The Nevada Supreme Court’s decision in Allstate Insurance Company v. Miller (2009) 212 P.3d 318, 125 Nev.300, confirmed an insurer’s duty, under the implied covenant of good faith and fair dealing, to inform an insured regarding settlement opportunities. When an insurer acknowledges its duty to defend its insured, it possesses a duty to adequately inform the insured of settlement offers. This duty applies to all settlement offers, including offers in excess of the applicable policy limits. Where an insurer fails to fulfill its duty to adequately inform its insured of settlement offers, this is relevant to the evaluation of a first party bad faith claim.
Miller sued his insurer Allstate for bad faith, after plaintiff (Hopkins) obtained a judgment against him for $703,619.88 in a third-party bodily injury case. Hopkins claims arose from a motor vehicle accident, wherein Miller was determined to be the at fault driver. Shortly after the accident occurred, Allstate offered to settle Hopkins’ claims against Miller for his policy limits, $25,000. Hopkins first attorney notified Allstate his client was not accepting the offer. Hopkins thereafter retained new counsel. Hopkins’ new counsel advised his client’s medical and attorneys’ liens exceeded Millers policy limits and that he would not accept a $25,000 tender of the policy limits if Allstate included the lienholders as payees on the settlement draft. Nonetheless, Allstate sent Hopkins’ counsel a check for $25,000 anyway, listing all lienholders as payees. Hopkins’ counsel rejected the check but advised Allstate that Hopkins would release Miller from liability if Allstate agreed to file an interpleader action to determine the rights of the lienholders. Allstate refused Hopkins’ pre-litigation offer.
After Hopkins filed a lawsuit against Miller, Allstate offered to file the interpleader action but Hopkins pre-litigation offer had expired. Hopkins then offered to release Miller if Miller agreed to a stipulated excess judgment with a covenant not to execute, in exchange for Miller presenting a bad faith claim against Allstate. Allstate rejected this proposal and it advised Hopkins counsel that if Miller agreed to the stipulated judgment, without Allstate’s consent it would not be bound by the judgment. Allstate further advised it could deny coverage based on the “cooperation clause” in Miller’s policy. Thereafter, Hopkins obtained his judgment against Miller.
In analyzing Miller’s claims against Allstate, the Nevada Supreme Court focused on the insurer’s duty to defend. The Court explained the duty to defend contains two potentially conflicting rights: the insurer’s right to control settlement discussions and its right to control litigation against the insured.
The Court noted these two duties create additional duties for the insurer.
The right to control settlement discussions creates the duty of good faith and fair dealing during negotiations. See Couch, supra, § 203:1 (stating that the insurer’s right to control settlement negotiations may create a conflict of interest between the insurer and the insured, and therefore, the insurer must act in good faith and give the insured’s interests equal consideration with its own). The right to control litigation creates the duty to defend the insured from lawsuits within the insurance policy’s coverage. (Allstate, supra, 212 P.3d at 325.)
A primary insurer’s right and duty to defend attaches when the insured tenders defense of the lawsuit to the insurer and carries with it the duty to communicate to the insured any reasonable settlement offer that could affect the insured’s interest. Citing Heredia v. Farmers Ins. Exchange, 228 Cal.App.3d 1345, 279 Cal.Rptr. 511, 519-20 (1991). (Allstate, supra, 212 P.3d at 325.)
Thus, an insurer’s duty to adequately inform the insured begins upon receipt of a settlement demand and continues through litigation to final resolution of that claim. As a result, if an insurer fails to adequately inform an insured of a known reasonable settlement opportunity prior to the filing of a claimant’s lawsuit, the insurer may breach its duty of good faith and fair dealing. If the insurer fails to adequately inform an insured of such an opportunity after the filing of a claimant’s lawsuit, then the insurer has breached its duty to defend the insured against lawsuits. (Allstate, supra, 212 P.3d at 325.)
Miller claimed that Allstate failed to inform and/or provide him with an opportunity to contribute to a settlement with Hopkins or to initiate an interpleader action on his own. Allstate’s handling adjuster’s claim file contained notations that Allstate advised Miller of Hopkins settlement offer but the notes did not detail what Allstate told Miller regarding the offer and Allstate could not provide any evidence that Miller did not or would not offer to fund/contribute to funding acceptance of Hopkins offer.
Significantly, the Nevada Supreme Court rejected Allstate’s position that its original offer to pay its policy limits to Hopkins barred Miller’s claims for bad faith. The Court declared,
A primary liability insurer’s duty to its insured continues from the filing of the claim until the duty to defend has been discharged. We refuse to adopt the absolute rule that a primary liability insurer’s bad-faith liability ends upon a timely offer of the insured’s policy limits. While in most cases an insurer’s timely policy-limit offer negates a finding of bad faith because the insurer has fulfilled its contractual obligations, the mere offering of the policy limit does not necessarily end a primary liability insurer’s contractual obligations, specifically, its duty to defend the insured. (Allstate, supra, 212 P.3d at 326.)
The Supreme Court of Nevada further explained that Allstate’s failure to inform Miller of the details of Hopkins settlement offer is enough, by itself, to state a claim for bad faith. (Allstate, supra, 212 P.3d at 326.)
The duty to adequately inform an insured of all settlement offers begins from the time the insurer first receives notice of a claim against its insured and until it obtains a release for its insured regarding said claims. It extends to counsel assigned by the insurer to defend its insured. And the duty exists regardless of whether the insurer does or does not have an opportunity to settle the claim within its policy limits.
If the insurer does not document in detail, the manner in which it complied with its duty to adequately inform its insured of all settlement offers, its insured will likely prevail regarding a bad faith claim against the insurer. Therefore, it is imperative that insurers and defense counsel assigned by insurers, provide written notification to their insureds/clients regarding all settlement offers, including details regarding any time limit to accept the offers and the amount the insured/client would have to contribute to fund acceptance of the same.