a cheaper and quicker resolution for all parties. In pursuing such a solution, policyholders must be aware that the defined term “suit” only encompasses mediations to which the insurer has given its consent. As concluded by the above cases, even an insurer’s withholding of consent to prevent the mediation becoming a “suit” does not necessarily remove all obligations to the policyholder.

There is also precedent holding that an insurer’s unreasonable conduct may negate the need to obtain that consent. In Wiseman-Hughes Enters. v. Harleysville Lake States Ins. Co.,[8] judgment was refused to the insurer because it was on notice of the mediation but had declined to attend. Nor did the insurer contest the insured’s participation or advise it in advance that any settlement secured would not be enforceable against it. The insurer’s silence in response to notification of, and requests to participate in, a mediation between the insured and claimants, precluded the insurer from obtaining summary judgment. Nevertheless, obtaining that consent is preferred for a smooth resolution.

Conclusion

As determined by the above cases, policyholders are entitled to early settlements where delays would inflict injury on the business. This may come in the form of hampering negotiations (as in Button) or damage to the business’s reputation (as in Plant Bingo). Mediation substitutes for a “suit” as a trigger of coverage in CGL policies, and typically satisfies federal district court ADR requirements. In either case, an insurer’s delay based solely on the fact that a formal complaint has not yet been filed is an unreasonable position that exposes it to bad faith damages.

*David A. Gauntlett is a principal of Gauntlett Law and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett Law at www.gauntlettlaw.com.

[1] Insurance policies typically define this term as “a civil proceeding in which damages because of bodily injury, property damage, environmental  damage, personal and  advertising  injury, any  act,  error  or  omission,  or  other  injury  or damage to which this insurance applies, are alleged.” The definition also explicitly includes arbitration and other forms of alternative dispute resolution.

[2] United States Fire Ins. Co., v. Button Transp., Inc., No. A108419, 2006 WL 1085782 (Cal. Ct. App. Apr. 26, 2006).

[3] Id. at *10.

[4] Id. at *13.

[5] See, e.g., Sacred Heart Health Servs. v. MMIC Ins., Inc., 575 F. Supp. 3d 1137, 1177–78 (S.D. 2021) (regardless of whether an excess insurer exercises its right to defend, it is still obligated to exercise good faith in making settlement decisions when it has discretion to settle); Allan D. Windt, 1 Insurance Claims and Disputes, Excess Insurer’s Duty To Settle § 5:26 (6th ed.) (“The fact that the excess insurer should have no duty to defend, since the primary insurer should still be provided a defense, is irrelevant. The duty to settle exists independently of the duty to defend.”).

[6] Teleflex Med. Ins. V. Nat’l Union Fire Ins. Co., 851 F.3d 976, 985–86 (9th Cir. (Cal.) 2016) (consent conditions in an excess policy do not create an absolute right to veto settlements; affirming denial of summary judgment to insurer on bad faith claim based on excess insurer’s delayed response to request to settle or take over the defense under long-standing California law holding that excess insurers may waive their rights under consent and no action conditions if they reject a reasonable settlement and at the same time fail to offer to undertake the defense).

[7] See, e.g., Boicourt v. Amex Assurance Co., 78 Cal. App. 4th 1390, 1399 (2000) (a bad faith claim can be based on an insurer’s prelitigation refusal to disclose policy limits).

[8] Wiseman-Hughes Enters. v. Harleysville Lake States Ins. Co., 2009 U.S. Dist. LEXIS 29797, *12 (N.D. Ill. Apr. 8, 2009).