Can Insureds Stop Their Carriers From Settling Claims?

Settlements Deemed Expedient

Most of the case law in which an insured seeks to hold the insurer liable for settlements within policy limits occurs in the context of policies that explicitly allow insurers to settle claims or lawsuits as the insurers "deem expedient." In these situations, some courts have found in favor of insurers, interpreting the "deems expedient" provision to preclude an action for breach of good faith against an insurer that settles a claim within policy limits, regardless of whether the insured consents.

A New York Court of Appeals case, Feliberty v. Damon, illustrates this point. In Feliberty, a medical malpractice panel found that the insured physician committed malpractice and was liable to the plaintiffs for $743,000. Before the judgment was entered, and without the insured's consent, the insurer settled the claim for $700,000 within policy limits. The insured later sued his insurer claiming that the settlement had damaged his reputation.

The court held that the insurer had an absolute right to settle a claim against its insured under the language of the policy, which included the "deems expedient" provision. Other courts, however, have ruled that the "deems expedient" provision provides only a conditional right on the insurer, with a corresponding duty to exercise that right in good faith, paying attention to the expectations of the parties to the insurance policy.

Shuster v. South Broward Hospital (Florida Supreme Court, 1992), for example, involved an insured physician's suing his insurer for bad faith because of the reputational (and other) damage of a settlement made by the insurer without his consent. Similar to the holding in Feliberty, the Shuster court held that the clear language of the "deems expedient" provision gave the insurer exclusive authority to control settlement and to be "guided by its own self interest when settling the claim for amounts within the policy limits."

The Shuster court, however, recognized that, even though an insurer has discretion to make settlements, there are circumstances in which a claim for bad faith can be established against an insurer as a result of such a settlement. The Shuster court further emphasized that every contract requires good faith performance of its provisions and that the "deems expedient" provision is not absolute. Reasoning that the intent and expectations of the parties must be given consideration, the court gave examples in which a bad faith action could be upheld.

First, when there were multiple parties to a lawsuit, the court said that a "deems expedient" provision would not protect an insurer that indiscriminately settles with one or more of the parties for the full amount of the policy, exposing the insured to an excess judgment from the remaining parties. Second, despite a "deems expedient" provision, a bad faith action could be maintained against an insurer when it settles a claim without regard to the fact that it may be barring a counterclaim of the insured.

Liability for Harm

Courts have imposed liability on insurers for harm to their insureds resulting from settlements within policy limits, over the insureds' objections. For example, in Barney v. Aetna Casualty & Surety Co., the California Court of Appeals held that the executor of the insured's estate could proceed on an action against an insurer for breach of the implied covenant of good faith and fair dealing, because the insurer had breached a fiduciary obligation to its insured when it knowingly settled a claim against the insured for personal injuries in connection with an automobile accident.

In Barney, the insurer settled the claimant's lawsuit without the consent or knowledge of the insured or her attorney, despite being aware that the insured alleged that her injuries were the result of the claimant's negligence in the accident and that the insured had retained independent counsel to pursue damages for those injuries. The settlement was finalized through a general release and the claimant's action was dismissed.

Subsequently, the court dismissed the insured's lawsuit against the claimant because of the earlier dismissal of the claimant's lawsuit. The insured then sought relief against the insurer for the breach of the covenant of good faith and fair dealing. The insurer argued that the covenant of good faith and fair dealing did not come into play because the insurance policy did not, by its terms, provide a right to an insured to prosecute a claim against a third party.

The court rejected the insurer's literal contract interpretation, pointing out the adhesive nature of insurance contracts and the tendency of courts to look beyond the four corners of an insurance policy and, instead, to focus on the reasonable expectations of insureds in determining whether insurers were liable for bad faith conduct. "The insured can hardly be said to have received any benefit from the policy of insurance if that benefit is totally voided by a countervailing detriment imposed upon him by the insurer without his consent," the court said.

Another decision recognizing that an insurer cannot ignore its insureds' rights is Bodenhamer v. Superior Court (Cal. Ct. App. 1958). In Bodenhamer, the insured's jewelry store was burglarized, resulting in a substantial loss to the insured's stock in trade and pieces of the customers' jewelry. The insured tendered its customers' claims to the insurer under its insurance policy, which covered the insured's customers' property. The insurer denied coverage for all of the customers' property. The insurer ultimately settled most of the customers' claims, but only after serious delay.

As a direct result of the insurer's actions, many customers stated that they had ill feelings toward the insured and chose to do business with other jewelers. The insured sued the insurer for the damage to its business goodwill that resulted from the insurer's mishandling of the customers' claims.

The California Court of Appeals noted that liability policies contain an implied promise to process claims "in a manner which will not injure the insured, which, in this case, includes injury to the business." The court held that, because the insurer allegedly "misrepresented its own assessment of the validity of customer claims, delayed settlement of those claims in bad faith, and caused injury to the goodwill of [the insured's business] by its actions," the insured was entitled to a trial on whether the insurer breached the covenant of good faith and fair dealing.

Retrospective Premiums

Courts also have held that the implied covenant of good faith and fair dealing requires an insurer to settle claims and establish reserves with good faith regard to its insured's retrospective premium obligations and potential dividends. For example, in Security Officers Service, Inc. v. State Compensation Insurance Fund, the California Court of Appeals held that, because the insured's insurance premium was calculated based upon how the insurer handled the claims and reserves, the covenant of good faith and fair dealing required the insurer to conduct its claim resolution and reserve allocation processes with good faith regard for the insured's interests.

Provision Requiring Consent

Some insurance policies contain a provision requiring the consent of an insured to settle a claim. In that context, courts have upheld causes of action against insurers for settling claims within policy limits that caused the insured a loss of business income, injury to reputation, or exposure to adverse publicity. For example, in Brion v. Vigilant Insurance Co., a Missouri appellate court held that an insurer could be held liable to its insured when the insurer unilaterally settled a malpractice suit within policy limits without the consent of the insured, causing the insured to suffer loss of business income and injury to his reputation.

The insurer settled claims of professional conduct against the insured, a psychiatrist, which were contained in an action filed by a hospital claimant. The insured alleged that, as a result of the unauthorized settlement, he suffered, among other things, disgrace individually and professionally, and loss of reputation and standing in the psychiatric community.

In holding that the insured had stated a claim against its insurer, the Brion court pointed out that the policy's consent provision was essentially a "pride" provision, giving the insured control over litigation that could jeopardize his professional reputation. It was, therefore, a valuable right for which it could be assumed that the insured paid an additional premium.

Loss of Deductible

Insurers also have been held liable to their insureds for settling claims within policy limits, but without the insured's consent, in the context of loss of deductibles. In National Service Industries, Inc. v. Hartford Accident & Indemnity Co., the insured consented to the settlement of the underlying product liability claim and to the filing of a third-party complaint against a second insurer to determine which insurer was responsible for the claim. The insured objected, however, to the resolution of the third-party complaint through an agreement between the two insurers to split liability evenly for settlement, causing the insured to be responsible for payment of deductibles in both policies.

The National court (Fifth Circuit, 1981) held that even assuming that Georgia law provided an insurer a general right to settle without an insured's consent, and even if the policy language implied a right to settle without consent, the requirement that an insurance company give equal consideration to the interests of its insureds in making settlement decisions was of greater importance. Thus, the court ruled that the insurer could not settle the third-party complaint against the second insurer without the consent of the insured.

Susan Page White is a partner in the Insurance Recovery and Commercial Trial Practice Groups in the Los Angeles office of Howrey Simon Arnold & White.