Pitfalls abound in settling around an insurer acting in bad faith2021-06-21T20:38:48+00:00
Pitfalls abound in settling around an insurer acting in bad faith

Businesses buy liability insurance to protect themselves from lawsuits brought by people injured by the business’s employees. But after the injury, and after the plaintiff has sued, the main concern is often between the injured plaintiff and the insurer for the business that doesn’t want to pay.

In this context, the defendant often settles the lawsuit and then gets out of the way to let the plaintiff get what it can from the insurer, which is often the only party with enough money to pay a judgment. But structuring this resolution must be undertaken with great care in recognizing legal niceties that, missing a crossed “t” or dotted “i” in the process, can give the insurer a free get-out-of-jail card, as a recent case arising out of a tragic accident in Boston shows.

In Salvati v. American Insurance Co., the federal First Circuit Court of Appeals last month held that American Insurance, an excess-layer insurer potentially on the hook for $5 million in a case involving the death of a worker, owed nothing at all for want of an agreed judgment as part of the settlement documents between the plaintiff and the settling defendants. In the case, the primary-layer insurer agreed to pay its full $1 million in limits, but American Insurance refused any coverage. The plaintiff and the defendants settled for a $1 million payment from the primary insurer, which was recognized as part of a “total payment” of $6 million. The unpaid $5 million was to be sought from American Insurance under an assignment to the plaintiff.

But unlike most settlement agreements doing exactly what the parties tried to do here, the parties simply dismissed the underlying case instead of filing an agreed judgment against the defendants — with a contemporaneous promise by the plaintiff never to enforce that same judgment. Without this impotent judgment, the Salvati court held that there was nothing the insured defendants were “legally obligated to pay as damages,” so there was nothing for the plaintiff to chase from American Insurance.

Only a lawyer could love the vanishingly fine distinction between (1) a case that is simply dismissed with an agreement to allow the defendant to chase the insurer, and (2) a case that is dismissed through a stipulated judgment that the plaintiff agrees never to enforce, with an agreement to allow the defendant to chase the insurer. In both cases, after all, the defendant will never have to pay. “The difference between this approach [entering an agreed judgment with a promise never to enforce it] and the Settlement Agreement,” the Court observed, “may seem technical, but it is significant.” Here endeth the lesson for lawyers and settling plaintiffs: “technical” matters a great deal, so step lightly.

As something of an aside, this issue will continue to doubly bedevil at least some settlements in Oregon. In November 2015, the Oregon Supreme Court decided the Brownstone case, which overruled a case from 1973 that had prevented even the convoluted path to settlements through the stipulated judgments described in the Salvati case (read about it in our blog post here).

In response to this welcome decision for insureds, however, the Oregon Professional Liability fund, which provides malpractice insurance for lawyers, recently amended its policy specifically to put its insureds right back where they were before Brownstone brought Oregon law into accord with nearly every other state. PLF’s policy now adds language to “legally obligated to pay as damages” designed to force insureds to ride along for the entire dispute:

Legally Obligated to pay Damages means a Covered Party is required to make actual payment of monetary Damages and is not protected or absolved from actual payment of Damages by reason of any covenant not to execute, other contractual agreement of any kind, or a court order, preventing the ability of the claimant to collect money Damages directly from the Covered Party.

All insureds ought to double-check their policies to understand whether the insurer is attempting to elude Brownstone in the way that the PLF has chosen. Settlements with this policy language are still possible, but they will require even more attention to the “technical” details to avoid letting the insurer off the hook completely. My advice: take a good coverage lawyer with you to any mediation, but especially one involving an obstinate insurer.

The opinion linked to this article was reprinted from WestlawNext with permission of Thomson Reuters. If you wish to check the currency of this case by using KeyCite on WestlawNext, please visit www.next.westlaw.com.


Ball Janik LLP was founded in 1982 with six lawyers and a four-person support staff in Portland, Oregon. Since our firm’s inception, we have expanded our capabilities, our professionals, and geographic footprint. What started as a firm focused in real property and land use (known then as Ball Janik & Novack), has grown to include the insights of a team of 30-plus attorneys, with a combined six centuries of experience, and capabilities including Real Estate and Land Use, Construction Defect, Commercial Litigation, Insurance Recovery, Construction and Design, Employment, Finance and Corporate, Public Agencies and Schools, and Community Associations. With offices in Florida and Oregon, our regional growth has earned us a national reputation for upholding the rights of our clients.

Ball Janik LLP has been recognized by Chambers USA, U.S. News & World Report and Best Lawyers®, The Best Lawyers in America©, and Corporate International. Ball Janik LLP’s success and integrity have repeatedly made it one of “Oregon’s Most Admired Professional Firms,” according to the Portland Business Journal’s survey results of CEOs throughout the region.

No Blog Tiles found.