In R.G. Wegman Const. Co. v. Admiral Ins. Co., No. 09-2022, 2011 WL 117086, 5 (7th Cir. 2011), the Seventh Circuit considered whether a carrier’s duty of good faith to its insured required it to give timely notice that potential damages may exceed the policy’s limit. This case is significant because it explores a positive duty in the good faith context.

Here, the defendant issued the plaintiff a $1 million general liability policy. The plaintiff-insured was subsequently sued by a worker who was injured on the job, and the carrier accepted tender. In May 2005, at the worker’s deposition, the carrier allegedly learned that the worker was demanding nearly $6 million to settle. Apparently, neither the carrier nor counsel hired to defend the suit informed the insured that potential damages exceeded the $1 million policy limit. The insured did not learn of the severity of the worker’s claims until the eve of trial in 2007, at which point it notified its excess carrier. That carrier, however, denied coverage on the ground of untimely notice. The worker’s case proceeded to trial, and a $2 million judgment was entered for the plaintiff.

The insured then sued its carrier, arguing that the carrier had breached its contractual duty of good faith by failing to timely notify it about the liability risks stemming from the worker’s claims. The trial court dismissed the complaint. The Seventh Circuit reversed, finding if indeed the carrier learned in May 2005 that the insured faced potential liability in excess of $1 million, it was duty bound to inform its policyholder:

The insurer’s duty of good faith is not onerous. When the company is handling the defense of a suit against its insured at its own cost and initially believes there’s no danger of an excess judgment against the insured, it has every incentive to monitor the progress of the litigation closely, for realistically it is the sole defendant. And monitoring the litigation places the insurer in a good position to learn about a conflict of interest if and when one arises. At that point [i.e., when the insurer learns that there is indeed a danger of an excess judgment against the insured], given the duty of good faith, it is strongly motivated to notify the insured of the conflict immediately lest it find itself liable…for the excess judgment….

The insurance company can satisfy its duty of good faith at the price of a phone call.

In so holding, the Seventh Circuit rejected the carrier’s argument that the lawyer it hired to defend the suit was solely at fault for failing to notify the insured of the danger of an excess judgment. For a complete copy of the decision, click here.