Interpreting Oklahoma law, the US Court of Appeals for the Tenth Circuit recently held that the duty of good faith and fair dealing does not require that an excess insurer, unlike a primary insurer, affirmatively investigate the claims against the insured and initiate settlement negotiations if the insured’s liability is clear and a judgment in excess of its policy limits is likely. SRM, Inc. v. Great Am. Ins. Co., No. 14-6160, 2015 WL 5011719 (10th Cir. Aug. 25, 2015), slip. op. available at https://www.ca10.uscourts.gov/opinions/14/14-6160.pdf.

The appeal stemmed from an automobile collision that left one dead, three injured, and caused extensive property damage.  Slip. op. at 2.  From the beginning, the truck company’s defense team, paid for by its primary insurer, concluded that there was no chance for a defense verdict.  Id. at 3.  The truck company’s separately-retained attorney determined that the company’s liability would exceed the combined limits under both its primary and excess liability policies and demanded that both insurers tender their respective policy limits to settle the case.  Id.  Great American Insurance Company, the truck company’s excess insurer, refused and “urged an aggressive defense.”  Id.  After the trial court rejected the truck company’s best defense, counsel renewed his demand that Great American tender its policy limit towards settlement, but Great American again refused.  Id.  At this point, even Great American’s attorneys estimated the truck company’s potential exposure in excess of the combined policy limits.  Id. Plaintiffs then made an initial settlement demand far beyond the policy limits, but decreased the demand to $6.5 million dollars, $500,000 in excess to the insured’s policy limits.  The case settled shortly thereafter for that amount.

The trucking company sued its excess insurer for the $500,000 it was forced to pay out of pocket to settle the case.  Slip op. at 4.  It argued that, had Great American “investigated its claims and initiated settlement negotiations by tendering its policy limits earlier in the litigation, the case would have settled within the policy limits,” and Great American’s failure to do so violated its implied duty of good faith and fair dealing.  Id. at 5.

The applicable Oklahoma law required primary liability insurers to promptly investigate and defend against third-party claims.  Id. at 6.  In doing so, such insurers are required to initiate settlement negotiations if “‘an insured’s liability is clear” and “‘a judgment in excess of policy limits is likely.’”  Id.(quoting Badillo v. Mid Century Ins. Co.,121 P.3d 1080, 1095 (Okla. June 21, 2005), as corrected, (June 22, 2005)).  “But Oklahoma courts have yet to decide how this duty applies to an excess insurer like Great American, whose contractual duties to the insured are not triggered until the primary insurer’s policy limits have been exhausted.”  Id. at 6-7.

Under Great American’s policy, the appellate court noted, the excess insurer had no duty to defend or indemnify the truck company until the limits under the primary insurance policy were actually paid.  Slip. op. at 9-10.  Because the primary insurer did not tender payment until the parties settled, Great American discharged its contractual duty to pay up to its policy limits at the very moment that its contractual duties took effect.  Id. at 9.

The Court rejected the insured's attempt to “sidestep the policy it agreed to” by arguing that its excess insurer owed it implied duties expressly rejected in their contract.  Slip op. at 9.  As the Court noted, a party is only required to “‘act fairly and in good faith in discharging its contractual responsibilities.’”  Slip Op. at 10 (quoting Christian v. Am. Home Assurance Co., 577 P.2d 899, 904 (Okla. 1977)).  Because the excess insurer had no contractual duty to investigate or defend the insured until the primary coverage limits were actually paid under the contract, it could not have breached its implied duty to act in good faith in doing so until that time.  Id. at 10.

This decision supports excess insurers who negotiate, allocate risk and price their policies based on the non-assumption of any contractual duty to investigate or defend the insured until primary limits are paid.