Strategies, Challenges, and Answers

When Must Insurance Companies Involve The Insured In Settlement Negotiation?

Most insurance contracts provide insurance companies with the right to negotiate and settle disputed liability claims.  In most cases, negotiations and settlements happen without the involvement of the insured.  Many times, a single initial contact with the insured may be all that is needed by the insurance company to open, process and settle a claim.  In fact, it is my guess that in most cases, the insured is only a peripheral part of any settlement.  However, there are circumstances when the insured must be closely involved in the negotiations.  If they are not involved, the consequences can be substantial.

Mills & Associates, Nevada Coverage Lawyer, Nevada Bad Faith Attorney 702-240-6060 An example of the problems that can arise is found in the Nevada Supreme Court case of Allstate v. Miller, 125 Nev. Adv. Op. 28, 212 P.3d 318 (2009).  Underlying this bad faith case is a claim gone awry.

That claim began like most others.  Allstate’s insured, Mr. Miller, caused an auto accident that seriously injured the claimant.  The claimant’s trauma center bill was $67,564.84.  As is often the case in these types of claims, the insured had a relatively small, $25,000.00 per person, auto policy liability limit.

When reports began arriving that the auto liability limits may not be enough to satisfy a judgment, Allstate notified its insured of the excess potential and advised him of his right to hire an attorney.

Claimant’s attorney then agreed to accept the policy limit of $25,000.00.  However, the Plaintiff would only accept if Allstate did not name the Hospital as a payee on the settlement check.

Claimant’s attorney rejected a check that included the Hospital as a named payee.  Claimant’s attorney then proposed that if Allstate would interplead the funds, the Plaintiff would give a full release.

Allstate balked.  It said that it couldn’t interplead.  But then it changed its mind and started the interpleader action.  By then it was too late.  The offer to settle had expired.  Matters went from bad to worse.  Claimant’s attorney went to trial and obtained a judgment in the amount of $703,619.88.

Obviously, Allstate’s insured was unhappy about the outcome.  He was even more displeased when Allstate refused to pay the judgment against him.  He filed a Bad Faith suit against Allstate.  He was awarded damages in the amount of $1,079,784.88.  Allstate appealed the Bad Faith verdict.

Without reaching a final decision, the Nevada Supreme Court made several rulings important to the development of bad faith law in Nevada.  Probably the most important lesson taught by the Nevada Supreme Court was that an insurance company can be liable for Bad Faith if it fails to inform the insured of settlement options that will affect him.  The court said that it would join jurisdictions in which followed the rule that a failure to adequately inform an insured of a settlement offer is a factor in deciding whether the insurance company acted in Bad Faith.  The Court went on to say:

we conclude that Miller’s failure-to-inform theory is a viable basis for bad faith by itself, regardless of whether Allstate had a duty to file an interpleader complaint. Miller’s allegation that Allstate did not adequately inform him of Hopkins’ settlement offer is a question of fact. . Allen, 656 F.2d at 489 (recognizing that under California law “What is ‘good faith’ or ‘bad faith’ on an insurer’s part has not yet proved susceptible to [definitive] legal definition. An insurer’s ‘good faith’ is essentially a matter of fact.”). Thus, the district court did not abuse its discretion when it submitted this issue to the jury. Id.

The court said that in a failure to inform case, that it would look at six factors in deciding whether Bad Faith was involved:

(1) the probability of the insured’s liability;
(2) the adequacy of the insurer’s investigation of the claim;
(3) the extent of damages recoverable in excess of policy coverage;
(4) the rejection of offers in settlement after trial;
(5) the extent of the insured’s exposure as compared to that of the insurer; and
(6) the nondisclosure of relevant factors by the insured or insurer.

The court concluded that the facts proved by Miller at the Bad Faith trial were sufficient to support a claim of failure to inform him of his settlement options.  The court specifically said if there was no communication of the options to settle that the insurance company would have the burden of showing that the insured would not have made any personal contribution to a settlement above that amount.

To the insurance company’s benefit, the court found that Allstate had no independent duty to file an interpleader action.  However, it did say that Allstate’s decision not to timely file an interpleader may be a factor to consider in whether in the end it acted in Bad Faith.  It also told the insurance company that it could have deposited the funds with the court and obligated the claimant to file an interpleader to get the funds.  Finally, the insurance company had no duty to stipulate to judgment against its insured.

The final word taught by this opinion is that insurance companies need to be very careful when they find themselves negotiating settlement that involves a risk of excess verdict to the insured.  The insured needs to be involved all along the way and informed of options so that he or she can determine their part of the course of negotiations.  Unless they do, insurance companies will find themselves in the same hot water as Allstate.

Mills & Associates Nevada Coverage Lawyers 702-240-6060