If settling liability disputes is a fine art, the resolution of cases in which the availability of insurance funds that the parties need to settle cases is contested can only be described as black art. The purpose of this article is to sketch the most common fact patterns in which these disputes arise and to discuss how certain tools and strategies can extricate settlements from coverage conflicts. In particular, we focus on potential pressure points and tools that can be used to untie these knots—including “hammer letters” and consent judgments—as well the respective roles of insureds and their insurers in working through these problems.
In the second section of this article, we consider the role of so-called “hammer letters.” In the context of insurance coverage disputes, a hammer letter is a demand that an insurer contribute its policy limits to effectuate a settlement of the liability claim against its insured. Such letters may be sent by the policyholder or, as is often the case, by an excess insurer whose policy may be implicated if the case does not settle and results in a verdict in excess of the primary limits. A hammer letter can be an effective tool to alert the primary or lower-tier excess insurer to deficiencies in its case before trial, such as the need to engage a rebuttal expert or to file motions in limine to address a particular issue. It can also be used to document past settlement opportunities in light of jury-verdict research on issues ahead of trial in a concerning venue.
When issued by an excess insurer, a hammer letter is useful, even if it does not induce settlement, because it may support a later suit for equitable subrogation or contribution against the primary insurer for sums that the excess insurer was ultimately obliged to pay due to the primary insurer’s failure to settle. In such circumstances, careful consideration should be given to the differing rules that some states follow with respect to the prerequisites for such claims. For instance, some states require the excess insurer to wait until the underlying case has settled or a judgment has been entered, while others require the insurer to preserve its rights contemporaneously through a declaratory judgment action or by intervening in the underlying action.
In the third section of this article, we consider the role of confessed judgments, also known as “consent judgments.” These are agreements that a policyholder may enter into with the underlying tort claimant, confessing to liability for a sum certain in consideration of the plaintiff’s agreement to seek recovery of the judgment only from the policyholder’s insurance company. As will be seen, there is considerable divergence among the courts with respect to the degree of prior notice that a policyholder must give to its insurer before entering into such an agreement, especially in cases where the insurer is defending the action, and on whether the insured is relieved of its “duty to cooperate” in cases where the insurer is defending under a reservation of rights, just as is typically the case where the insurer has denied coverage or otherwise refused to defend.
A major point of controversy in the litigation over consent judgments is the efforts by courts to balance the insured’s right to safeguard itself against a case that an insurer has refused to cover with the insurer’s right to be protected against excessive or otherwise unreasonable judgments that would never have resulted had the case gone to trial. In light of the fact that the insured is assenting to a judgment that it will never be asked to pay, there is certainly a risk of fraud and collusion in cases of this sort. Given this risk, some courts require independent judicial scrutiny of consent judgments before they can be effected.
In most states, however, courts apply a two-part inquiry to assess whether such an agreement is reasonable. In the first step, the tort plaintiff, who becomes the judgment creditor, must demonstrate “the overall reasonableness of the settlement,” including both covered and uncovered claims. The test is whether the settlement reflects “what a reasonably prudent person in the position of the defendant would have settled for on the merits of plaintiff’s claim at the time of settlement.”
In the fourth and concluding section of this article, we analyze the problems relating to control of the defense and settlement in cases where there is an objective risk that the underlying claims may result in a judgment in excess of the available insurance limits. A similar problem arises in so-called “mixed cases,” where the insurer has reserved its rights with respect to certain categories of damages that it says are not covered.
In general, the parties to such disputes may pursue one of three courses of action. First, the insured may proceed to defend the underlying litigation and later pursue coverage from the insurer for any excess judgment. Second, the insured may seek a waiver of consent from the insurer, allowing it to settle with the underlying claimant itself. Finally, the insured may settle without the insurer’s consent.
Even when a policy requires the insurer’s consent to settlement, an insured may be entitled to settle without that consent in two key circumstances. First, when an insurer that has accepted coverage unreasonably refuses to settle the underlying claim. Second, when an insurer has denied coverage or has reserved its rights to do so and refuses to either (1) withdraw its reservation of rights and accept coverage, thereby guaranteeing that it will fund any settlement or judgment within limits, or (2) waive the consent requirement, granting the insured control over settlement.
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"Uncovering Settlements: Problems, Opportunities, and Solutions for Settling Liability Cases in Which Insurance Coverage Is in Dispute," by James R. Murray, Marialuisa Gallozzi*, Jodi McDougall*, and Catalina Sugayan* was published in the Journal of the American College of Coverage Counsel (Vol. 32, No. 2).
Blank Rome associate Dominique G. Khani contributed to the article.
* Marialuisa Gallozzi of Covington & Burling LLP; Jodi McDougall of Cozen O’Connor; and Catalina Sugayan of Clyde & Co. U.S. LLP.