Excess Carrier’s Refusal to Consent to Settlement
In the event of a catastrophic loss, the obligations and duties of primary and excess carriers owed to the insured and to each other may be triggered.
Most circumstances require the primary carrier to assume a defense obligation while the excess carrier’s duties, including defense obligations, typically are invoked upon the exhaustion of the primary policy either by payment or tendering of the primary limits. As a result, excess carriers often take the position that they have no obligations and no liability until the exhaustion of the primary limit, which can hinder early resolution through settlement.
These positions can create an undue burden for both the primary carrier and the insured when claimants have presented a reasonable settlement offer invading the excess carrier’s layer and the excess carrier refuses to consent to the settlement.
Fortunately, California and the 9th Circuit Court of Appeals have crafted a reasonable rule for dealing with an excess carrier’s reluctance to authorize reasonable settlements.
Teleflex Med. Inc. v. Nat. Union Fire Ins. Co.
The underlying litigation in Teleflex involved a defamation and false advertising claim against LMA North America by one of its competitors.
LMA was insured by a primary policy with a $1 million limit issued by CNA and an excess policy with a $14 million limit issued by National Union. CNA picked up the defense of the claims and National Union did not raise any policy or coverage defenses.
Eventually, the claims were mediated with a tentative settlement of $4.75 million (pending approval from CNA and National Union). CNA committed its $1 million primary limit and National Union, hesitant to recognize the claims could invade its coverage layer, requested that counsel for LMA provide an updated liability and damage analysis. Counsel for LMA provided its analysis indicating a risk of an award in excess of $10 million, not including defense costs, and that $4.75 million was a reasonable settlement.
A week later, counsel for LMA repeated a request for National Union’s position on the settlement and informed National Union that it could accept the settlement, reject it and assume LMA’s defense, or reject the settlement and defense and risk a lawsuit by LMA.
National Union eventually declined to consent to the settlement and did not assume LMA’s defense. LMA then took steps to finalize the settlement and paid the excess.
District Court Case
After finalizing the settlement, LMA sued National Union for bad faith and breach of contract and sought contract damages, interest, attorneys’ fees, costs and punitive damages based on National Union’s failure to accept and consent to the settlement.
National Union argued it had no liability as it had an absolute right to veto any settlement based on its policy containing a provision prohibiting LMA from making voluntary payments and assuming liability and its “no action” clause. National Union claimed LMA’s settlement without its consent violated these provisions and nullified coverage.
After the district court denied National Union’s motion for summary judgment, the case proceeded to a jury trial. The jury unanimously found for LMA on the breach of contract and bad faith claim but did not award punitive damages. Instead, $3,750,000 (the settlement minus CNA’s payment) was awarded as contractual damages, $1,216,580.99 was awarded as attorneys’ fees (representing the cost of obtaining the benefits due under the policy), and $1,113,987.44 was awarded as pre-judgment interest.
National Union appealed the jury verdict and judgment.
The 9th Circuit affirmed the District Court’s judgment.
In doing so, the Court ratified previous California precedent that an excess carrier has three options when presented with a proposed settlement of covered claims that has been approved by the primary carrier and insured:
- Approve the settlement;
- Reject the settlement and take over the defense; or
- Reject the settlement, decline to take over the defense, and risk a potential lawsuit by the insured.
In so holding, the Court determined that “no voluntary payment” and “no action” clauses do not give an excess carrier carte blanche authority to veto settlements invading its coverage layer.
As discussed in prior precedent, permitting such veto authority, while still allowing the excess carrier to reject the insured’s defense, imposes an undue burden on the primary carrier and other parties by forcing the case to continue with the primary carrier bearing the cost of the defense. By failing to accept the defense of the insured after the primary carrier has offered to tender its limits, the excess carrier may be deemed to have waived its rights under the no action and no voluntary payments clause.
In addition, the Court viewed the above rule as fair as the excess carrier is not automatically bound by all unauthorized settlements. To be bound, the excess carrier must have been provided the opportunity to assume the defense of the insured yet refused to do so. Further, the excess carrier is still allowed to challenge the reasonableness of the settlement as well as whether the settlement was the product of fraud and collusion between the primary carrier and insured.
The holding of Teleflex appears to strike the appropriate balance of duties owed by the primary and excess carriers and insureds in large exposure losses. Primary carriers and the insured are protected from incurring increased expense and exposure due to an excess carrier’s unjustified refusal to consent. Excess carriers are still protected by being offered the choice to assume the defense of its insured if it does not approve of the settlement and by being permitted to challenge the reasonableness and any fraud in a completed settlement.
While not precedent in Missouri, Teleflex can be read in conjunction with the discussion in Hyatt Hotels, Johnson v. Allstate and Truck Ins. Exch. v. Prairie Framing that an insured can enter into reasonable settlements after a carrier breaches its good faith duty to consider settlement offers, without forfeiting the insured’s right to full indemnity.