Settlement May Be Recoverable Against a Non-Defending Insured Without a Trial

Settlement May Be Recoverable Against a Non-Defending Insured Without a Trial

By David A. Gauntlett

Introduction

If the underlying case settles before judgment is issued, the court assessing the insurer’s duty to indemnify monies paid in settlement may not have the benefit of adjudication for liability or damages in the underlying action. Such an insurer, therefore, must assess the its obligation to compensate the insured for amounts it paid in settlement based on the insured's potential for liability in the underlying action.[1] This determination is made based on the facts established in the case at the point of settlement, including the facts that were assumed by the parties and formed the basis for the settlement.[2]

Settlement Payment Must Be Reasonable

Moreover, many courts do not require proof of actual liability in order for an insurer to be responsible for a settlement.[3] A number of courts require the insured to show that it settled the claim in reasonable anticipation of liability.[4] In United States Gypsum Co. v. Admiral Ins. Co.,[5] the court determined a two-part test requiring: (1) reasonable anticipation of liability for covered claims; and (2) reasonableness of the settlement amount in light of potential liability for covered claims. The court further reasoned that:

[E]ven if these factors were at least partially in Gypsum’s control, a settlement reached based on the insured’s dissatisfaction with the manner in which the trial is proceeding does not necessarily make the settlement unreasonable… in fact, some courts have taken the position that the weak posture of an ongoing case at the time when the case is settled is a positive factor to be considered in assessing the reasonableness of a settlement.[6]

Furthermore, courts have, also, held that an insurer's breach of its duty to defend jeopardizes its right to contest its duty to indemnify a settlement in the case.[7] When the insurer is not in breach of the duty to defend, for example when an insurer concedes a defense to independent counsel due to a conflict of interest, it is free to contest claims that the indemnity is covered or the reasonableness of the settlement of a covered claim.[8] The insured can enforce their right even if the insurer concluded that amount collusive, reasonable settlement falling within the policy coverage.[9]

“Voluntary Payment” Provision May Bar Benefits for Recovery of Settlement

CGL policies typically bar an insurer from making any payment including one to settle a lawsuit against an insured due to a “voluntary payment” provision. It bars recovery for monies an insured agrees to pay to the claimant which were offered without the insurer’s prior authorization as to whether it agrees to defend or is evaluating whether it will agree to defend a suit after receiving notice of a lawsuit from its insured. Courts routinely enforce “voluntary-payment” provision.[10]

When the insurer was not involved with the defense and settlement of the underlying action, an insured may seek reimbursement of sums paid in settlement of the action, provided the settlement is reasonable.[11] The settlement amount must also be reasonable in view of the likelihood of the plaintiff's success in the action and the amount of its possible recovery.[12] The insurer can only avoid indemnification of all or part of the settlement if it establishes that the settlement amount is unreasonable.[13]

Settlement of Multiple Claims

When a covered claim is settled with other uncovered claims, the insured does not need to apportion liability but must show the covered claim was a primary focus of the settlement.[14] In TRAX, LLC v. Cont'l Casualty Co.,[15] a case involving a policy that excluded coverage for trade secret misappropriation claims, the US District Court for the Northern District of Illinois, applying Virginia law, held that the insured was entitled to recover the entire sum paid in settlement where only a small part of the settlement concerned the trade secrets claim and the focus of the settlement was the covered copyright claim.

Similarly, in Federal Ins. Co. v. Binney & Smith, Inc.,[16] where a class action lawsuit was filed against Binney alleging breach of implied warranty, violations of the Illinois Consumer Fraud Act and Uniform Deceptive Trade Practices Act and breach of express warranty, the court determined that the settlement was reasonable and there was “no way to decipher how much, if any” of the settlement was attributable to the uncovered warranty claims. Additionally, absent some bilateral agreement, insurers do not have the right to recoup costs spent defending a policyholder when it is later determined that not duty to defend existed.[17]

Conclusion

Insurers often argue that insureds must prove “actual liability” in order to recover settlement reimbursement benefits. This argument, however, is inconsistent with a majority of case law which only requires the insured to demonstrate potential coverage for asserted claims. As such, policyholders may fail to secure the recovery benefits they are entitled. Seeking coverage counsel assistance in navigating coverage disputes and litigation against the insurer and settlement negotiation pursuits against the insurer is recommended for abandoned insureds left to settle the asserted claims.

 
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[1] Santa’s Best Craft, L.L.C. v. Zurich Am. Ins. Co., 408 Ill. App. 3d 173, 184 (2010) (“Where the insured settles the underlying lawsuit prior to verdict, it must demonstrate that it settled an otherwise covered loss in reasonable anticipation of personal liability to recover the settlement.”); Union Ins. Co. v. Delta Casket Co., 2010 U.S. Dist. LEXIS 151433, *43 (W.D. Tenn. July 30, 2010) (“[T]he Court looks to the potential for liability and the facts as they existed when the claim was settled in determining whether [the insurer] had a duty to indemnify.”)

