Selecting “Independent Counsel” to Maximize Opportunity for an Insurer Funded Settlement
At the inception of a lawsuit, most policyholders focus on whether an insurer has agreed to defend. Equally significant, however, is assuring that the policyholder obtains “independent counsel” funded by an insurer who can favorably position their interests to obtain a favorable settlement of the action, significantly underwritten by insurer funding.
Counsel appointed by the insurer, whether it is designated as “independent counsel” or “panel defense counsel,” will not be in a position to effectively represent the policyholder’s interests in securing an insurer-funded settlement. Policyholders should therefore obtain their own counsel, whenever possible, or reach agreement with the insurer on “mutually acceptable counsel.”
The Test for the Reasonableness of a Settlement Depends on Case-Specific Analysis
First, the underlying suit must be potentially covered by the policy in question. Since the duty to settle is derived from the insurer’s implicit obligation to use good faith in fulfilling its contractual obligation to defend its insured in a third-party lawsuit, the duty to defend is a predicate to any settlement obligation.
Second, the insured’s exposure must be in excess of the settlement offer. Some courts articulate the rules requiring likely exposure in excess of policy limits. The duty to settle may be triggered by the reasonable likelihood that the insured would be found liable for an amount in excess of the settlement offer. But an insurer cannot prefer its own interests to those of the insured by raising insurance coverage issues as a basis for paying less than the reasonable amount necessary to settle the underlying action.
Third, there must not only be potential excess exposure but probable exposure in excess of the settlement offer, thus making the settlement reasonable under the circumstances. Id. In other words, the amount of the settlement offer must make sense when comparing (1) the extent of the negative consequences that would be potentially suffered by the insured if the suit does not settle, and (2) the likelihood that these negative consequences will occur if the case continues. Id.
This is the case in the majority of jurisdictions, including California pursuant to Civil Code § 2860, where a conflict arises between the interests of the insurer and the insured.
The applicable test under Florida law. Continental Ins. Co. v. City of Miami Beach, 521 So. 2d 232, 233 (Fla. Dist. Ct. App. 1988) (A business liability insurer was precluded from asserting any defenses to an insured’s claim when the insured failed to timely select independent counsel within the meaning of Florida Civil Code § 627.426(2)(b)(3). It was of no moment that the policyholder refused to accept available alternatives the insurer had chosen for him because it did not preclude the insurer from choosing other options. See Auto Owners Ins. Co. v. Salvia, 472 So. 2d 486 (Fla. Dist. Ct. App. 1985).
Peerless Lighting Corp. v. American Motorists Ins. Co., 82 Cal. App. 4th 995, 1016 (2000) (“[N]o duty to defend the underlying action . . . no duty to settle it . . . .”).
Lehto v. Allstate Ins. Co., 31 Cal. App. 4th 60, 67 (1994).
Besel v. Viking Ins. Co. of Wis., 49 P.3d 887, 890 (Wash. 2002); see Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4th 489, 498 (2001) (“ ‘[T]he only permissible consideration in evaluating the reasonableness of the settlement offer … [is] whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer.’ ”).