In SRM, Inc. v. Great American Insurance Co., --F.3d--, 2015 WL 5011719 (10th Cir. Aug. 25, 2015), the United States Court of Appeals for the Tenth Circuit, applying Oklahoma law, affirmed the district court’s grant of summary judgment to an excess insurer, holding that, per the unambiguous terms of the policy, the excess insurer’s obligation to investigate and settle claims did not arise until the primary layer was exhausted.  Accordingly, the court held that the insured could not recover for costs allegedly incurred due to the fact that the excess insurer did not tender its policy limits for settlement earlier in the litigation.

The appellant, SRM, Inc. (SRM), a concrete supplier, owned a dump truck that was struck by a train, killing the driver of the truck, and injuring three workers on the train.  SRM was sued by the injured workers and named as a defendant in a cross-claim by Union Pacific Railroad, the owner of the train.  At the time SRM had a $1 million primary insurance policy with Bituminous Insurance Company (Bituminous), and a $5 million excess policy with Great American Insurance Company (Great American).

SRM’s defense team initially estimated “damages to be $4.2 million and settlement value to be $2.5 million, with no chance of a defense verdict.”  Id. at *1  Based on the estimate, SRM demanded that Bituminous and Great American both tender their entire policy limits to aid in settlement.  Bituminous agreed, but Great American “rejected that approach and urged an aggressive defense.”  Id.  After SRM’s strongest defense was stricken by the court, SRM renewed its demand of a full tender, and Great American again declined.  Id.  Then, after discovery, and before mediation, SRM updated its damages assessment to “between $4-4.5 million and $7 million.”  Id. at *2.  Great American conducted its own assessment, and concluded that damages at trial were likely to be awarded “between $2 and $4.65 million.”  Id.  At mediation, after SRM offered to contribute $500,000 above and beyond its policy limits, the parties settled for $6.5 million, with Bituminous and Great American both paying policy limits ($1 and $5 million respectively).

SRM then brought suit against Great American, claiming that “if Great American had investigated the claims and initiated settlement negotiations by tendering its policy limits earlier in the litigation, the case would have settled within the $6 million policy limits[,]” and SRM would not have paid $500,000 out of pocket.  Id.  The district court granted summary judgment to Great American, in part on the ground that Great American’s duties to SRM were not triggered “until Bituminous tendered its policy limits[, which did not occur until] the time of settlement.”  SRM appealed, arguing that Great American had breached an implied duty of good faith and fair dealing.

As noted by the court, Oklahoma law imposes “an affirmative duty” on primary insurers to investigate claims and “to initiate settlement negotiations if an insured’s liability is clear and injuries of a claimant are so severe that a judgment in excess of policy limits is likely.”  Id. at *3 (citations omitted).  SRM argued that this implied duty should apply to excess carriers as well – an issue not previously decided by Oklahoma courts, which left the Tenth Circuit to “predict how the Oklahoma Supreme Court would decide th[e] question”.  Id.

In rejecting SRM’s argument, the Tenth Circuit looked first to the plain language of the excess policy.  The court concluded that “the policy was unambiguous:  Great American’s contractual duties to investigate, settle, or defend claims against SRM did not kick in until SRM’s primary insurer exhausted its policy limits by actually paying claims.”  Id. at *4.  SRM alleged that the policy language was irrelevant because the duty of good faith and fair dealing was implied in law.  SRM contended that the duty was “independent of policy language, and therefore applies equally at all times to all insurers . . . .” Id.  But, as the court noted, even the implied duty only requires an insurer to “act fairly and in good faith in discharging its contractual responsibilities.” Id. (citations omitted) (emphasis in original).  Therefore, because Great American’s contractual responsibilities were clearly delineated by the policy, the court held it would be “inappropriate . . . to alter Great American’s obligations or economic expectations, which are rooted in the unambiguous terms of its contract with SRM.”  Id. at *5. 

Accordingly, the court found no basis “for overriding the unambiguous terms of [the] excess insurance policy and extending [an implied] duty to Great American—an excess insurer—before Great American’s contractual obligations to investigate, settle, or defend kicked in.”  Id. at *6.