The Tenth Circuit Rejects Excess Insurers' Implied Duty To Investigate And Initiate Settlement Negotiations

Interpreting Oklahoma law, the US Court of Appeals for the Tenth Circuit recently held that the duty of good faith and fair dealing does not require that an excess insurer, unlike a primary insurer, affirmatively investigate the claims against the insured and initiate settlement negotiations if the insured's liability is clear and a judgment in excess of its policy limits is likely. SRM, Inc. v. Great Am. Ins. Co., No. 14-6160, 2015 WL 5011719 (10th Cir. Aug. 25, 2015), slip. op. available at https://www.ca10.uscourts.gov/opinions/14/14-6160.pdf.

The appeal stemmed from an automobile collision that left one dead, three injured, and caused extensive property damage. Slip. op. at 2. From the beginning, the truck company's defense team, paid for by its primary insurer, concluded that there was no chance for a defense verdict. Id. at 3. The truck company's separately-retained attorney determined that the company's liability would exceed the combined limits under both its primary and excess liability policies and demanded that both insurers tender their respective policy limits to settle the case. Id. Great American Insurance Company, the truck company's excess insurer, refused and "urged an aggressive defense." Id. After the trial court rejected the truck company's best defense, counsel renewed his demand that Great American tender its policy limit towards settlement, but Great American again refused. Id. At this point, even Great American's attorneys estimated the truck company's potential exposure in excess of the combined policy limits. Id. Plaintiffs then made an initial settlement demand far beyond the policy limits, but decreased the demand to $6.5 million dollars, $500,000 in excess to the insured's policy limits. The case settled shortly thereafter for that amount.

The trucking company sued its excess insurer for the $500,000 it was forced to pay out of pocket to settle the case. Slip op. at 4. It argued that, had Great American "investigated its claims and initiated settlement negotiations by tendering its policy limits earlier in the litigation, the case would have settled within the policy limits," and Great American's failure to do so violated its implied duty of good faith and fair dealing. Id. at 5.

The applicable Oklahoma law required primary liability insurers to promptly investigate and defend against third-party claims. Id. at 6. In doing so, such...