Insured Not Liable For Declining To Settle Within Its Self-insured Retention

September 23, 2022 / Writing and Speaking

By Don R. Sampen, published, Chicago Daily Law Bulletin, September 20, 2022

Applying Illinois law, the 7th U.S. Circuit Court of Appeals recently held that an umbrella insurer had no cause of action against an insured for failure to settle within the insured’s retained limit. North American Elite Insurance Co. v. Menard, Inc., No. 21-1813, 2022 U.S. App. Lexis 21592 (7th Cir. Aug. 4).

The insurer North American, was represented by Walker Wilcox Matousek LLP of Chicago. Menard was represented by Reed Smith LLP of Chicago.

A customer of Menard, owner of a chain of home improvement stores, brought suit against it after being hit by a forklift in a store. At the time, Menard had a self-insured retention of $2 million, a primary layer of insurance with Greenwich Insurance Company subject to a $1 million limit, and an umbrella policy with North American subject to a $25 million limit per occurrence.

On the first day of trial, the customer offered to settle for about $1.9 million, within Menard’s self-insured retention. Menard declined and the case continued nearly to verdict when the parties entered into a high-low agreement. That agreement required Menard to pay a minimum of $500,000 and a maximum of $6 million, depending on the verdict. The jury returned a verdict of $13 million for the customer.

North American indemnified Menard under the terms of the high-low agreement for the $3 million in excess of Menard’s retention and the Greenwich policy limit, and then brought this suit seeking reimbursement. It claimed Menard violated its good faith duty to settle by rejecting the $1.9 million settlement offer. The district court dismissed the claim, and North American appealed.

Analysis

In an opinion by Judge Frank H. Easterbrook, the 7th Circuit affirmed. He initially addressed North American’s argument that Menard’s self-insured retention obligation vested Menard with a duty to settle similar to that of an insurance company. The argument was based in part on Lexington Insurance Co. v. RLI Insurance Co., 949 F.3d 1015 (7th Circuit 2020), in which the court made reference to a self-insured retention that, the court said, made the insured “its own primary insurer.”

Easterbrook observed, however, that Lexington did not say that the self-insured business assumes the legal responsibilities of an insurer by bearing some of its own liability. He also pointed to one Illinois case, Nicor, Inc. v. Associated Electric & Gas Insurance Services Ltd., 223 Ill. 2d 407 (2006), which characterized a self-insured retention as a “deductible.”

He then concluded that, however characterized, Menard’s payment obligation was not insurance giving rise to a duty to settle.

Turning next to the language of North American’s umbrella policy, Easterbrook wrote that the company, while having no duty to defend, did have the right to participate in the defense of any claim, which North American did not do. The policy also imposed an obligation on Menard to cooperate with North American in various ways, but North American had not claimed a lack of cooperation.

Easterbrook compared these provisions to the Greenwich policy, which required Menard to exercise the utmost good faith in administering the self-insured retention and imposed the right and duty upon Greenwich to defend and to assume control of settlement.

According to Easterbrook, these types of provisions may have allowed Greenwich to impose a contractual good faith settlement obligation upon Menard. But such provisions were not a part of the North American policy, and that policy contained no “follow form” provision. Rather, Menard reserved more control over its litigation strategy under the North American policy than it did under the Greenwich policy.

Easterbrook also rejected the notion that Menard had a common-law duty to settle. He did so in part based on his view that, under Illinois law, any claim by an insurer of another’s breach of the duty of good faith would be contractual in nature. Here, the North American policy did not give rise to such a claim, and North American was not entitled to the benefit of the Greenwich policy language.

The court therefore affirmed in favor of Menard.

Key Point

According to this court, absent policy provisions otherwise, an insurer has no cause of action for failure to settle against an insured that declines an opportunity to settle with the limits of its self-insured retention.

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