Law Blog
An Insurer's Duty to Defend
2009-08-03 16:35:52
Insurance Coverage
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.
The Effect of the Economy on Divorce
2009-03-09 09:56:55
Family
In today's world of unemployment and negative home equity, individuals contemplating or currently involved in a divorce are significantly affected. Many of these individuals are either postponing their dissolutions in the hope of more favorable economic conditions in the future, while others are unable to sell their assets even once Judgment of Dissolution has been entered.
According to the S&P/Case-Shiller Home Price Index, home values dropped 19.4% in the past year. As a result, divorcing spouses, already enduring difficult times, must be prepared for the possibility they may be unable to re-finance their home and may be forced to sell their real property in order to buy out the other spouse. Given the significant decline in home values, many spouses are facing excessive debt compounded by a negative home equity situation. These spouses may simply decide to stay in the home, and often in the marriage, in an effort to weather the economic storm and await better times.
When dividing the community assets, 401(k) plans and other stock accounts are often used to offset an interest in other assets. These plans and retirement accounts are now worth significantly less, making it more difficult to separate the assets and equalize the parties. Many professionals who previously received bonuses based upon a company's profitability are now receiving smaller bonuses or none at all. This makes the job of dividing up the community estate much more difficult.
Perhaps the most concerning situation a party can face in the midst of divorce is that of unemployment, either with respect to him or herself or with respect to a spouse. Despite best efforts, it may be impossible to find alternative employment that compensates the party at the same level as the prior employment. These spouses may then become locked in a heated Court battle, seeking a Court order imputing a salary to one spouse for spousal or child support purposes. When the Court imputes a salary, it assigns a salary to a party as if they were earning a specific income. This is based on the theory that the spouse should be able to earn the imputed amount of income should they chose to work. However, given the current economic conditions, the question for the Court becomes whether or not the unemployed spouse should be "imputed" for the amount of income they could have made prior to the economic crisis, or if they should be imputed based on the current economic climate. These questions are handled by the Court on a case by case basis.
Despite the bleak prognosis for the economy and employment situation, there are still ways to achieve a favorable outcome during divorce. The parties should avail themselves of the mediation programs available through the Court. Most of these programs are available free of charge. There are also many community mediation programs available. Spouses who retain attorneys but are still able to communicate should try to reach agreement with their spouse on as many controverter issues as possible. Many attorneys will adopt a collaborative approach in working with the opposing party and counsel to reach a mediated settlement. It is incumbent upon the parties to recognize that the less time and money spent on small or relatively unimportant issues, the more affordable the dissolution will be. Parties should also be reasonable. Ultimately the Court will view these parties more favorably if there are unresolved issues that have to be tried.
In some cases, spouses may be able to delay their divorce and stay in the home, perhaps living on separate floors. While this may not be the first choice, it has worked for couples in the past, and may be beneficial to the children. When lawyers are involved, parties should be wise and circumspect with respect to the time they spend with their attorneys. Parties should limit their communications with attorneys to legal issues and seek assistance from a therapist or counselor with respect to emotional problems.
Another option for reducing attorney fees is to seek specific and isolated services from an attorney. Many attorneys will agree to handle only isolated aspects of dissolution, such as only child visitation and custody. This leaves the party to represent himself or herself with respect to the remainder of the issues in the case, either on their own or with the assistance of the Court's self help services. Much of the paperwork can be completed by the party with the Court's help.
Particularly in the current economic climate, a party should properly interview his or her attorney before proceeding. The party should ensure that the attorney is a good fit, and that client and attorney are like-minded with respect to settlement and negotiation.
With careful analysis and planning, and with good legal representation, an individual may effectively navigate divorce and the related processes despite the current economic conditions.
California Assembly Bill 2738
2008-10-01 16:49:14
Construction Law and Litigation
California Assembly Bill 2738, which amends and add to CC 2782, was created to reform problems associated with defense obligations under residential construction contracts, and to reform the huge exposures under poorly designed wrap insurance programs that threaten trade contractors' solvency.
On September 29, 2008, California Governor Arnold Schwarzeneggar signed California Assembly Bill 2738 into law to become effective January 1, 2009.
Assembly Bill 2738 will likely reduce the defense costs of lawsuits filed against trade contractors in construction defect claims. It also will ensure that builder-controlled insurance policies are fair and equitable and include adequate limits to protect trade contractors and consumers in construction defect situations. The highlights of this new legislation are as follows:
- For Wrap Commencing Construction after January 1, 2009 for Residential Construction (a limited number of these items apply to public works projects)
- Disclosure Prior to Signing Contract of the calculation of any credit or compensation for premium required by the subcontractor
- Indemnification for sole negligence is unenforceable
- Indemnification for reimbursement of insurance or defense costs for claims unrelated to your scope of work is unenforceable
- Sub Contractor owes no defense or indemnity obligation unless the GC provides written tender of the claim including all documentation that they have regarding the claim. This must includes the subs scope of work at which point the sub can 1) defend the claim with counsel of his choice 2) share in defense and judgment of the claim with proper allocation to the parties involved in the loss including the GC. There are time limits and penalties for not complying for both the Sub and GC
- Contract must disclose the insurance premium credit or compensation required by the subcontractor – failure to do so results in the participant not being legally bound by the bid
- Contract must disclose the policy limits
- Contract must disclose the scope of policy coverage
- Contract must disclose the policy term
- Contract must disclose basis upon which the deductible or occurrence is triggered by the insurance carrier
- Contract must disclose if the policy covers more than one work of improvement, the number of units, if any, indicated on the application for the insurance policy
- Contract must disclose a good faith estimate of the amount of available limits remaining under the policy as of the date indicated in the disclosure from the insurer.
- Upon written request of the participant a copy of the policy must be given. If the policy is not available the binder including coverage terms can be provided. The participant can show this to their broker and legal counsel but no other 3rd parties. Their broker and legal counsel cannot show this to another 3rd party.
A copy of the Enrolled Version of AB 2738 can be found on the Internet at here.