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If limits are exhausted, must insurer still defend?

If limits are exhausted, must insurer still defend?

February 25
08:33 2019

If limits are exhausted, must insurer still defend?

A 16-vehicle traffic accident occurred on July 20, 2011. A chain reaction was precipitated when an employee of Joginder Singh, driving Singh’s semitruck, approached congested traffic ahead of him in the right lane without slowing down. He swerved into the adjacent lane and collided with a logging truck owned by Gilliardi Logging and Construction Inc. The momentum of the collision caused the trucks and their cargo to crash into other vehicles. One, a truck driven by Bryan Sykes, was flipped onto its side. Another was occupied by 9-year-old Nancy Beckwith, who died as a result of the impact.

Beckwith’s family and estate filed a wrongful death complaint against Singh and Gilliardi and secured a trial date in 2013. The Beckwith claimants made clear that they saw the value of their claim as exceeding the combined policy limits of Singh and Gilliardi and that they were not interested in global mediation with other claimants.

Singh was insured by Zurich American Insurance Company under a commercial automobile policy with a $1 million liability limit. The policy set forth Zurich’s duty to defend Singh. It also stated: “Our duty to defend or settle ends when the Liability Coverage Limit of Insurance has been exhausted by payment of judgments or settlements.”

Zurich retained attorney Ken Roessler to defend Singh. Roessler contacted other potential claimants asking for information about their claims. He received a letter of representation from Sykes’s attorney stating that Sykes was injured. Although the letter did not specify the details of Sykes’s damages, it said he “makes claim for said injuries” and stated that his wife and daughters were tendering loss of consortium claims. Farmers Insurance Company, having paid claims to its own insureds, filed a subrogation suit for $25,150.32.

Roessler recognized that it was in Singh’s interest to remove his exposure to the Beckwith claim by offering to settle with the Beckwiths for $1 million. At the same time he recognized that under the Zurich policy, a settlement that exhausted Singh’s policy limits would leave Singh undefended if other significant claims emerged later. Roessler testified that he was trying to think of “creative ways” to get the Beckwith claim settled while still maintaining a defense for Singh to continue “shooing away” the other claims.

In January 2013, Roessler asked Zurich to allow Singh to contribute $1,000 toward the $1 million that would be offered to settle the Beckwith claim. In March 2013, Zurich declined Roessler’s proposal and instructed Roessler to offer to settle the claim for the full $1 million policy limit. Roessler did so, and the offer was accepted.

At the same time the Beckwith plaintiffs accepted a policy-limit settlement of $2 million from Gilliardi, who was covered by Alaska National Insurance. Under the terms of the settlement, Gilliardi held back $100,000 until expiration of the statute of limitations. This allowed Gilliardi to maintain some degree of coverage and to have a defense in the event another claimant came forward.

Farmers withdrew its subrogation suit on learning that Singh’s policy limits had been exhausted. For a number of months Zurich continued to pay Roessler to fend off the other claims.

The statute of limitations expired in July 2014. Shortly before that, Sykes filed a complaint. Singh tendered the complaint to Zurich. On August 1, 2014, Zurich informed Singh that because his policy limits had been exhausted, the company had no further duty to defend and would not defend him.

Singh retained private counsel and with court approval settled with Sykes for $250,000 on May 11, 2016. Meanwhile Singh filed suit against Zurich for bad faith, breach of contract, negligence, and violations of the Insurance Fair Conduct Act (IFCA) and the Consumer Protection Act (CPA).

The jury found that Zurich breached the policy, causing Singh economic damages of $286,000. This included $250,000, the amount of his settlement with Sykes that constituted presumed damages for Zurich’s bad faith, and $36,000 in damages for the legal fees he incurred defending Sykes’ suit. The jury also found that Zurich was negligent, causing the same $286,000 in economic damages; and that it failed to act in good faith, causing the same $286,000 in economic damages plus $5,000 in emotional distress damages.

The jury found further that Zurich violated the IFCA, but the violation did not cause damage; and the insurer did not violate the CPA.

The court entered judgment on the verdict of $291,000.00 plus interest and awarded Singh $293,710.23 in attorney fees and costs. Zurich appealed.

On appeal, Zurich argued that Singh’s bad-faith claim impermissibly expanded Zurich’s obligations under the policy, reasoning that its conduct could not have been in bad faith because the policy contained no provision that limited its right to exhaust policy limits with the Beckwith settlement. Zurich contended that insurers are entitled to rely on contractual language to cap their exposure and are not required to defend every lawsuit, despite the benefits that might bring to the insured.

The court concluded that no bright-line rule absolutely excludes an insurer from its duty to defend once coverage is exhausted in an excess exposure case that involves multiple claimants.

When the evidence was viewed in the light most favorable to Singh, the court said, it raised a question of material fact as to whether Zurich considered Singh’s interest equally with its own when negotiating the Beckwith settlement and, if not, whether its failure to do so damaged Singh. The court concluded that the trial court did not err in refusing Zurich’s requests to rule that it acted in good faith as a matter of law.

The court affirmed the trial court’s judgment on the verdict and the award of attorney fees and costs.

Singh vs. Zurich American Insurance Company-Court of Appeals of Washington, Division 1-August 13, 2018-No. 76479-9-I.

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