Recently, the Montana Supreme Court, in a split decision, found that the trial court must utilize an objective standard in considering the value of the claim and the insured’s loss of coverage when it determines the reasonableness of a stipulated settlement entered into by the insured after the insurance company wrongfully denied coverage.
In Tidyman’s Management Services, Inc. v. National Union Fire Insurance Co. of Pittsburgh, (Tidyman’s II) 384 Mont. 335, 378 P.3d 1182 (2016), the settlement agreement provided for a covenant not to execute and that the putative insureds would assign their claims against the insurer after the insurer failed to defend. In a prior decision in the case, Tidyman’s Management Services, Inc. v. Davis, (Tidyman’s I) 330 P.3d 1139 (Mont. 2014), the court remanded that case to the trial court for a determination of whether the settlement was reasonable. The court also found that the insurance company had the burden of establishing that the stipulated judgment was unreasonable. In Tidyman’s II the Supreme Court found that reasonableness was determined by an objective standard based on the point of view of a prudent person in the position of the insured defendant. The standard took into consideration the insurer’s denial of coverage. The trial court was required to consider the merits of the underlying case and the value to a prudent uninsured defendant of a covenant not to execute on a judgment.