Commercial General Liability policies provide that an insurer’s duty to defend ends when the policy’s applicable limit of insurance is used up in the payment of judgments or settlements.Coverage issues may arise, however, when a lawsuit is brought against multiple insureds covered under the same policy.
The Duty to Defend and Settle
Most obligations related to insurance coverage for insurers and insureds alike originate from the language found within the policy itself. So it is with an insurer’s duty to defend. In that regard, many Commercial General Liability (“CGL”) policies provide that an insurer’s duty to defend ends when the policy’s applicable limit of insurance is used up in the payment of judgments or settlements. CGL policies also often provide that an insurer has the discretion to investigate any occurrence and settle any claim, with settlement being favored as a matter of public policy.
Coverage issues may arise, however, when a lawsuit is brought against multiple insureds covered under the same policy. In particular, where an insurer covers multiple insureds, several jurisdictions hold that an insurer has the discretion to settle claims against one insured, even if the settlement exhausts the applicable policy limits to the detriment of another insured. The insurer, however, must execute settlements in good faith and is prohibited from exhausting the policy’s applicable limit to relinquish its defense obligations. Thus, coverage disputes arise when settlements are reached at the discretion of the insurer that exhaust the applicable policy limits and terminate an insurer’s duty to defend any outstanding claims remaining against an insured. Such was the case in National Surety Corp. v. First Specialty Insurance Corp., 2016 WL 7057503 (N.J. Super. Ct., Law Div. November 18, 2016).
National Surety Corp. v. First Specialty Insurance Corp.
As a matter of first impression, in National Surety Corp. v. First Specialty Insurance Corp. the Essex County Superior Court of New Jersey, Law Division, found that an insurer has the discretion to settle claims and exhaust its policy limit on behalf of one insured to the detriment of an additional insured as long as the settlement was made in good faith.
In National Surety Corp. v. First Specialty Insurance Corp., the coverage dispute involved a murder at the Short Hills Mall in Short Hills, New Jersey. On behalf of the deceased, Plaintiff brought a declaratory judgment action to determine the responsibilities of the various insurers. The insureds included, among others, Taubman Centers, Inc. and Short Hills Associates, LLC ("the Mall") and the Universal Protection Service, LLC, ("UPS") (collectively “the insureds”). The insureds obtained primary-level additional insured coverage under a CGL policy from First Specialty Insurance Corporation ("FSIC"). The policy provides a $2 million limit of liability for each occurrence and afforded FSIC the discretion to settle any claim or suit. Furthermore, FSIC's policy states that FSIC's duty to defend the Mall and UPS ended when the applicable policy limit was used up.
Notably, after numerous attempts, FSIC failed to reach a global settlement between the Plaintiff and the insureds collectively, leading to FSIC negotiating a settlement offer between the Plaintiff and UPS. FSIC believed that it had the opportunity to pay its $2 million policy limit to satisfy the claims against UPS because the policy limit was insufficient to satisfy a global settlement. Thus, if the settlement offer was agreed to, it would have exhausted FSIC's policy limit and the Mall's claims would have remained unresolved. The Mall, however, was still able to obtain coverage under their primary insurance and their excess insurer issued by the National Security Corporation ("National Surety"). Accordingly, the Mall's excess insurer, National Surety, disputed FSIC's settlement with UPS and brought a declaratory judgment against FSIC to prohibit FSIC from extinguishing UPS's claim.
National Surety sought a determination from the court requiring that FSIC make settlement offers of the policy limits equally on behalf of both the Mall and UPS. They also sought a declaration that FSIC had a continued duty to defend even when it exhausted the policy limits. FSIC brought a counter claim against National Surety seeking a declaration that it had the discretion to exhaust its policy limit in good faith to settle the underlying claims against one of its insureds and that its duty to defend all of its insureds ends upon exhaustion of its policy limits.
National Surety argued that an insurer should not have the discretion to decide which insured should be released from liability and that global settlements would be discouraged if an insurer was permitted in good faith to apportion the entire policy limit to one insured. National Surety contended that this would contradict New Jersey public policy which strongly favors the settlement of disputes. Furthermore, National Surety argued that a proposed settlement for only one insured would be unreasonable and constitute bad faith. Moreover, National Surety argued that FSIC could not escape its duty to defend by entering into a settlement and exhausting the policy limits.
The Court disagreed, finding in favor of FSIC. The Court determined that FSIC’s repeated attempts to negotiate a global settlement established that FSIC exhausted the policy’s applicable limit in good faith. Additionally, the court noted that FSIC's policy language unambiguously established that FSIC had the discretion to settle any claim or suit, stating: "[w]e [FSIC] may, at our discretion, investigate any occurrence and settle any claim or suit that may result.” In support of its holding, the court cited other jurisdictions that have considered the issue and deferred to an insurer's discretion to settle claims in good faith on behalf of one insured, even when it resulted in actual exhaustion of the policy limits to the detriment of another insured. Thus, due to the plain language of FSIC’s policy and FSIC’s good faith attempt to reach a global settlement between the parties, the Court found that FSIC had the discretion to exhaust the policy limit to settle UPS’s claims.
The Court then looked to FSIC’s policy language to determine whether FSIC’s duty to defend the Mall was terminated upon the exhaustion of the policy’s applicable limit. The court found that the policy unambiguously provided that FSIC’s duty to defend any of the insureds terminated when the policy’s applicable limit was used up. Furthermore, the Court noted and concluded that, “the Mall…will not be left bereft of coverage…[and were] fortuitous in having FSIC defend them to this juncture; however, their preference that FSIC continue to do so is not a basis to conclude that FSIC’s decision to achieve a partial settlement is in bad faith.”