The Washington Court of Appeals recently adopted a choose your own poison approach to cases where an insurer exhausts its policy limits in settlement of one claim while other related claims remain unresolved. In Singh v. Zurich American Ins. Co., 428 P.3d 1237 (Wash. App. Div. I, 2018) the court found that an insurance company’s fiduciary duty may preclude the insurer from exercising policy rights.
The claim for bad faith in this matter arose out of a multi-vehicle traffic accident. Zurich insured one of the drivers. Zurich’s policy had a standard right to settle clause which granted to Zurich the right to settle any claim or lawsuit “as we consider appropriate” and expressly stated that once Zurich paid its policy limits, its duty to defend or settlement ended upon the exhaustion of the policy limits by payment of settlements or judgments. Zurich hired defense counsel to defend its insured. It was defense counsel’s opinion that it was in the best interest of the insured to remove through settlement the insured’s exposure to a wrongful death claim of one of the victims by paying Zurich’s policy limits of $1 million. At the same time, defense counsel fully understood that the exhaustion of the limits would leave the insured undefended if other significant claims emerged later.
Defense counsel tried to think of creative ways to avoid exhausting the Zurich policy limits so as to keep Zurich on the line for defense. One idea defense counsel had was to ask Zurich to allow the insured to contribute $1,000 toward the $1 million settlement amount on the wrongful death claim. By still having indemnity dollars left on the Zurich policy, the insured could continue to get a legal defense. However, Zurich declined this offer and instructed the attorney to settle the claim by offering Zurich’s $100 million policy limit. In fact, the Estate of the wrongful death victim settled for Zurich’s policy limit.
Shortly before the statute of limitations expired, another claimant sued the insured. Zurich denied its insured’s request for a defense of the new claim, advising the insured that because of the exhaustion of policy limits, Zurich no longer had a duty to defend the insured. Thereafter, the insured entered into a consent settlement with the new claimant. That settlement was then used as a measure of damages in the insured’s bad faith lawsuit against Zurich. The bad faith matter proceeded to trial. The trial court allowed the jury to decide whether an insurance company committed bad faith by (1) refusing to allow its insured to pay a portion of a policy limits settlement demand to settle a wrongful death claim in order to preserve defense coverage; (2) insisting on exhausting its entire policy limit to settle the wrongful death claim; and then (3) invoking its right under the insurance policy to refuse a defense.
On appeal, the Washington Court of Appeals found that there was sufficient evidence to support the jury’s finding against Zurich that it put its own interest above those of its insured when it settled the wrongful death claim.