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Vol. 4, Iss. 12
December 16, 2015

SRM, Inc. v. Great American Insurance Co., 798 F.3d 1322 (10th Cir. 2015)

Excess Insurer Need Not Initiate Settlement Negotiations –
Even When Primary Insurer Must


As discussed above, in the context of the Louisiana Supreme Court’s decision in Kelly v. State Farm, when a demand to settle within the insured’s limit of liability is never made, insurers generally see themselves as relieved of any risk of exposure for an excess verdict. After all, even if the insured has a legitimate risk of personal liability for a verdict above its policy limit, the insurer’s hands are tied. Right? Without a demand to settle within the insured’s limit of liability, what’s it to do? No matter how much it makes sense to settle the case, the opportunity to do so just isn’t there.

Granted, that’s not always true. In some states, such as Oklahoma, the “duty of good faith and fair dealing requires primary insurers to do more than ... simply not refuse unconditional settlement offers within [its policy] limits. [I]f an insured’s liability is clear and the injuries of a claimant are so severe that a judgment in excess of policy limits is likely, a primary insurer has an affirmative duty to initiate settlement negotiations.” SRM, Inc. v. Great American Insurance Co., 798 F.3d 1322 (10th Cir. 2015) (citations and internal quotes omitted).

In SRM, Inc. v. Great American, the Tenth Circuit examined, in detail, whether Oklahoma’s rule, applicable to primary policies, also requires excess insurers to take that same affirmative step.

The court describes the facts like this: At a rail crossing in rural Oklahoma, “a Union Pacific Railroad train t-boned an SRM dump truck as the truck crossed the tracks in the path of the oncoming train. The collision killed the truck driver and derailed the train causing extensive damage to the train’s engines, its cars, and three of its workers.” The three injured train workers sued Union Pacific, SRM, and SRM’s primary auto insurer. SRM’s excess liability insurer, Great American, “received notice of the claims and monitored the case for potential exposure under its umbrella policy.”

SRM’s personal attorney demanded that the primary and excess insurers tender their respective limits to settle the case. He asserted that the injured train workers’ claims alone would exceed the $6 million in combined liability coverage. The primary insurer was willing to offer its $1 million liability limit to Union Pacific to settle that claim, “or to tender its limit to SRM and Great American for their use in negotiating a settlement with Union Pacific and/or the other claimants. But Great American rejected that approach and urged an aggressive defense.”

After court rejected SRM’s cross-claim and best defense, personal counsel renewed his demand that Great American tender its $5 million policy limit to settle the case. “He warned that any delay in tendering the entire $6 million available for settlement might make it impossible to settle at a later date. Great American again declined, stating it required additional discovery to properly evaluate the claims and suggesting the claims would be resolved in mediation after discovery was complete.”

Before mediation, the primary insurer’s-retained defense team “revised its estimate of potential exposure to be between $4–4.5 million and $7 million. A Great American-retained attorney estimated economic damages at roughly $8 million, but estimated a jury would award between $2 and $4.65 million. At the mediation, the plaintiffs initially demanded $20 million but later in the day reduced their demand to $6.5 million. Great American countered with $450,000. . . . A week later, the case settled for $6.5 million. The primary insurer paid $1 million; Great American paid $5 million and SRM paid $500,000.

SRM sued Great American. It’s argument was simple: if Great American had investigated the claims, and initiated settlement negotiations by tendering its policy limits earlier in the litigation, the case would have settled within the $6 million policy limits. In other words, SRM would not have been required to pay $500,000 to settle the claims. SRM argued that Great American’s failure to take these actions violated the insurer’s implied duty of good faith and fair dealing.

But the court concluded that Great American had no such duty. It reached its decision based on strong reliance on the language of the Great American policy: “As the district court correctly concluded, the policy was unambiguous: Great American’s contractual duties to investigate, settle, or defend claims against SRM did not kick in until SRM’s primary insurer exhausted its policy limits by actually paying claims.” But, the court observed, this did not happen until the primary insurer paid its respective policy limits to settle the claims against SRM. “At that time, Great American fully discharged its contractual obligations by simultaneously contributing its policy limits toward settling the case.”

SRM sought to overcome this policy-language based argument by resorting to an “implied duty” – “[T]he duty of good faith and fair dealing is . . . independent of policy language, and therefore applies equally at all times to all insurers—whether primary or excess—regardless of when an insurer’s express contractual duties to the insured kick in.” But the court rejected the “implied duty” argument, concluding that the language of the Great American policy was paramount.

When all was said and done, the court held that, at most, an excess insurer’s duties are limited to considering and evaluating a reasonable, within-limits settlement offer.

The SRM court’s decision is entirely justifiable based on the policy language rationale. However, it is not difficult to imagine a court, in a state that imposes an affirmative duty on a primary insurer to initiate settlement negotiations, when an insured’s liability is clear, and a judgment in excess of policy limits is likely, to turn around and impose the same affirmative duty on an excess insurer. A court that imposes this duty on a primary insurer may not have a difficult time concluding that, despite what the policy language may say, the duty of good faith and fair dealing is independent of policy language and, therefore, applies equally to all insurers. A court may conclude that, to have the duty apply to the primary insurer, but not the excess insurer, may not achieve the objective being sought.

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