Nevada Supreme Court Concludes Liability Insurer's Good Faith Obligation Includes the Duty to Inform Policyholder of a Settlement Offer
August, 2009
By
Andrew B. Downs
The Nevada Supreme Court recently held that the implied covenant of good faith and fair dealing obligates a liability insurer to inform an insured of a settlement offer made by the claimant. The court also held that the insurer's subsequent offer of policy limits did not cure the earlier failure to inform.
Allstate Insurance Company vs. William Miller, 125 Nev. Adv. Op. 28. arose out of a claim under an automobile liability policy. The policy limits were only $25,000 and Allstate offered the policy limits. But, third parties (medical providers and the claimant's former attorney) had asserted liens against the claimant's cause of action that far exceeded the $25,000 demand. The claimant offered to accept $25,000 if Allstate would interplead the funds (a procedural mechanism to allow the court to allocate the settlement funds among the competing claimants). Allstate refused to interplead its policy limits. It also did not tell its insured about the settlement offer. Some months later, Allstate did offer to interplead its limits, but the claimant rejected that offer and instead obtained a larger stipulated judgment against the policyholder. The policyholder then sued Allstate for bad faith. The Nevada Supreme Court held that the policyholder could state a bad faith claim based on the insurer's failure to notify him of the demand to implead the policy limits. The court did, however, hold that Allstate had no duty to file an interpleader action and that its good faith obligations did not require it to agree to the stipulated judgment between the policyholder and the claimant.
The Nevada Supreme Court concluded that there was a good faith duty to notify by combining the "special relationship" between a policyholder and an insurer with the contractual duty to defend. The court also held that while an insurer does not have to place its policyholder's interests above its own interests, it does have to "give the interests of the insured at least as much consideration as it gives to its own interests."
The court also held that Allstate had the burden of proving by "affirmative evidence" that there was no realistic possibility of settlement within policy limits even if it had informed the policyholder of the settlement demand.
In Allstate's favor, the Nevada Supreme Court also held that while an insurer's refusal to file such an interpleader on behalf of a policyholder may be considered as evidence of bad faith under the duty to defend, there is no contractual obligation to file an interpleader action. It also held that Allstate had no good-faith duty to agree to a stipulated excess judgment. The Supreme Court noted that Allstate had a contractual right under the policy to have the underlying judgment determined by trial or a settlement to which it had agreed, thus the implied covenant did not require it to accept an excess stipulated judgment offer.
It remains to be seen whether this case will be interpreted by the trial courts as broadening the standard of bad faith liability. Although it covers new ground in Nevada, the duty to inform the policyholder of offers (already an ethical duty on the part of defense counsel) is present in some other jurisdictions. At the same time, the opinion includes discussions regarding interpleader and stipulated judgments that are favorable to the insurance industry. In addition, the opinion changes the standard for the use of special verdicts at trial in a manner that should be favorable to defendants generally.