The insured dump-truck owner brought an action against its excess liability insurer, alleging that the insurer breached its policy and duty of good faith and fair dealing by not investigating claims against the insured, and by refusing to tender its policy limits to spur settlement negotiations in an underlying action.
At a rail crossing in Oklahoma, a Union Pacific Railroad train hit an SRM Inc.-owned dump truck as the truck crossed the tracks. The collision killed the truck driver and derailed the train, causing extensive damage to the train and injuring three of its workers. The three injured train workers sued SRM.
SRM was insured by Bituminous (the primary insurer) and Great American (the excess insurer). Bituminous offered its policy limits to SRM and Great American for use in negotiating a settlement. Great American rejected the offer and urged an aggressive defense. The case eventually settled for $6.5 million, with the parties agreeing to pay as follows:
- Bituminous, $1 million.
- Great American, $5 million.
- SRM, $500,000.
After the dust settled on the underlying litigation, SRM sued Great American, alleging that the insurer breached its excess liability insurance contract and failed in its duty of good faith and fair dealing. The district court granted Great American's summary judgment motion, and this appeal followed.
'Inadequate investigation' claim
SRM blamed Great American for forcing SRM to pay $500,000 out-of-pocket to settle the claim. SRM argued that if Great American had investigated the claims and initiated settlement negotiations by tendering its policy limits earlier in the litigation, the case would have been settled with the policy limits. The U.S. Court of Appeals for the 10th Circuit noted that Oklahoma courts had not yet decided how the duty to initiate settlement negotiations in a case such as this applies to an excess insurer. The court said its task is to predict how the Oklahoma Supreme Court would decide this issue.
The appeals court noted that the Great American policy limited its responsibility for damages to that portion of damages in excess of the retained limit. Also, the policy specifically reiterated that unless the primary insurance limits were exhausted or SRM faced a claim not covered by a primary insurance policy, Great American would not be obligated to assume charge of the investigation, settlement or defense of any claim or lawsuit.
The court found that the policy was unambiguous; that is, Great American's duties didn't kick in until SRM's primary insurer exhausted its policy limits by actually paying claims. This didn't happen until Bituminous and Great American simultaneously paid their respective policy limits to settle the claims against SRM. Thus, said the court, at the same time that Great American's contractual duties to SRM took effect, Great American fully discharged its contractual obligations by contributing its policy limits toward settling the case.
The court agreed that an excess insurer owes its insured a duty to act reasonably when evaluating a settlement offer or a settlement agreement negotiated by the primary insurer. But in this case, the railroad and its workers made no settlement offers or demands until the mediation, which was just a week before Great American paid its policy limits to settle the case. And, the primary insurer did not negotiate a settlement that Great American refused to join.
The Circuit Court affirmed the district court's grant of summary judgment in favor of Great American.
This case is SRM v. Great American Insurance Company, 798 F.3d 1322 (2015).
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