Ensure carriers are held responsible for their denial of coverage.
August 2016  |  Bad Faith Update  |  Vol. 2 Iss. 10

Reasonableness of Judgment

Following the execution of a .065 agreement and the entry of a judgment against an insured, carriers often assert each and every affirmative defense known to man in the coverage suit in an effort to escape their policy obligations. A favorite of the insurance industry is to argue that they are not bound by the amount of the judgment and can contest the reasonableness of the amount of the judgment entered against their insureds.

A carrier’s belief that it can attack any judgments entered against its insured stems from an overreliance on Gulf Ins. Co. v. Noble Broadcast

However, the test developed in Gulf Ins. only applies in limited circumstances and a carrier’s ability to challenge the reasonableness of damage awards should rarely be available after properly structured settlements that end in a final judgment.

Gulf Ins. Co. v. Noble Broadcast

The Supreme Court in Gulf was tasked with determining whether .065 agreements were subject to a reasonableness test. While the Court ultimately determined that .065 settlements were subject to a reasonableness test, the .065 agreement in Gulf provided for a consent judgment to be entered in the amount of $1,000,000. 

By agreement, liability and damages were determined by the insured and the claimant without any court truly weighing in on liability, damages, or the reasonableness of the agreement. 

As a result, the carrier was permitted to attack the judgment and challenge its reasonableness.

Schmitz v. Great American & Columbia Cas. Co. v. HIAR Holdings, LLC

Following the Gulf decision, carriers have launched numerous attacks on the reasonableness of damages awarded to claimants following the execution of .065 agreements. Fortunately, the Supreme Court has put a stop to this attempted extension of Gulf beyond consent judgments.

In Schmitz, the Court reiterated that the Gulf holding only applied to .065 settlements where a judgment amount is agreed to without a fact finding. Carriers are not permitted to attack the reasonableness of a judgment entered by a Court after a bench trial on liability and damages. In a similar vein, the Columbia Casualty Court found that carriers cannot challenge the reasonableness of a .065 settlement in which the underlying liability court specifically determined that the settlement amount was reasonable.

Both Schmitz and Columbia Cas. recognized the inherent unfairness in allowing a carrier to deny its obligations to its insured and then contest the reasonableness of the resolution of the liability and damage issues. This would give the carrier “two bites of the same apple” and would not hold the carrier responsible for its earlier decision not to participate in the defense of its insured.

Practical Tips to Hold Carriers Responsible

Certain steps can be taken by claimants and insureds to ensure a carrier is held responsible for its denial of coverage and prevented from challenging the reasonableness of any damage finding in the liability action. Of importance are:

  • Including a provision in the .065 agreement for the underlying liability court to determine liability and claimants damages;
  • Conducting a bench trial in which evidence is presented as to the insured’s liability and the claimant’s damages;
  • Requesting that the underlying liability court find that the .065 agreement is fair, reasonable and was negotiated at arms’ length; and
  • Requesting that the underlying liability court find that the .065 agreement is free from fraud and collusion.

If these steps are taken there should be no traction for the carrier’s argument regarding the reasonableness of any final judgment. Any affirmative defense based upon such argument can be disposed of at the summary judgment stage if necessary.

"I've been working on bad faith cases for over 30 years. If you need help, contact me for advice."

- Kirk Presley
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