I like to think I’m pretty fair and impartial in these blog posts. I said that to a friend of mine in the defense bar who apparently reads my ramblings, though, and she laughed at me. I suppose I have a classic case of confirmation bias, where I think that insurance companies often forget what they’re supposedly in business to do, and some judges are too willing to let them forget. Along those lines, I like to quote former Chief Justice Stanley Feldman of the Arizona Supreme Court, who once eloquently wrote: “In delineating the benefits which flow from an insurance contract relationship we must recognize that in buying insurance an insured usually does not seek to realize a commercial advantage but, instead, seeks protection and security from economic catastrophe.” Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 570 (1986).
Even if I generally display a pro-policyholder bias, sometimes a case comes down the pike where I can’t figure out what the policyholder was trying to accomplish. I was intrigued by a recent decision of the Second Circuit in Sea Tow Services v. St. Paul Fire & Marine, in which the Court, in affirming summary judgment against the policyholder, wrote: “Establishing that an insurer acted in bad faith when settling a claim can be a tough row to hoe.” You can read the Second Circuit decision here.) So, I decided to investigate a little further, and ended up more confused.
By way of background, if you’re not an insurance law aficionado, there are basically two types of insurance bad faith. First, an insurance company can be held liable for bad faith if it recklessly disregards facts or insurance policy provisions in reaching a coverage decision. (Good luck with proving that, since many courts hold that if you can’t get summary judgment against the insurance company on the coverage issues, there’s no bad faith. Given the complexity of insurance policies, getting summary judgment on the duty to defend isn’t always easy, at least in New Jersey.) The second kind of insurance company bad faith happens when a carrier refuses to settle within the policy limits with an injured claimant, essentially “rolls the dice” with the policyholder’s money, and the injured claimant wins a verdict in excess of policy limits. The Sea Tow case seems to be a variant of this second kind of bad faith…I guess.
It’s important to remember that under most liability insurance policies, you give up control of your defense. As long as the insurance company represents your interests in an objectively reasonable way, there’s not a whole lot you can do. The carrier doesn’t really need to consider factors outside the potential merits of the case, such as whether the claimant is one of your business competitors and would benefit financially from a settlement. I think the New Jersey Supreme Court put it best in Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474 (1974), when it described the factors that a liability insurance carrier must consider in determining whether or not to settle a case, as follows: “While the view of the carrier or its attorney as to liability is one important factor, a good faith evaluation requires more. It includes consideration of the anticipated range of a verdict, should it be adverse; the strengths and weaknesses of all of the evidence to be presented on either side so far as known; the history of the particular geographic area in cases of similar nature; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured, and the witnesses at trial.”
Which brings us back to Sea Tow. The Second Circuit opinion doesn’t contain a detailed factual exposition, but the trial court decision, which appears at 211 F. Supp. 3d 528, does. Sea Tow is a marine salvage company. One of its franchisees, Triplecheck, had an employee named Juan Fernandez, who got whacked in the face by a tow hook while on the job. He sued both Sea Tow and Triplecheck. (There’s no discussion in the Court decision as to why workers’ comp didn’t fully compensate him.) Sea Tow was insured by St. Paul, and Triplecheck was insured by RLI. There were two applicable RLI policies: a protection and indemnity policy with eroding limits (meaning defense costs were deducted from the limits as the underlying case progressed), and a marine general liability policy with a separate $1 million limit for defense costs.
There are a lot of twists and complications to the insurance and indemnity agreements in the case, but basically what the insurance dispute boils down to is that Sea Tow wanted to settle with Fernandez on a global basis to protect its franchisee, and St. Paul wanted to settle with Fernandez on behalf of Sea Tow only. So, St. Paul reached a settlement in principle with Fernandez for $750,000 on behalf of Sea Tow only, but before the settlement could be concluded, Sea Tow intervened and concluded a global settlement with Fernandez without St. Paul’s approval. The total settlement was for $2.25 million. St. Paul paid in its $750,000, and RLI paid $1.475 million to settle both the direct claims against Triplecheck and vicarious liability claims against Sea Tow.
Sea Tow then sued St. Paul for bad faith, even though the case had been settled within policy limits, and Sea Tow had no damages except arguably some unreimbursed legal fees from the underlying case. If you’re scratching your head about this, so was the judge, who wrote: “While to Court is tempted to pick apart the illogic that permeates this parade of horribles, it need not do so.” (Ouch.) The Court concluded: “St. Paul was well within its contractual rights to settle its sole insured out of the lawsuit within policy limits, without also trying to extricate Triplecheck – a party that it did not insure and owed no legal obligation to. And St. Paul was free to do so even if [Sea Tow] would suffer significant backlash from its franchisees. Had [Sea Tow] felt so strongly about the need for global settlement in joint franchisor-franchisee suits to preserve its ‘united front’ and to ensure that it did not abandon a franchisee, then it should have paid for an insurance policy that required its consent to settlement.”
A couple of takeaways from this “parade of horribles”:
First, you paid for your policy, and if you’re unhappy about the way your carrier is defending you, then, by all means, complain. But if you start directly interfering with defense strategy, such as by undermining settlements that the carrier wants to conclude, you’re playing with fire. Unless you have a “consent to settlement” clause in your insurance policy, the insurance company can settle with the underlying claimant on terms that it deems reasonable (as long as it can justify its reasoning objectively, by using factors such as those listed in Rova Farms). Here, Sea Tow is very lucky that St. Paul didn’t argue that coverage had been forfeited because Sea Tow tried to blow up the underlying settlement.
Second, as Clint Eastwood once said, “A man’s got to know his limitations.” Neither the legal system nor your insurance company are particularly concerned about your business interests or strategy. All they care about is whether the insurance policy covers, or potentially covers, a claim against you. Your carrier generally doesn’t have an obligation to make settlements that will help you achieve your business goals.