By Kevin Clonts
In Singh v. Zurich Am. Ins. Co., 2018 Wash. App. LEXIS 1937 (2018), Division 1 of the Washington Court of Appeals clarified an insurer’s duties in cases involving multiple claimants that likely would exhaust policy limits. Though the court did not establish a “bright-line rule,” its ruling instructs that an insurer must be cautious when a settlement could exhaust policy limits, thereby leaving the insured exposed to defense costs should other claimants come forward. The court held that if an insurance carrier has reason to believe that payment of a policy limits settlement to one claimant would leave the insured exposed to defense costs for other claims, the carrier should explore potential methods to leave some amount of policy limits in reserve in order to preserve the defense duty. Failure to do so could result in a bad faith claim and damages, including damages for defense and settlement costs incurred over policy limits.
Singh involved an accident caused, in part, by the negligent operation of a semitrailer by an employee of Joginder Singh, the insured under the Zurich policy. The resulting accident involved multiple semis and vehicles, one death, and at least one claim of personal injury.
Claimants in the wrongful death matter “made clear early on that they saw the value of their claim as exceeding the combined policy limits of” the policies held by Singh and another semitrailer and that “they were not interested in global mediation with other claimants.”
Zurich appointed defense counsel to defend against the wrongful death matter. Defense counsel contacted other potential claimants seeking information about their claims, and one claimant gave notice of intent to pursue allegations of personal injury and loss of consortium.
Defense counsel “recognized that it was in Singh's interest to remove his exposure to the [wrongful death] claim by offering to settle for” policy limits. However, he also recognized that such a settlement would exhaust the Zurich policy, leaving the insured undefended against other claims. Therefore, defense counsel proposed that Zurich allow Singh to contribute $1,000 toward a policy limits settlement offer, thereby holding some amount of the policy in reserve and avoiding exhaustion of the policy.
Zurich declined defense counsel’s proposal and, instead, instructed defense counsel to offer the full policy limits. The wrongful death plaintiffs accepted the offer, and the Zurich policy was exhausted.
The personal injury claimant then filed suit against Singh. When Singh tendered defense, Zurich denied the defense, because the policy limits had been exhausted by the wrongful death settlement. Singh hired private counsel and settled the personal injury matter for $250,000.
Thereafter, Singh filed suit against Zurich. The jury found that Zurich had acted in bad faith and breached its contract with Singh. The jury awarded nearly $300,000 in damages, including the $250,000 Singh paid in settlement, Singh’s attorney fees, and emotional distress damages.
Zurich appealed, arguing that Singh’s bad faith claim impermissibly expanded Zurich’s obligations under the insurance contract. The insurance contract specifically stated that Zurich had the right to investigate and settle any claim as it deemed appropriate. Therefore, Zurich argued, its conduct could not have been in bad faith because the contract contained no provision limiting its right to exhaust policy limits with the wrongful death settlement. Zurich also argued that “insurers are entitled to rely on contractual language to cap their exposure and they are not required to defend every lawsuit, despite the benefits that might bring to the insured.”
The Court of Appeals began its analysis by acknowledging that the “insurer’s duty to defend the insured is one of the main benefits of the insurance contract.” Therefore, though an insurance “policy may specifically provide for termination of the duty to defend upon payment of the policy limits, public policy requires the insurer to act in good faith in the interest of the insured.” Also, a breach of the duty of good faith does not run only from the contract, but also arises from the fiduciary relationship between carrier and insured.
Because of the blurring of contractual and fiduciary duties, “there is no bright-line rule absolutely excusing an insurer from its duty to defend once coverage is exhausted in an excess exposure case involving multiple claimants.” “If the insurer acted in bad faith when negotiating a settlement that exhausted the policy limits, the insurer cannot then use the exhaustion of policy limits as the basis for denying defense coverage. Even when the contractual language is unambiguous, there may still be a valid concern that the insurer has attempted to circumvent its duty to defend by making an early escape from the litigation.”
At trial, Singh introduced evidence that Zurich had placed its own interests above the insured’s when it settled the wrongful death claim. Singh introduced a witness who was a former employee of an insurance company who testified that Zurich should have explored the option of a holdback when negotiating the settlement, as had been recommended by defense counsel. The witness also opined that the reason Zurich rejected that proposal “was to avoid having to create a reserve for defense costs” for other claims.
The appellate court found that the insured had submitted sufficient evidence to the jury to support its theory that the carrier could have negotiated a settlement of the wrongful death claim that did not leave the insured undefended should other claimants file suit. This evidence was sufficient to support the jury’s finding of bad faith and to support the award of bad faith damages.
The opinion can be found here: https://www.courts.wa.gov/opinions/pdf/764799orderpubandopinion.pdf.