It is the proverbial “damned if you do and damned if you don’t” situation for insurers. An insurer is presented with a policy limits demand to settle for one insured – and it should be accepted based on liability and damages considerations -- but the settlement offered will not secure a release for all insureds.

If the insurer accepts the settlement offer, and secures a release for one insured, then the insured that is not released can be expected to allege that the insurer acted in bad faith, by exhausting the policy without consideration of its interests. If the insurer does not accept the settlement offer, because what’s proposed does not secure a release for all insureds, then the insured who did not obtain the settlement that had been offered to it, can be expected to allege that the insurer acted in bad faith. This insured will invariably argue that the insurer is liable for any resulting excess verdict because the liability and damages justified the insurer accepting the settlement offer.

This conundrum for insurers -- one court calling the issue a Hobson’s choice -- was addressed by a Kansas District Court in Kemp v. Hudgins, No. 12-2739 (D. Kansas Sept. 22, 2015).

Kemp is a very long and detailed opinion. It would take forever to describe it here. Plus, doing so would distract from the point I’m trying to make – which is simply how one court addressed the issue. So I’ll take the easy way out – which is also the best way to describe the case. I’ll quote the court’s conclusion:

“Dairyland [Insurance Company] insists that it would have breached its duty of good faith to Kelley, had it accepted Kemp’s initial settlement demand to release only Hudgins in exchange for the policy limits. Kemp contends that Dairyland would not have breached any duty to Kelley by settling because the policy did not cover negligent entrustment claims, and suggests that Dairyland failed to reasonably investigate its potential liability on such a claim under Kansas law. . .

The Court agrees with Dairyland that its rejection of Kemp’s initial offer to settle without a release of both insureds was not in bad faith because Dairyland reasonably believed it owed a duty of good faith toward both insureds—Hudgins and Kelley—to obtain a release of both. [I]n this case the uncontroverted facts establish that Dairyland quickly offered to pay its policy limits to Kemp to settle the claim. The only point of contention between the parties was whether the policy limits settlement would be in exchange for a release of Hudgins, or of Hudgins and Kelley. Although Kemp did not ask to explicitly reserve his right to pursue a negligent entrustment claim against Kelley, the Court finds that this is a distinction without consequence. Whether or not Kemp explicitly reserved his right to pursue a claim against Kelley, under a negligent entrustment theory or otherwise, his refusal to release Kelley left her open to liability after Dairyland exhausted its policy limits in settling the claims against Hudgins. For the same reasons explained by Judge Marten in Brummett [v. American Standard Insurance Co., No. 04–1114–JTM, 2005 WL 1683610 (D. Kan. July 18, 2005)] the Court finds that Dairyland’s rejection or repudiation of the initial settlement offer was within the bounds of good faith because it did not include a release of both insureds.”


There are not a ton of cases addressing this issue, but it’s not a barren wasteland either. The cases to do so go both ways. And the arguments on both sides are easy to see. Here’s another to add to the mix.