R.C. Wegman Construction Company v. Admiral Insurance Company
629 F.3d 724 (7th Cir. 2010)Words & Phrases
Duty To Defend: Conflict Of InterestTrial Judge
James B. ZagelAppellate Judge
Easterbrook, Posner, TinderHolding
Conflict arose when insurer learned that an excess judgment was a nontrivial probability.Fact Summary
In R.C. Wegman Construction Co. v. Admiral Insurance Co., 629 F.3d 724 (7th Cir. 2011), the Seventh Circuit held that an insurer breaches its implied duty of good faith by failing to timely alert its insured about a likely or “nontrivial” possibility that judgment or settlement in the underlying suit might exceed the insured’s policy limit. The Plaintiffs’ demand for settlement in excess of policy limits created a conflict of interest between the insurer and policyholder. The failure to acknowledge the conflict prevented the insured from hiring a new lawyer whose loyalty will be exclusively to him and, in this case, prevented the insured from timely notifying its excess insurance carrier of the underlying suit.
Admiral Insurance Company (“AIC”) issued a liability insurance policy that named Wegman as an additional insured and provided $1 million limit for a single occurrence. While the policy was in effect, Budrik, a worker at a construction site managed by Wegman, was injured in a fall and sued Wegman for negligence. AIC accepted the defense. Budrik later prevailed at trial and obtained a judgment against Wegman for approximately $2 million.
Wegman filed suit against AIC, claiming that Wegman would not have been liable for damages in excess of the $1 million policy limit had AIC not breached its implied contractual duty of good faith to “settle a claim on terms that will protect the insured against an excess judgment.” In particular, Wegman alleged that AIC knew, but failed to warn Wegman, that the underlying lawsuit presented a realistic possibility of a potential loss to Wegman of nearly $5 million over the policy limits of subject policy. The realistic possibility created a conflict of interest. Wegman was not afforded an opportunity to hire independent counsel. Furthermore, by the time Wegman learned that the underlying suit presented a realistic possibility of an excess judgment and notified its excess insurer, the excess insurer refused coverage on the basis that it had not received timely notice. The district court nevertheless dismissed Wegman’s suit, holding that there is no breach of the duty of good faith because Wegman did not claim that AIC’s actions exposed Wegman to an excess judgment or that AIC’s actions deprived Wegman of the right to settle within policy limits. R.C. Wegman Const. Co. v. Admiral Ins. Co., No. 08 C 6479, 2009 WL 779834, at *4 (N.D. Ill. Mar. 20, 2009).
The Seventh Circuit reversed on appeal and held that while “the insurer’s duty to defend includes the right to assume control of the litigation,” it also requires the insurer to “keep [the insured] abreast of progress and status of litigation in order that it may act intelligently and in good faith on settlement offers.” In the underlying suit, when the attorney appointed by AIC learned that a judgment or settlement of the claims might well exceed the policy limits, that likelihood created a conflict of interest. The court held that it was then AIC’s duty to notify Wegman of this likelihood, giving Wegman the option of hiring independent counsel at AIC's expense for the reasonable fees for the new lawyer. The court also noted that if the attorney appointed by AIC was the one who failed to notify AIC of the potential excess judgment, AIC would nevertheless be bound by its duty of good faith, but may have a right of contribution or indemnity from the attorney.
The court further explained that, had AIC notified Wegman of the likelihood of excess judgment and Wegman hired independent counsel, the new lawyer “would have tried to negotiate a settlement with Budrik that would not exceed the policy limit; and if the settlement was reasonable given the risk of an excess judgment, AIC would be obligated to pay.” Wegman also would have had the opportunity to timely notify its excess insurer had AIC promptly notified Wegman that judgment or settlement could exceed the subject policy limits. The court also noted that an insurer’s duty of good faith “is not onerous” – AIC could have satisfied its duty of good faith “at the price of a phone call.”
In closing, the court noted that, ordinarily, in similar cases, the insured would have to prove that had it not been for the insurer’s breach, the underlying case would have been settled within the policy limit. Such proof, however, may not be required for Wegman because, had AIC timely notified Wegman of the likelihood of an excess judgment, Wegman could have sought and obtained coverage under its excess policy.
For these reasons, the Seventh Circuit reversed the district court’s dismissal of Wegman’s complaint.