When Can an Insurer Be Compelled to Pay the Full Amount of the Contemplated Settlement of an Underlying Action?
Insurer Refuses to Defend a Potentially Covered Lawsuit and A Settlement Requiring Insured Contribution Arises
Insurer Attempts to Limit Settlement Payments to Those Claims for Which the Insurer Is Exposed to Liability
In many lawsuits a number of distinct claims are asserted, some falling within, others outside of, coverage. In this scenario, what rights does an insured have to compel its insurer to fund a settlement of “mixed” claims against it? The answer will depend in part on what forum’s law applies. This in turn depends on what law the court chooses to apply. This determination will turn on where the suit initiated over coverage issues is pursued, as well as what choice of law rules that forum will apply.
In Warfield-Dorsey Co. v. The Travelers Cas. & Sur. Co. of Illinois, 66 F. Supp. 2d 681, 686-687 (D. Md. 1999), the underlying action was settled within three months of Travelers’ denial of a defense to its insured. Analyzing the insurer’s obligation to fund the settlement, the court stated:
Particularly in a case where all of the claims in the underlying action have been settled but only some of them qualify for coverage, many more factors must be considered by a court in determining whether the insurer has a duty to indemnify the insured for all or part of the amounts paid in settlement. . . . “It is the extent of the defendants’ exposure to liability and not mere allegations in the plaintiffs’ complaint that govern the appraisal of reasonableness.”
Applying this “alternate exposure to liability” test, the court found that there might
