Excess insurance, while great for mitigating risks of large losses to policyholders, does not always cooperate during litigation. This is particularly true during settlement negotiations, as excess insurers do not have an obligation to settle in good faith until it’s their turn to defend. This was the decision of the Seventh Circuit in Fox v. Am. Alt. Ins. Corp., 757 F.3d 680 (7th Cir. 2014). In Fox, the plaintiff twice made demands for settlement, both before and after a jury verdict came down, that was in excess of the primary policy. But, as the excess insurer had no duty to defend until the primary policy was “exhausted,” meaning actually paid out, the Seventh Circuit found that in neither demand had the excess insurer violated their duty to settle in good faith.
The lesson to be learned from Fox – in dealing with excess insurers – is that the timing of a settlement offer matters as much as the amount of the settlement itself. It is important to get excess insurers to the table though, as the potentially high payouts of a trial ultimately create a higher risk of exposure than settlement. Plaintiffs operating in jurisdictions under the Fox Rule can trigger a duty by seeking offers to settle that will be renewable after primary policies are exhausted. Doing so would give an insured peace of mind that they will not have to re-litigate once the primary policy is exhausted, but still allow settlement discussions to continue.
Some jurisdictions acknowledge duties that excess insurers have prior to the primary policy’s exhaustion. In the Ninth Circuit’s Teleflex Med. Inc. v. Nat’l Union Fire Ins. Co., 851 F.3d 976 (9th Cir. 2017), the Court of Appeals reconsidered the continued applicability of the “Diamond Heights” Rule. The Diamond Heights rule requires that excess insurers have three options when presented with a proposed settlement of a covered claim:
- approve it,
- reject it and take over defense, or
- reject it and decline to take over defense, but face the possibility of a contribution lawsuit from the policyholder.
In Teleflex the excess insurer, National Union, refused to agree to a settlement offer, despite possible exposure that was well in excess of the primary policy’s coverage. The Ninth Circuit, upholding the Diamond Heights rule, found that National Union had a pre-trial duty to approve settlement of a covered claim or else take up defense.
To invoke Teleflex, the excess carrier must be consulted regarding potential settlements. This includes the developing estimates of potential exposure and liability, so that excess carriers are aware enough to enter into settlement discussions. This can occur as early as discovery since, as the court says, there may be good reasons to settle even then.
Defendants can go even further to drive excess insurers to the settlement table by communicating to them the harm caused to the defense by the excess insurer’s absence. This notion is supported by the Supreme Court of Texas’s ruling in Keck, Mahin & Cate v. Natl. Union Fire Ins. Co., 20 S.W.3d 692 (Tex. 2000). In Keck, the excess insurer attempted to sue a policyholder for a poor handling of the defense, alleging they had caused the excess insurer to settle at a much higher amount. The policyholder argued the excess insurer was comparatively negligent for the high settlement by not accepting an earlier, lower, offer. The Supreme Court of Texas held that National Union was not comparatively at fault, despite being completely silent during settlement talks. However, the court did leave open the possibility of comparative fault “if the insured’s defense w[as] harmed by” the excess insurer’s conduct. Looking forward, this can be used to drive excess insurers to the settlement table. A refusal to negotiate settlement can harm the insured’s defense, since many settlement offers are contingent on the excess insurer’s agreement to the offer.
Some jurisdictions deny the possibility of any pre-exhaustion obligations. See Twin City Fire Ins. Co. v. Burke, 63 P.3d 282 (Ariz. 2003). In such a case it is best practice to communicate clearly with excess insurers and appeal to their financial interests, since settlement can result in a much better outcome than a verdict. This is especially true when the exposure of a claim will reach far into the excess insurer’s coverage.
Otherwise, insured defendants would be wise to make use of the tools described in Teleflex and Keck to attempt to bring excess insurers to the settlement table. Where a good faith settlement offer of a covered claim is on the table, excess insurers have an obligation to accept it or take up the defense. Failure to do so could be considered harmful to an insured’s defense, making an excess insurer who fails to negotiate settlement comparatively at fault for untoward results. Most of all, clear communication with excess insurers of their own risks and the benefits that settlement can bring to their own bottom line are key to getting excess insurers to act in their own, and thus the insureds, interest.
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