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By Daven G. Lowhurst
The Trouble for Insureds
As
reported here previously, a California appellate court last year dismissed a lawsuit
by a plumbing contractor against the insurer-appointed law firm that settled a
construction defect lawsuit without the contractor's knowledge or consent. The
court found that the insurance policy, which required the insurer to defend the
contractor, also gave the insurer the unfettered discretion to settle any lawsuit
within policy limits without consulting the contractor. The insurer's right to
settle was unaffected by the fact that, as a result of the settlement, the contractor's
insurance premiums increased, its coverage decreased and it was forced to insure
with weaker insurers. New Plumbing Contractors, Inc. v. Edwards, Sooy &
Byron, 99 Cal.App.4th 799 (2002). (Click
here to view a summary of the case.) A
California Court of Appeal recently took that decision one step further. In Hurvitz
v. St. Paul Fire and Marine Insurance Co., 2003 DJDAR 6442 (June 16, 2003),
the court dismissed the insureds' lawsuit against their liability insurer after
the insurer settled several lawsuits for the insureds over their objection, one
of which the insurer had refused to defend in the first place.
The Facts in Hurvitz
Dr.
Hurvitz and his medical partner already were in litigation between themselves
when four of their former employees threatened to sue Dr. Hurvitz's partner for
sexual harassment. Before lawsuits were filed, the partner settled the claims.
However, a detailed draft complaint got into the hands of Dr. Hurvitz, and he
forwarded it to Bob Woodward of the Washington Post, who obligingly published
some of the allegations. Dr.
Hurvitz and his wife then were sued by his partner for defamation and related
claims in four actions. The Hurvitzs tendered the lawsuits for defense to St.
Paul, which agreed to defend them in three of the actions but not in the fourth.
After appointing defense counsel to defend the three actions, St. Paul notified
the Hurvitzs that they could withdraw their tenders, but if they did not, St.
Paul might settle the lawsuits. Sure enough, St. Paul settled the lawsuits, not
just the three it was defending but also the one it had refused to defend. The
settlement expressly preserved the Hurvitzs' pending affirmative claims against
the medical partner. Over the Hurvitzs' objection, the trial court accepted the
settlement and dismissed the partner's claims against the Hurvitzs. The
Hurvitzs sued St. Paul for breach of the policy and bad faith, claiming that St.
Paul's unilateral settlement wrongfully forfeited the Hurvitzs' malicious prosecution
claim against the medical partner based on what the Hurvitzs viewed as frivolous
lawsuits, injured the Hurvitzs' reputation, gave the medical partner money with
which to fund his defense against Dr. Hurvitz's lawsuits and negatively impacted
the Hurvitzs' future insurability. The
appellate court affirmed the dismissal of the Hurvitzs' lawsuit against St. Paul.
The insurance policy gave St. Paul the "right and duty" to defend any
claim or suit, even if "groundless, false or fraudulent," but it also
gave St. Paul "the right to settle any claim or suit within the available
limits of coverage." The court found that St. Paul had no duty to obtain
the Hurvitzs' consent before settling with the medical partner, even though the
settlement forfeited the Hurvitzs' malicious prosecution rights, injured their
reputation (by suggesting that they were not innocent of the allegations) and
impacted their future insurability. The court noted that liability insurance serves
to protect the assets of the insured, not the insured's reputation or general
well-being, and "does not require the insurer to fight a legal action until
the bitter end when the costs of defense exceed the benefit to be achieved."
As
to the one lawsuit that St. Paul settled despite having refused to provide a defense,
the court relied on a variety of factors to excuse the insurer's actions. These
included the court's belief that the Hurvitzs' benefited from the settlement of
the lawsuit and that St. Paul could not have settled the other three lawsuits
in good faith without effectively settling the fourth.
Lessons
The
first lesson learned from Hurvitz and New Plumbing Contractors is
that the "automatic" decision to tender a potentially covered lawsuit
to a liability insurer no longer should be viewed as "automatic." The
vast majority of CGL policies have similar language pertaining to the insurer's
right to settle any claim or suit against the insured. Thus, as a threshold matter,
a lawsuit should only be tendered if the insured is willing to give its insurer
control, not only over the defense of the lawsuit but also over settlement decisions. If
the insured believes the lawsuit involves minimal damages or can be settled upfront
for a relatively small amount, it may be rational to withhold tender and pay defense
and settlement costs. This would give the insured control over defense and settlement.
Legal counsel can help with this threshold decision. Second,
the risk that tendering a relatively minor lawsuit may result in increased insurance
premiums or a reduction in future insurability is a factor that should be considered.
Third,
in deciding whether to file a coverage lawsuit, legal counsel should be consulted
about the risk of recoupment by the insurer. Essentially, an insurer that reserves
its right to later deny coverage may demand that its insured reimburse defense
costs incurred by the insurer against non-covered claims. Insurers have sued their
insureds to get back defense costs. Thus, not only does tender transfer control
over the lawsuit to the insurer, but the insurer later can force the insured to
reimburse defense costs. What
to do about the lawsuits that an insurer already is defending? The insured may
be rightfully concerned, for a variety of reasons, about its insurer settling
behind its back. For example, the insured may value its business's reputation
above having to pay the cost of fighting a meritless lawsuit. The insured also
may want to discourage future litigation by disabusing the world of the notion
that it is a pushover in litigation. If
the insured has any of these concerns, a couple of precautions may help. First,
write to the claims representative and the defense counsel appointed by the insurer
to notify them that the insured expects written notice of any settlement negotiations.
Second, demand advance written notice from the insurer of any intent to settle
the claims. If for no other reason, this will give the insured an opportunity
to withdraw its tender and take over control of the defense and settlement of
the lawsuit, albeit at its own cost. Third, if the insured has any affirmative
claims against its adversary, whether asserted or to be asserted, notify the claims
representative and defense counsel of these affirmative claims and warn them not
to do anything that releases or in any way compromises the claims. Finally,
depending on how important it is to be able to have a say in whether and how a
lawsuit is settled, the insured may be able to negotiate an endorsement to its
policy, at an additional premium charge, mandating its informed consent to any
settlement.
Conclusion
Recent
case law renders the decision to tender a lawsuit to a liability insurer no longer
automatic. Careful consideration should be given to relinquishing control over
defense and settlement, forfeiture of a malicious prosecution claim against an
adversary, the possibility of a later recoupment claim by the insurer, and the
impact of rising insurance costs and reduction in future insurability. When faced
with the already unpleasant prospect of resolving a dispute through litigation,
exploring these factors with a risk manager or legal counsel early on can help
avoid an additional dispute with an insurer.
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