(Article from Insurance Law Alert, December 2020)
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The Eleventh Circuit ruled that a primary insurer is liable to an excess insurer for negligently failing to settle the underlying suit against the policyholder, rejecting the primary insurer’s “safe harbor” defense. American Guarantee & Liability Ins. Co. v. Liberty Surplus Ins. Co., 2020 WL 6554654 (11th Cir. Nov. 9, 2020).
A tenant sued the owner and management company of his apartment complex for injuries incurred in a gas explosion. The defendants collectively held several primary and excess liability policies. Liberty, a primary insurer, defended the suit. The tenant issued a settlement demand of $5 million with a thirty-day expiration. In response, Liberty offered $50,000. The tenant indicated he would not negotiate further unless Liberty offered its $1 million policy limit, and thereafter lowered his demand to $3 million subject to Liberty tendering its policy limit. Settlement negotiations continued for several months without success. After trial, the jury returned a verdict of $72.96 million in compensatory and punitive damages and attorney’s fees.
Thereafter, American Guarantee, an excess insurer, sued Liberty, alleging that it negligently failed to settle the underlying suit and seeking reimbursement for the $2 million that American Guarantee contributed to the ultimate $15 million settlement. A Georgia district court found that Liberty was negligent in failing to settle and the Eleventh Circuit affirmed.
Under Georgia law, an excess insurer may bring a failure-to-settle claim against a primary insurer pursuant to equitable subrogation. The Eleventh Circuit ruled that American Guarantee satisfied the elements of such a claim because Liberty’s duty to settle was triggered by the tenant’s settlement demands, which were within the insurers’ combined policy limits. In addition, the court ruled that Liberty was not entitled to a “safe harbor” because it eventually offered its policy limits. An insurer that receives a settlement demand involving multiple insurers is protected by a “safe harbor” from liability if it meets the portion of the demand over which it has control. However, the court deemed the safe harbor doctrine inapplicable where, as here, the insurer responds to a settlement demand by attaching conditions within its own control. Here, Liberty restricted the use of its policy limit through a high-low agreement.