All too often policyholders find themselves in a difficult predicament when it comes to resolving a lawsuit. Although their insurer may have been defending the case, it has now drawn the purse strings tight when it comes to settlement. It will point to that long reservation of rights letter sent to the policyholder months or even years ago and explain why it will not contribute with respect to certain portions of any judgment or settlement. Or perhaps the insurer has valued the claim less than what the plaintiff is willing to accept, thus forcing the policyholder to trial. These are some of the murkiest waters we negotiate as coverage attorneys. Here are three things policyholders should know about coverage rights and obligations regarding settlements.
1. Recognize the distinction between the duty to defend and duty to indemnify.
First, the duty to defend and the duty to indemnify are different. The duty to defend is broad, and under many policies, if the insurer is obliged to defend any part of the allegations asserted against the policyholder, it must defend the entire case – even claims for which there is no potential for coverage. The duty to indemnify, on the other hand, is narrower. Generally, an insurer may not have to indemnify uncovered loss. Thus, while an insurer may have been defending the case, where the damages are allocable to particular claims, it may not agree to fund the portions allocated to uncovered claims. The facts of each case and the language in the policy at issue can greatly affect the outcome in these cases. Therefore, when negotiating a settlement, care should be taken, and consulting a coverage attorney may be beneficial.
2. Insurers may not place their own interests above the policyholder’s.
Second, insurers typically have the right to settle a claim against their policyholder, but must consider the policyholder’s interests at least equal to their own interests when making settlement decisions. Netzley v. Nationwide Mut. Ins. Co., 34 Ohio App.2d 65 (2nd Dist. Mont. Cty. 1971). Moreover, if an insurer has the opportunity to settle within policy limits, failure to do so could constitute a breach of its duty of good faith and fair dealing and render the insurer liable for any excess judgments to which the policyholder is exposed.
3. Insurers that breach their duty to defend and/or denied coverage may not control settlement.
Third, if the insurer has breached its duty to defend and/or denied coverage, the policyholder is free to enter into a reasonable settlement and still pursue coverage afterwards. The insurer cannot, on the one hand, deny coverage or breach its obligations and then assert coverage defenses based on policy conditions such as the consent to settle or voluntary payment conditions. Sanderson v. Ohio Edison Co., 69 Ohio St.3d 582, 587 (1994) (“Neither the insured nor the injured party is required to perform conditions in a policy made vain and useless by reason of the insurer's prior breach.”); Ward v. Custom Glass & Frame, Inc., 105 Ohio App.3d 131, 663 N.E.2d 734 (8th Dist.1995). Additionally, even an insurer that has not breached its duty to defend, but that has indicated it will not indemnify the policyholder against a judgment, may be precluded from controlling settlement under the right set of facts. See Ward, supra (holding that “[w]hen an insurance company refuses to provide coverage and at the same time seeks to maintain control of the same litigation, it . . . creates a frustration of purpose. Such conduct would compel a person of reasonable faculties to cut his/her costs and settle a lawsuit to avoid the possibility of a higher judgment.”).