An Insurer's Duty to Defend

AN INSURER'S DUTY TO DEFEND - THE NEVADA SUPREME COURT'S OPINION,  AND A LESSON FOR US ALL

    On July 30, 2009, the Nevada Supreme Court issued its opinion in an insurance bad faith lawsuit entitled Allstate Insurance Company v. William Miller, Case Number 49760.  The State of Nevada is an interesting jurisdiction.  Because it has so few published legal opinions, it regularly looks to and evaluates case law in other jurisdictions.  Therefore, the Nevada Supreme Court opinions regularly give a national perspective on issues.  This case is no different.

FACTS OF THE CASE

    The primary issue of the case concerns the obligation of an insurance carrier to inform its insured of the opportunities that exist to settle a claim.

    The case at issue concerned an automobile accident.  William Miller ("Miller") struck and injured Mark Hopkins ("Hopkins").  Miller had an automobile insurance policy with Allstate Insurance Company ("Allstate") with policy limits of $25,000.  It is undisputed that liability was adverse to Miller, and that the reasonable settlement and verdict potential exceeded the $25,000 policy limits.
    Allstate notified Miller that there was potential damages in excess of the policy limits and that he had the right to retain his own counsel at his own expense.  Allstate then, within 13 days of the accident, offered its $25,000 policy limits.  This offer was rejected by Hopkins' then lawyer, Steven Karen.  Thereafter, through new counsel, Hopkins made a $25,000 policy limits demand, but with an important caveat.  There was a substantial medical lien, and the prior attorney's fee lien, and, as a result, the lien holders were required to be named as joint payees on the settlement draft along with plaintiff and his new counsel.  

    Hopkins' counsel objected to the listing of the lien holders on the settlement draft.  Despite the objection, Allstate issued a settlement draft made payable to plaintiff, his new counsel and the lien holders.  This check was rejected by Hopkins.

    Hopkins' counsel then agreed to release Miller from all liability if Allstate would file an interpleader action to determine the rights of Hopkins, the lawyers and the medical provider to the settlement funds, or to interplead the settlement funds to the District Court with the agreement that the lien holders would abide by the District Court's ruling on disbursement.  This offer was rejected by Allstate without discussing the matter in detail with its insured, and then Hopkins filed suit against Miller.

    Several weeks later, Allstate agreed to file the interpleader action.  However, by this time, the settlement proposal had expired, and Hopkins refused to reinstate it.  Hopkins then agreed to release Miller if Miller would stipulate to an excess judgment.  Allstate refused to consent to the proposal.  

    The case proceeded to trial, and Hopkins received a verdict against Miller for $703,619.88.

    Miller then filed a bad faith lawsuit against Allstate, alleging that Allstate had breached the covenant of good faith and fair dealing by failing to inform Miller of the settlement options, that Allstate had the obligation to file the interpleader action, and that Allstate had the obligation to permit Miller to consent to the stipulated excess judgment.  A jury awarded Miller damages against Allstate in the amount of $1,079,784.88 (without being required to identify which theory of the three they were accepting as the trial judge refused to require the jury to answer special interrogatories).  Allstate appealed.

    The Nevada Supreme Court held that Allstate had a duty to fully advise Miller of the settlement options, thus giving Miller the opportunity to make an informed decision, which was one of the bad faith "options" that the jury was provided.  The court rejected the theories that Allstate was required to file the interpleader action or to consent to the stipulated judgment.

DUTY TO DEFEND - THE CARRIER'S DUTY

    The Nevada Supreme Court first discussed the covenant of good faith and fair dealing, noting that the duty is implied in the law, and is not a function of the insurance contract.  The standard is not a contract term, but rather is defined as whether the carrier has an "actual or implied awareness of the absence of a reasonable basis for denying benefits of the insurance policy".

    In the duty to defend context, the insurer has 2 rights, which the court admitted are potentially "conflicting":

        1. The insurer's right to control settlement discussions; and,
        2. The insurer's right to control the litigation against the insured.

    While these rights exist, they create the duty for the carrier to act in good faith during settlement negotiations and during their control of the litigation.  The duty arises upon notice of a claim, and continues through the final resolution of the claim.  As a result, if the insurer fails to adequately inform an insured of a known settlement opportunity, either prior to or during the pendency of litigation, the insurer may have breached the covenant of good faith and fair dealing.

    In the instant case, there was testimony at trial that the claim's professional from Allstate did discuss the settlement proposal, but stated that "Mr. Hopkins' attorney was asking her to do things that they (Allstate) would not do".  Mr. Miller testified that the concept of the "interpleader" was not discussed, nor was he given the option of paying for or initiating the interpleader action himself.  Mr. Miller also testified that he was not given the option of contributing to the settlement on top of the policy limits to get the case settled.

    The Nevada Supreme Court focused heavily on disclosure, and stressed that the carrier has a duty to discuss all phases of the settlement process (presumably all demands and all offers, as well as settlement strategies), that the carrier must advise the insured of potential liability in excess (and presumably, outside of) available coverage, and that the carrier must advise the insured of its ability to contribute to the settlement if the insured desires.

ALLSTATE'S FAILURE TO DISCLOSE WAS THE PROXIMATE CAUSE OF DAMAGE TO ITS INSURED

    In the instant case, the Nevada Supreme Court held that Allstate's recognition of the potential excess liability coupled with the failure to inform its insured of the opportunity for settlement "may have prevented" its insured from obtaining a release.
    At trial, Miller testified that had he been informed of his options, he would have paid the costs of the interpleader (although he testified that he had no idea how much those costs could have been).  Regardless, the Nevada Supreme Court held that even if Miller did not have the financial resources to fund the interpleader action (and, presumably could not have afforded to pay settlement monies out of his own pocket to bridge the gap between a settlement demand and available policy limits), the obligation to notify the insured and give the insured a chance to make an informed decision still rests with the carrier, and opens the carrier up to bad faith liability.  The fact that the lack of information "prevented Miller from considering his available options" was the key fact.

    Therefore, the court held that the failure to advise the insured was the proximate cause of the $703,619.88 judgment.

EVALUATION

    There are numerous cases Nationwide where insurers are held liable for excess verdicts where the carrier does not avail itself of an opportunity to settle a case within policy limits.  Nevada has now taken it to the next level, and held that the failure to even disclose a settlement opportunity where the case cannot be settled within policy limits opens the carrier up to exposure beyond the policy limits.

    This case is a cautionary tale and provides a teachable moment for those who insure and represent insureds.  This case illustrates that the insured has the ultimate say in whether a case settles in that the insured always reserves the right to pay a settlement out of its own pocket, or make any other arrangement to get itself out of harm's way.  And importantly, even if the insured would have had no desire to settle a case because of financial resources or otherwise, the duty to inform the insured of its options continues to exist from the date of notice of claim through the end of the litigation.  The duty exists even though the carrier in the instant case informed the insured of the potential for an excess judgment, advised the insured of his right to independent counsel, and actually paid its limits within 13 days of the accident.