What should an insurance company do when liability of the insured is clear, the damages clearly exceed the limits, and the claimant sends a settlement demand that would exhaust policy limits while releasing only one out of two (or more) insureds?

This is one of the “darned-if-you-do, darned-if-you-don’t” situations that some plaintiff attorneys enjoy presenting to insurers.  The insurer is faced with a dilemma where either decision could land it in a bad faith lawsuit.  If the insurer settles and only obtains a release of the driver and the insured owner is later sued, then the owner could allege the insurer acted in bad faith in settling without obtaining a release of the owner as well.  If the insurer insists on a release of both insureds and the claimant refuses, then the insured driver will argue that the insurer acted in bad faith in failing to accept the policy limits demand.  This is the exact situation an insurer found itself in the recent case of Kemp v. Hudgins, No. 12-2739, 2015 WL 5568082 (D. Kan. Sept. 22, 2015).

Fortunately, the Kemp Court found that the insurer’s rejection of a settlement offer for a release of only the driver was within the bounds of good faith because it did not include a release of both insureds.  Id., at *16.

In Kemp, the insured driver was driving under the influence and evading police when he was involved in a collision with another vehicle.  As a result of the collision, a mom and her daughter who were in the other vehicle were killed.  The owner of the vehicle acknowledged that she was aware the driver was intoxicated when she gave him the keys to her car.  When the surviving husband/father refused to settle for the policy limits with a release of both insureds because he was considering a negligent entrustment claim against the owner, the insurer reneged on the settlement.

The insurer in Kemp took actions that helped build its good faith case:

  • It quickly agreed in principle to settle the matter for its policy limits;
  • It did not dispute that its insured was the at-fault party for the collision;
  • It acknowledged that damages would far exceed the minimal $50,000 per collision limits;
  • It documented that it would have breached its duty of good faith to the owner by agreeing to a settlement where only the driver was released when the claimant was threatening to bring a claim against the owner; and
  • When a suit was later filed against only the driver, the insurer repeatedly offered its policy limits in exchange for a release of only the driver.

The Court in Kemp also acknowledged the claimant’s set up attempt, by noting that the claimant’s “sole motivation for rejecting [the insurer’s] policy limits settlement offer was to manufacture a bad faith claim.” Id. at *21.  In conclusion, the Court stated, the claimant’s “settlement proposals establish that even if [the insurer] accepted his offers, an excess judgment would have been entered in this case and [the claimant] would have pursued a bad faith claim against [the insurer] to recover that amount.”  Id.

The lesson from the Kemp case is that insurers can and should document their good-faith settlement efforts enough to win summary judgment in a subsequent failure-to-settle case, even when faced with clever “set-up” tactics.