Excess Carrier’s Bad Faith Exposure
Individuals and businesses purchase both primary and excess insurance policies in the hopes of protecting their personal and corporate assets in the event they become liable for injuries to a third party. While these two types of policies are purchased for the same reasons, the carrier’s duties and thus its exposure for extra-contractual liability differ significantly. After an excess carrier was sued for bad faith, the 10th Circuit took the opportunity to point out some of the differences in the duties owed by primary and excess carriers and the potential for excess carrier exposure.
SRM, Inc. v. Great American Ins. Co.
Underlying Facts and Litigation
The case arose after a dump truck owned by SRM crossed into the path of an oncoming Union Pacific train causing the train to derail. The accident caused extensive damage to the train and injured three employees of Union Pacific. At the time of the accident SRM held a primary insurance policy issued by Bituminous Insurance Company providing $1 million in policy limits and an excess policy issued by Great American Insurance Company with policy limits of $5 million.
SRM was sued by multiple parties, including Union Pacific and the three injured employees. Bituminous assumed the defense of SRM and Great American began monitoring the case for excess exposure. Various estimates placed SRM exposure for the claims to be between $2 million and $8 million with Great American estimating economic damages to be $8 million with a jury likely awarding between $2 million and $4.65 million in damages. SRM retained its own counsel who demanded that both Bituminous and Great American tender their limits to settle the claims. Instead of tendering its limits, Great American preferred to take an aggressive approach in defending the claims and the case proceeded to mediation.
At mediation the Plaintiffs eventually offered to settle all claims against SRM for $6.5 million dollars or $500,000 above the Bituminous and Great American policy limits. In response to this offer Great American offered to pay $450,000 of its policy limit to settle the case. After Great American’s offer, personal counsel for SRM disclosed to the Plaintiffs that SRM was willing to contribute $500,000 of its own money to settle the case. A week after the conclusion of the mediation, the case settled for $6.5 million with Bituminous paying $1 million, Great American paying $5 million, and SRM paying $500,000.
Bad Faith Action
After the settlement of the underlying case, SRM filed a bad faith claim against Great American that was subsequently removed to federal court. SRM’s claims alleged that Great American breached the insurance contract and acted in bad faith in failing to adequately investigate and in failing to initiate settlement negotiations. Specifically, SRM asserted that it was required to expend $500,000 to settle the underlying case as a result of Great American failing to tender the limits of its policy at an earlier date. Great American moved for and was granted summary judgment with the district court finding Great American had no duty to investigate or initiate settlement negotiations until Bituminous had paid their policy limits.
On appeal, the 10th Circuit began its opinion by discussing the duties owed by a carrier providing primary coverage noting that under Oklahoma law a primary carrier has a duty to act in good faith in performing its obligations to investigate and defend its insureds. To satisfy this duty, primary carriers have an obligation to initiate settlement negotiations if an excess verdict is likely and the insured’s liability is clear. Moreover, any settlement decision made by a carrier must be based on a thorough investigation of the underlying claims. Following this reiteration of Oklahoma law, the 10th Circuit switched gears and attempted to predict if the Oklahoma Supreme Court would impose similar duties on an excess carrier prior to the exhaustion of the underlying policies.
Unfortunately for SRM the 10th Circuit, in predicting Oklahoma law, believed an excess insurer would not be required to investigate or initiate settlement negotiations prior to the exhaustion of any underlying policies. In the present case, the Court looked to the language of the Great American policy which provided that until primary limits were exhausted, Great American was not obligated but would have the opportunity to participate in the settlement and defense of claims. In affirming the district court’s grant of summary judgment, the 10th Circuit held that because Great American was not obligated to investigate or initiate settlement discussions until Bituminous paid its limits, Great American could not have acted in bad faith in refusing to do so. In dictum however, the Court went on to discuss that even an excess insurer faces potential extra-contractual exposure when it fails to accept a reasonable settlement offer within limits.
While the SRM decision is only binding on federal courts interpreting Oklahoma law, the decision illustrates the differing obligations and potential extra-contractual exposure faced by primary and excess insurers. As SRM makes clear, in most circumstances the primary insurer is obligated to undertake the bulk of the claims handling and defense duties and thus faces the highest potential for bad faith liability. However, an excess carrier’s exposure for extra-contractual damages may arise when an offer within the limits of the available insurance is rejected. By offering to settle a claim within the combined policies’ limits, a claimant provides an excess insurer with the opportunity to settle and may create a situation in which the excess carrier’s exposure is beyond its policy limits. The lack of such a demand seemed to be the motivating factor for the 10th Circuit’s ruling.