When Coverage Not Denied
The importance of an insured complying with the cooperation provisions of a liability policy normally cannot be understated and has been the topic of a prior issue of this bad faith update. A breach of such provision can lead to a forfeiture of coverage if a carrier can demonstrate prejudice resulting from the breach.
However, the insured can be excused from compliance with cooperation provisions due to certain actions and omissions of the carrier.
Duties Owed Under The Insurance Policy
An insurance policy, like any other contract, requires each party to perform certain duties.
The policyholder, in addition to other obligations, is required to cooperate in the defense and adjustment of claims made against them. Part of this obligation requires the insured to refrain from settling claims without the consent of the carrier.
The carrier on the other hand is required to defend covered claims, to provide indemnity to its insured and to act in good faith regarding settlement of claims against their insureds. The carrier’s exclusive right to control settlement is a crucial element of any extra-contractual liability claim.
In Missouri, if the carrier breaches any of its duties, the insured’s obligations under the policy appear to be excused.
Failure to Defend Without Reservation
Missouri Courts, including the Supreme Court in Schmitz and Butters and the Court of Appeals in Hyatt and Prairie Framing, have made clear that when a carrier denies coverage to its insured or attempts to defend a covered claim under a reservation of rights, the insured is no longer bound by the cooperation provisions of the insurance policy.
Because the carrier has breached its obligations under the policy by improperly denying coverage, the courts have held that the carrier has waived control of the underlying lawsuit.
The insured, in turn, is free to go its own way in reaching a good faith settlement as any prohibition from settling the claim or requirements to cooperate with the carrier in defending the claim are considered released. Thus an insured does not forfeit its right to coverage by entering into a R.S.Mo. §537.065 or other reasonable settlements in the face of a coverage denial.
Failure to Settle a Claim in Good Faith
Missouri Court have been slightly less clear on whether an insured is entitled to protect its own rights by entering into a settlement agreement without the carrier’s consent after the carrier has failed to resolve a claim within policy limits when presented the opportunity.
However, starting with the Hyatt Court, the Western District Court of Appeals explained that “when an insurer breaches its good faith duty to consider offers of settlement, the insured may effect reasonable good faith settlements on its own and enforce such settlements against the insurer.”
These sentiments have been echoed in both Prairie Framing as well as Johnson v. Allstate Ins. Co. The implication from these proclamations is of course that after the carrier has failed to seize the opportunity to resolve the insureds liability for an amount within the limits of the insurance policy, the insured may be entitled to enter into a R.S.Mo. §537.065 or another reasonable settlement without the consent of the carrier and without forfeiting coverage. This should be especially true in situations in cases where the claim is greatly in excess of the insured’s policy limits.
The Western District’s statements in Johnson, Hyatt and Prairie Framing are in line with Missouri courts which have determined that a carrier’s failure to defend without reservation releases an insured from its cooperation obligations including the obligation not to settle with the claimant. Both a carrier’s failure to unqualifiedly accept coverage and/or accept reasonable settlement demands constitute breaches of the insurance policy. Pursuant to fundamental contract law, after a breach of the contract, the non-breaching party is excused from further performance.
Certainly not every situation in which a carrier has failed to resolve a claim within the limits of the insurance policy will necessarily entitle or justify the insured attempting to settle a claim on their own. This is certainly not the case when the limits of insurance appear adequate to satisfy any judgment. However, when a claim exceeds the policy limits and the carrier fails to resolve the claim within limits when given the opportunity, the insured should be free and should consider a reasonable settlement with the claimant with or without the carrier’s consent.
Counsel needs to carefully balance whether the failure to settle constitutes a breach against the risk of a coverage defense for non-cooperation. The greater the policy limit, the greater the risk in jeopardizing indemnity by an unauthorized settlement.
The better practice is to make the carrier a party to any settlement agreement and utilize the policy limits as consideration. The failure of the carrier to participate in such a settlement, given a prior breach, may constitute a separate and independent act of bad faith.
Have Questions About a Bad Faith Situation?
Kirk Presley and his team work on bad faith cases on a routine basis. If you need help, call him at (816) 931-4611 or send him an email.