Earlier this month, I was asked by Elizabeth Lorell, an excellent defense lawyer, to speak at a CLE conference sponsored by her law firm. (You can read Elizabeth’s bio here.) The audience consisted of other defense lawyers, and insurance company claims representatives. In other words, I was basically a snake at a mongoose convention.
The group wanted the policyholder’s perspective on demands for policy limits in liability cases, a situation we often see when there are relatively low limits and high potential liability. The key case in New Jersey, of course, is Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474 (1974), which you can access here.
Rova is a horrible situation to read about. Back in the sixties, a 27-year-old guy (McLaughlin) took a header off a diving board at a resort and was rendered a total quad because, unbeknownst to him, the water was only about three feet deep. That’s bad enough, but the insurance company’s response made things worse. Rova Farms (the resort owner) had a $50,000 primary liability policy. The carrier offered only $12,500 to settle the personal injury lawsuit (that’s amazing), and refused to move off that number. The carrier apparently intended to argue, with no evidence whatsoever, that McLaughlin must have been imbibing heavily before his tragic dive, and that would somehow result in a defense verdict. It didn’t. The jury came back with $225,000 (big money back then), and the carrier was eventually held liable for the entire amount of the loss, including the amount in excess of policy limits.
Following Rova, it’s been standard practice for plaintiff’s lawyers (and coverage counsel) to send letters to carriers demanding limits payouts. Maybe I shouldn’t be saying this as an attorney who represents policyholders, but a Rova letter does not, in and of itself, create “open limits” exposure for the carrier. The key is whether the carrier has exercised good faith business judgment in deciding whether to take a case to trial, or not. That is to say, has the carrier evaluated the case as though no excess coverage existed, and as though the interests of the carrier and the policyholder were identical? The Rova Court defined a good-faith evaluation as including “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.”
In this digital age, there’s no justification for a claims department to stake out a “no pay” or low pay position without having conducted focus groups and basic jury research to determine the likelihood of an adverse verdict. And, in any coverage litigation, the lawyer for the policyholder should be actively asking for all evidence of the carrier’s assessment of liability.
There’s an interesting side issue in the Rova case, that appears in the concurring opinion of Justice Clifford. Because of allegations in the underlying complaint that the behavior of the policyholder (Rova Farms) had been wanton and reckless, the carrier advised the policyholder to obtain independent counsel, with respect to allegations in the complaint that might not be covered because they went beyond mere negligence. Once independent counsel became involved, he pressed the carrier to settle the case within limits, knowing (but not disclosing) that his client would contribute $25,000 if the carrier paid in its full limits of $50,000, and that $75,000 would settle the case. Independent counsel did not tell the carrier that he had the $25,000 commitment from the policyholder, because he was afraid that the carrier would then not pay in its limits to get the case settled. The Court held that his suspicion was well-founded, and that the lawyer’s behavior was proper and ethical. But I note the following statement from Justice Clifford: “[The carrier] chose to treat its insured’s personal attorney as an adversary and failed to initiate a cooperative and bipartisan approach to settle.”
Insurance carriers should always remember that independent counsel can be an invaluable resource. This is a fresh set of eyes looking at the case, who can give an honest of the potential for liability, which the carrier should take very seriously. The carrier and independent counsel are in fact natural allies, trying to drive the plaintiff’s number into a reasonable range.
In any event, the lesson for policyholders is clear: If you think that the potential exists for verdict in excess of policy limits, show the carrier why, and create an objective paper trail that can later be used in coverage litigation. For carriers, the lesson is equally clear: if you’re going to gamble with your policyholder’s money, you’d better be sure that your claim file reflects an honest and thorough evaluation of the facts and potential liability.
Rova should be required reading for anyone involved in the liability insurance claims handling process.
By the way, as I was writing this, I learned that a Massachusetts appeals court recently shed some additional light on the “open limits” issue. Caira v. Zurich American Ins. Co. (which you can read here) involved a car wreck. David Madigan-Fried was driving a car he’d rented while working for his employer, Groom Construction Company. Michael Caira was injured in the accident. Caira offered to settle with Groom’s primary carrier, Zurich, for the $1 million primary limit, but said he wouldn’t release Madigan-Fried or Groom, since he intended to pursue damages over $1 million. He’d agree, however, to go after the excess damages from Groom’s excess carriers only, and not from Madigan-Fried personally or from Groom itself.
Zurich said, nah. Release the insureds too, or no deal. But Caira insisted his damages were over $3 million, and refused to provide the global release. After much wrangling, the underlying case eventually settled for $900,000 – Zurich’s remaining policy limit of $770,000 plus $130,000 contributed by an excess carrier. As part of the settlement, Caira retained his right to sue Zurich for alleged bad faith. Caira’s theory was essentially that Zurich had a good-faith obligation to facilitate his ability to collect full damages from the excess carriers, despite contributing its policy limit.
Go away, said the appeals court, writing: “An insurer who acts in good faith to protect the interests of its insured from additional liability will not be deemed to have committed an unfair settlement practice…. An insurer need not forsake its demand for a release in order to enable a claimant to collect additional damages, either from the insureds themselves or from an excess insurance policy.”
So, Zurich avoided excess liability (“open limits”) by placing the interests of its policyholders first and foremost.