[2] Home Ins. Co. v. St. Paul Fire & Marine Ins. Co., 229 F.3d 56, 66 (1st Cir. (Ma.) 2000); Bank One, N.A. v. Echo Acceptance Corp., 522 F. Supp. 2d 959, 980 (S.D. Ohio 2007); IDC Const., LLC v. Admiral Ins. Co., 339 F. Supp. 2d 1342, 1349 (S.D. Fla. 2004)

[3] United States Gypsum Co. v. Admiral Ins. Co., 643 N.E.2d 1226, 1244 (Ill. App.Ct.1994); see also Luria Bros. & Co. v. Alliance Assur. Co., 780 F.2d 1082, 1091 (2d Cir. (N.Y.) 1986)

[4] New Century Mortg. Corp. v. Great Northern Ins. Co., 2009 U.S. Dist. LEXIS 100033, at *6 (D. Del. 2009); Commonwealth Edison Co. v. Nat'l Union Fire Ins. Co., 752 N.E.2d 555, 564-65 (Ill. App. Ct. 2001); but see Hoffman, LLC v. Community Living Sols., LLC, 2011 WI App 19, P11 (Ct. App. Wisc. 2010) (rejecting the "reasonable anticipation of liability" standard and finding that the facts in the underlying case did not show a covered injury)

[5] United States Gypsum Co. v. Admiral Ins. Co., 268 Ill. App. 3d 598, 625-26 (1st Dist. (5th Div.) 1994)

[6] Id. at 638

[7] Hartford Cas. Ins. v. Softwaremedia.com, 2012 U.S. Dist. LEXIS 38731, at *1 (D. Utah Mar. 19, 2012); Tower Ins. Co. of New York v. Capurro Enters. Inc., 2012 U.S. Dist. LEXIS 46443, at *14 (N.D. Cal. Apr. 2, 2012)

[8] Johansen v. Cal. State Auto Ass’n Inter-Ins. Bureau, 15 Cal. 3d 9, 15-16 (1975) (“An insurer who denies coverage does it 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…’good faith,’ though erroneous belief in noncoverage affords no defense to liability flowing from the insurer’s refusal to accept a reasonable settlement offer.”); First Mercury Ins. Co. v. Nationwide Sec. Servs., Inc., 54 N.E.3d 323, 330 (Ct. App. Ill. 2016) (“Where…the insurer surrenders the defense to independent legal counsel because of a conflict of interest, it thereby relinquishes control over the litigation and  a reasonable settlement by the insured should not prevent an action for or n opposition to indemnification.”)

[9] Low v. Golden Eagle ins. Co., 110 Cal. App. 4th 1532, 1547 (2003)

[10] Zurich Am. Ins. Co. v. Frankel Enter., 287 F. App’x 775 (14th Cir. 2008); Jamestown Builders, Inc. v. General Star Indem. Co., 77 Cal. App. 4th 341, 347 (1999)

[11] Texaco A/S (Denmark) v. Commercial Ins. Co. of Newark, NJ, 160 F.3d 124, 128 (2d Cir. 1998)

[12] Id.

[13] Zurich Ins. Co. (U.S. Branch) v. Killer Music, Inc., 998 F.2d 674, 679-80 (9th Cir. (Cal.) 1993)); Fuller-Austin Insulation Co. v. Highlands Ins. Co., 135 Cal. App. 4th 958, 990 (2d Dist. 2006) (“[An Insurer] that does not participate in a settlement is still entitled to protection against unreasonable or collusive settlements, and for that reason may ‘challenge the settlement on the ground of unreasonableness.”)

[14] Santa's Best Craft, LLC v. St. Paul Fire and Marine Ins. Co., 611 F.3d 339, 352 (7th Cir. 2010)

[15] TRAX, LLC v. Cont'l Casualty Co., Case No. 10-CV-6901, 2012 U.S. Dist. LEXIS 123141, *7 (N.D. Ill. (Aug. 29, 2012)

[16] Federal Ins. Co. v. Binney & Smith, Inc., 393 Ill. App. 3d 277, 288-90 (1st Dist. (Ill.) 2009)

[17] Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 828 N.E.2d 1092, 1097 (Ill. 2005); Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707, 719 (8th Cir.  (Minn.) 2009); American and Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 505 Pa. 584, 614 (Pa. 2010); Nat'l Sur. Corp. v. Immunex Corp., 297 P.3d 688, 695 (Wash. 2013); Great Am. Assurance Co. v. PCR Venture of Phoenix LLC, 161 F.Supp.3d 778, 787 (D. Ariz. 2015); American Western Home Insurance Company v. Gjonaj Realty & Management Co., 192 A.D.3d 28, 42 (N.Y.A.D. 2 Dept., December 30, 2020); see also, David A. Gauntlett. The Implied Right to Recoupment – A Tale of Smoke and Mirrors. www.gauntlettlaw.com. (Jun. 17, 2021)