Primary Insurer Loses Failure-to-Settle Dispute to Excess Insurer

Photo by Nishant Vyas on

An interesting thing sometimes happens when a policyholder with a tower of insurance is sued and settlement discussions involve members of the insurance tower. The excess insurers may look to the primary insurer to defend the claim and to run point on the settlement. The primary insurer, where it is clear that the settlement will be well above the primary insurance limits may look to the excess insurers to lead the settlement discussions. But what happens if the case is not settled and the verdict impacts the excess layers? Does an excess insurer have any recourse if the primary insurer failed to settle the case?

In a recent case in the Eleventh Circuit Court of Appeals, the court found in favor of an excess insurer and against the primary insurer on a failure-to-settle dispute.

In American Guarantee & Liability Insurance Co. v. Liberty Surplus Insurance Corp., No. 19-11541 (11th Cir. Nov. 9, 2020) (Not for Publication), the 11th Circuit affirmed a district court judgment in favor of an excess insurer against a primary insurer for failure-to-settle. The policyholder was an apartment complex, which was sued after a tenant walked into an apartment and was met with a gas explosion. The policyholder had a tower of insurance.

The defense team estimated a jury verdict that was multiples lower than the large jury verdict that was issued. The parties settled and a settlement allocation dispute unfolded, with one of the excess insurers claiming that the primary insurer (and one lower layer excess insurer) had failed to settle and was liable for negligently failing to settle. The district court held a bench trial and found in favor of the excess insurer.

In a long, fact-intensive analysis, the circuit court affirmed. The case was decided under Georgia law, which allows an excess insurer to bring a failure-to-settle claim under the doctrine of equitable subrogation. As the court explained, the issue arises when the insurers receive a an offer to settle the claim for policy limits. When that happens, the interests of the insurers and the policyholder diverge.

The court rejected the primary insurer’s argument that the excess insurer did not meet the elements of a failure-to-settle tort claim. Under Georgia law, said the court, an offer within the insured’s policy limits is a prerequisite for the insurer to owe a duty to settle. Here, a demand was made with the tower’s policy limits on the first day of trial and after a “day in the life” video was shown to the jury. The district court, affirmed by the appellate court, found that the primary insurer did not respond reasonably to the settlement offer.

What happened was that the primary would only allow $500,000 of its $1 million limit to be used as the lower limit of a high/low agreement negotiation. Thus, although it ultimately tendered its full limits to the next excess layer, the refusal to use it’s full limits for the lower limit of the high/low negotiation precluded the excess insurers from negotiating a settlement.

The court also rejected the primary insurer’s claim that the settlement demand had to be within its policy limits. The court noted that under Georgia law, the demand had to be within the “insured’s” policy limits, which in this case encompassed the tower of insurance available. The court also agreed that the excess insurer had met the proximate cause requirement, because the primary insurer’s actions in not using it’s full limits for the high/low negotiations prevented the excess insurer’s ability to reach a settlement.

Finally, the court did not allow the primary insurer access to the safe-harbor provisions of Georgia law when tendering policy limits because of the restrictions that the primary insurer put on the tender.