It is unquestionably one of the most challenging issues to confront an insurer – the demand to settle a claim within the insured’s limits of liability. We all know the drill. An insurer has been defending its insured for a while. The case is coming down to the end and trial is on the horizon. The insurer is at the point where it knows as much about the liability and damages issues as it ever will. And with that information, the possibility of a verdict in excess of the limits of liability is known to be a real one. A demand to settle within the insured’s limit of liability, thereby relieving the insured of the risk of personal liability, is made by the plaintiff. All things considered, the applicable state standard, for whether the insurer should accept the limits demand, has been met. In other words, not accepting the demand will saddle the insurer with liability for an excess verdict. [Of course, when there are also coverage issues, the degree of difficulty here goes from a double lutz to a triple axel. But that’s not the issue today.]

But there is another version of this story. Change one fact -- a demand to settle within the insured’s limit of liability is never made. In this situation, 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, and the insurer knows it, 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.

But is this true? Does an insurer instead have an obligation to attempt to settle a case -- even if there is no demand within limits? And, if it fails to do so, and there is an excess verdict, the insurer is liable for the whole ball of wax. Most courts have said no. But a few have said yes. Welford v. Liberty Insurance Corporation, No. 15-333 (N.D. Fla. June 2, 2016), following Florida law on this issue, demonstrates the challenge for insurers that find themselves in yes states.

Welford involves an automobile claim with odd facts. Matthew Zisa struck three pedestrians who were walking in the southbound lane of a road. Two were killed and one was injured. Zisa, travelling north, had gone into the southbound lane to pass another northbound vehicle. The southbound lane was a marked passing zone. The individuals struck were wearing dark clothes and had no flashlights. Prior to this, Zisa had attempted to pass the same northbound vehicle, but it sped up, causing Zisa to return to his lane.

The driver of the car that had sped up, preventing Zisa from passing the first time, was John Middleton. He was driving his girlfriend’s mother’s vehicle with consent. It was insured under a Liberty Insurance policy with liability limits of $10,000 per person and $20,000 per accident. Middleton and his girlfriend returned to the scene of the accident and gave statements to law enforcement. The Florida Highway Patrol concluded that the pedestrians were the cause of the accident and not Zisa.

Two months after the accident an investigator for a lawyer for the estate of one of the decedents called Lisa Mottsey, the owner of the vehicle that Middleton was driving. She was angry and insisted that her daughter and Middleton had done nothing wrong. She refused to give the investigator her insurance information and falsely told him that she had no insurance. Later that day, Mottsey called Liberty and reported the accident.

Here’s where the story gets very detailed and, given the unusual facts, it’s not worth getting into the weeds to make the important points. To put it simply, Mottsey was eventually sued. The case went to trial and one of the decedent’s estates recovered $1.3 million. The jury apportioned liability as follows: 55% on the decedent; 7% on Zisa; and 38% on Middleton (for speeding up and failing to let Zisa pass the first time).

The court got into a discussion of bad faith failure to settle, which is the point here.

Under Florida law (Powell v. Prudential), the court observed: “The lack of a formal offer to settle [by the plaintiff] does not preclude a finding of bad faith .... Bad faith may be inferred from a delay in settlement negotiations which is willful and without reasonable cause. Where liability is clear, and injuries so serious that a judgment in excess of the policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations.”

The court then went on to note that, under Powell, an insurer’s affirmative duty to initiate settlement discussions will exist only “where liability is clear.”

The court observed that, in Powell, the insured’s liability was evaluated at being somewhere between 80-100%. Here, however, liability was not anywhere near as certain. The court explained: “[I]t was debatable whether Middleton had any responsibility at all. Not only did Mottsey, Middleton, and Mayhair each dispute liability, but Corporal Davis [Florida Highway Patrol] found that ‘Middleton is listed as a witness. There [was] no contact with his vehicle. FHP can’t prove that he contributed to the accident.’” (emphasis in original)]

Herein lies the challenge for insurers that find themselves in states that impose an affirmative duty to initiate settlement discussions. How does it know if liability is clear? On one hand, the Welford court offered some guidance, rejecting the “some potential liability” standard: “On its face, Powell does not obligate insurers to initiate settlement negotiations whenever an insured is involved in a crash and has some potential liability. Indeed, if that were the law, insurers would have that obligation in virtually every accident case as it is almost always possible that an insured may be found at least partially liable for an injury.” (emphasis in original).

So we know what “clear” liability is not. As for what it is, the court defined “clear” as follows: free from doubt; sure; unambiguous; obvious; beyond reasonable doubt; plain; evident; free from doubt or conjecture and unequivocal. Yep, that’s clear.