Earlier this month, the California Appeals Court reversed a trial court's decision in favor of Lloyd's of London that its insured did not provide Lloyd's a reasonable opportunity to participate in settlement negotiations. The court also held there was a triable issue of material fact as to whether Lloyd's unreasonably withheld consent to settlement.
Lloyd's provided a professional liability policy to Safeco Insurance Company of North America ("Safeco"). The policy included a provision that prohibited Safeco from settling any claims or incurring any defense costs in excess of $2.5 million without the Lloyd's written consent.
In 2005, Safeco faced claims of malpractice and bad faith brought against it by one of its policyholders. Safeco settled the claims for $10 million, the amount of the deductible, without obtaining the Lloyd's consent. Thereafter, Lloyd's refused to provide coverage. Safeco sued, alleging Lloyd's had breached the terms of the policy by failing to pay defense costs in excess of the deductible. The trial court granted motion for summary judgment in favor of Lloyd's.
On appeal, the court reversed the summary judgment decision because there were triable issues of material fact as to whether Lloyd's was afforded a reasonable opportunity to participate in the settlement negotiations. The court noted that Safeco did not provide Lloyd's with a current liability and exposure analysis, written reports of mock jury trial results, or mediation briefs, even though Lloyd's had advised Safeco such materials were necessary to evaluate proposed settlement offers. Further, Safeco gave Lloyd's only two days notice of a settlement meeting, which Lloyd's could not attend because of the short notice. The court noted, however, that Lloyd's had considerable factual and procedural background at least one month prior to the mediation, and that Safeco had given Lloyd's an oral report of the mock jury trial results. Further, during the mediation, Safeco kept Lloyd's apprised of the status of settlement negotiations through phone and email messages. Based on the foregoing, the court held that there was a material issue of fact as to whether Lloyd's was denied a reasonable opportunity to participate in the settlement. The court also held that there was a triable issue of material fact as to whether Lloyd's unreasonably withheld consent to settlement. Although Safeco and Lloyd's had a telephone conversation during the mediation in which Lloyd's made it clear it would not consent to any settlement achieved that day because it lacked sufficient information about the case, the court noted that the "substantial" information provided to Lloyd's prior to the mediation created an issue of fact as to whether Lloyd's unreasonably withheld consent.
This case demonstrates that the reasonableness of an insurer's claims handling conduct is ordinarily a question of fact, which suggests it may be difficult for insurers to obtain a favorable decision by summary judgment.