Excess Insurer Did Not Have Duty to Initiate Settlement Negotiations with Third Party Claimant, Tenth Circuit Holds

The U.S. Court of Appeals for the Tenth Circuit has ruled that an excess liability insurer had no duty to initiate settlement negotiations with a third party claimant.

Background

Under Oklahoma law, a primary insurer owes its insured a duty to initiate settlement negotiations with a third party claimant if the insured’s liability to the claimant is clear and the insured likely will be held liable for more than its insurance will cover.

In this case, the insured, SRM, Inc., sought to extend this obligation to its excess liability insurer, Great American Insurance Company.  Specifically, SRM claimed that Great American had breached its insurance policy and duty of good faith and fair dealing by not proactively investigating claims against SRM and by refusing to tender its policy limits to spur settlement negotiations.

The district court granted Great American’s motion for summary judgment on SRM’s claims and denied SRM’s request to reconsider. SRM appealed to the Tenth Circuit.

The Circuit Court’s Decision

The Tenth Circuit affirmed, agreeing with the district court that Great American, SRM’s excess insurer, had not breached its duty to fairly and in good faith discharge its contractual obligations to SRM.

In its decision, the circuit court explained that, under Oklahoma law, primary insurers generally are immediately responsible for investigating and defending the insured against third party claims. In performing its contractual obligations, a primary insurer owes its insured a duty of good faith and fair dealing.

This implied duty, the Tenth Circuit said, includes “an affirmative duty to initiate settlement negotiations” if an insured’s liability is “clear” and a claimant’s injuries are so severe that a judgment in excess of policy limits is “likely.”

The circuit court refused to extend this duty to excess insurers. It pointed out that the Great American policy was “unambiguous” and that Great American’s contractual duties to investigate, settle, or defend claims against SRM “did not kick in until SRM’s primary insurer exhausted its policy limits by actually paying claims.”

The Tenth Circuit concluded that it would be “inappropriate” to alter Great American’s obligations or economic expectations to imply such a duty on the part of Great American where, under its policy with SRM, it had no obligation to investigate, settle, or defend a claim until the primary insurer had exhausted its policy limits by paying claims.

The case is SRM, Inc. v. Great American Ins. Co., No. 14-6160 (10th Cir. Aug. 25, 2015).