Failing to Initiate Settlement Negotiations is Risky Business (Reprinted from Claims Journal, November 7, 2017)

by | Jun 10, 2021 | Firm News, Insurance Law

Two recent cases have addressed insurance company extracontractual exposure for failing to initiate settlement negotiations.

In Stalley v. Allstate Insurance Co., 2016 WL 1752764 (M.D. Fla. April 29, 2016) the court considered the so-called “Powell rule” where the insurance company has an affirmative duty to initiate settlement negotiations under Florida law when the liability of the insured has become clear and the injuries are so serious that a judgment in excess of the policy limits is likely to occur.  The Stalley case involved an automobile accident in which Benjamin Hintz was rendered totally incapacitated as a result of a head injury that was received when his scooter was struck by a Volkswagen driven and owned respectively by Emily Boozer and Otto Boozer.  The Volkswagen was insured under Emily’s parents’ Allstate policy.  The parents’ policy had a $100,000 policy limit.  Douglas Stalley brought suit in the status of a third party and guardian of Mr. Hintz.  The case went to trial with a jury rendering a verdict in excess of $11 million.  Judgment was entered against Emily Boozer in the entire amount of the judgment and against her father, Otto, in the amount of $100,000.

At the time of the accident, Allstate had several policies available, including two policies which had been issued to Emily Boozer’s grandparents, with one of those policies having a $100,000 liability limit and the other being an umbrella policy with $1 million of liability limits.  Allstate ultimately paid $1.1 million under the Boozer parents’ primary policy and under the Boozer grandparents’ umbrella policy in partial satisfaction of the judgment against Emily.  Thereafter, Stalley sued Allstate for bad faith.

Allstate moved for summary judgment, asserting that there was no bad faith in settlement.  The federal judge applied Florida’s Powell rule, noting that while Allstate paid one of the policy limits within ten days under the Boozer parents’ policy, the record also reflected that there were two other Allstate policies (apparently unbeknownst to Allstate initially) which were issued to Emily Boozer’s grandparents.  Allstate did not offer the $1 million policy limits under the grandparents’ umbrella policy until 1 ½ years after the accident.  Under the facts presented, the court found that a fact issue existed to preclude summary judgment regarding whether Allstate should have resolve issues regarding damages and coverage under the grandparents’ policy earlier.

A similar ruling was reached in Kleinsasser v. Progressive N. Insurance Co., 2016 WL 1583664 (W.D. Okla. April 19, 2016).  In the Kleinsasser case, two vehicles struck a cow.  The first vehicle to strike the cow was driven by Bellows.  The first collision killed the cow.  The second vehicle was driven by Michael Kleinsasser.  Daniel Caswell was riding in the Kleinsasser vehicle when it struck the cow.  Mr. Caswell was injured in the second collision with the cow, which also involved a collision with the rear end of the Bellows pickup truck.

Progressive Northern settled Mr. Caswell’s claim without notifying Mr. Kleinsasser.  No demand had been made by Mr. Caswell.  The record reflected that Progressive Northern approached Mr. Caswell to achieve the settlement.  Thereafter, Kleinsasser sued Progressive Northern, alleging that it breached the duty of good faith and fair dealing.  The Federal District Court noted that Oklahoma law imposed upon insurance companies an affirmative duty to initiate settlement negotiations when an insured’s liability was clear and the injuries of a claimant were so severe that a judgment in excess of the policy limits was likely.  Kleinsasser’s complaint pled a bad faith claim based upon Progressive Northern’s settlement with Caswell, in part because Kleinsasser argued that Progressive Northern did not have an obligation to initiate settlement negotiations.  The ruling of the district court found that Kleinsasser had sufficiently pled a bad faith claim against Progressive Northern.  The district court denied Progressive Northern’s motion for judgment on the pleadings because the face of the bad fad pleadings revealed issues of fact.

The takeaway from the Stalley and Kleinsasser cases is that bad faith failure to settle cases are very difficult to receive summary judgment on.