This summary of a recently filed complaint illustrates one of the worst-case scenarios an insured defendant can find itself in: getting slapped with a verdict in excess of your liability insurance limits.  Here, it was an $11 million verdict against an insured who had only a $1 million insurance policy.  Even worse, the insured could have settled the case before trial for the $1 million policy limits.  The entire premise of the insurer's complaint (which it filed against the defense lawyers it hired to defend its insured) is that the insurer would have gladly accepted the plaintiff's $1 million settlement demand if it had been fully advised of the risks of going to trial.  

One of my jobs as an insurance recovery attorney is to help prevent my clients from ending up in the situation this insured defendant found itself in.

We're fortunate that the courts have developed rules to make sure that insureds remain fully protected even if insurers (or the attorneys they hire) fail to see the wisdom of settling the case before trial.  If an insurer fails to accept a reasonable settlement demand within its policy limits, it typically becomes liable for the full amount of the subsequent judgment.  That's the rule adopted by the California Supreme Court in Comunale v. Traders & General Ins. Co. (1958), the Texas appellate court in the famous Stowers decision (1929), and Section 24 of the recent Restatement of the Law of Liability Insurance, among many others.  As the California Supreme Court has explained, if insurers' liability remained capped at their policy limits, they would always roll the dice by going to trial instead of settling.  After all, that would be a “gamble … which only the insured might lose.”  Murphy v. Allstate Ins. Co. (1976).

But the back-end financial protection of an insurance bad faith claim might be cold comfort for an insured defendant who in the meantime gets put on trial, suffers the agony of waiting for its appeal to get decided, and finally may need to file a lawsuit against its insurer to hold it liable for the full judgment.  While a successful bad faith lawsuit against the insurer is always a feather in an insurance recovery attorney's cap, in many cases, a far better outcome would have been if the insurer had simply accepted the policy-limits demand for $1 million rather than taking its chances at trial.

One of the most gratifying parts of my role as an insurance recovery attorney is to work alongside defense counsel and help my clients' insurers understand the various reasons why a within-limits settlement demand is reasonable in the circumstances of the particular case.  This requires appreciating – and reminding the insurer about – the frequency of so-called “nuclear verdicts” as well as plaintiff-friendly doctrines like the joint-and-several liability rule in California that allowed the injured plaintiff in this case to recover all $11 million of its economic losses from the insured defendant who was only 3% at-fault.

Frequently, this type of insurance recovery work early in a case can result in an insurer-funded settlement within policy limits well before trial.  And as this recent complaint demonstrates, insurers sometimes need to be reminded of the reasons why such a settlement is preferable to a trial.