Ruling Offers Insurers A Path to Settle Sans Insured Consent
This article was written for Law360.
North Carolina joins a number of states in finding that an insurer may consider its own interests, as well as those of its insured, when entering into settlement negotiations and agreements.
The U.S. District Court for the Eastern District of North Carolina recently confirmed this principle in its opinion in Martin Marietta Materials Inc. v. Ace American Insurance Co., issued on July 15.[1]
This ruling serves as an important reminder that, in many jurisdictions, an insurer has options when it finds itself at odds with an insured, or the insured's chosen counsel, over the valuation of a claim.
If an insured refuses to participate in settlement negotiations, believing the demand to be too high or declining to accept liability for the claimant's injuries or damages, under the terms of most standard commercial general liability policies, an insurer may use its discretion to settle directly with the claimant.
If the policy allows, the insurer can then seek reimbursement for the amount of the settlement falling within the insured's deductible. This strategy allows an insurer to avoid the uncertainties of trial or a runaway jury in situations where the insured refuses to settle, for whatever reason.
In the case recently before the Eastern District of North Carolina, the insured, a building materials supplier, sought a declaration that it did not have to reimburse its insurer for a $2.5 million settlement that the insurer brokered with an injured plaintiff after the insurer took over settlement negotiations.
In the underlying action, the plaintiff alleged that he suffered bodily injuries, including three amputated toes, a broken ankle and a serious shoulder injury, due to the negligence of the insured's employee. The injured plaintiff filed suit against his employer and the insured, seeking recovery of $2.1 million in economic damages, as well damages for pain and suffering, mental anguish, impairment, disfigurement and loss of consortium.
After receiving notice of the claim, the insurer opted not to take over the insured's defense, and instead chose to collaborate with the insured's chosen counsel.
After receipt of a $4.4 million settlement demand from the plaintiff, a dispute emerged over the valuation of the claim. The insured's counsel believed a verdict under $1 million was a reasonable goal based on the plaintiff's alleged comparative negligence.
However, the insurer believed this figure undervalued the claim and the risks inherent in a jury trial. The insurer sought a second opinion from outside counsel. Outside counsel found there was a slight chance of a verdict under $1 million, but thought it was more likely that a verdict would fall in the $2 million to $3 million range.
Ten days before trial, the plaintiff made a settlement demand of $2.825 million. The insurer advised the insured that if it refused to engage in settlement negotiations, then the insurer would exercise its right to settle the claim within the insured's $3 million deductible.
In response, the insured offered $500,000 but refused to negotiate further after the plaintiff countered with an offer of $2.75 million.
At this point, the insurer took over the settlement negotiations, and the underlying action proceeded to trial. During opening statements, the plaintiff's counsel indicated that he would seek damages between $9 million and $12 million.
In discussing the viability of settlement, the insured informed the insurer that it was its position that any settlement the insurer made without the insured's consent was an unrecoverable voluntary payment.
Despite this assertion, the insurer, acting without consent from the insured, settled the suit on the second day of trial for $2.5 million, relying on a policy provision that provided that the insurer, at its discretion, could settle any claim or resulting suit. After funding the settlement, the insurer sought reimbursement from the insured; this request was refused.
Shortly after the settlement of the underlying action, the insured filed suit against the insurer, bringing claims for breach of the duty of good faith and fair dealing, violation of North Carolina's Unfair and Deceptive Trade Practices Acts, and declaratory judgment regarding the insurer's handling of the claim.
In support of its breach of the duty of good faith arguments, the insured alleged that the insurer failed to give adequate consideration to its interests while negotiating with the plaintiff. The insured argued that it advised the insurer that it would not reimburse the insurer for settlements to which it did not consent, making its position and interests clear.
The Eastern District found these arguments unavailing, emphasizing that North Carolina law does not require that an insurer place its insured's interests ahead of its own in settlement negotiations, or even that the insurer give equal consideration to the interests of its insured. Instead, the court cited North Carolina precedent for the principle that an insurer may act in its own interest in settlement of a claim.
Additionally, the court noted that bad faith does not arise when there is an honest disagreement over the value of a claim. The court found that the insurer considered the insured's interests by negotiating a settlement that represented a smaller portion of the insured's deductible and not forcing the insured to accept the initial $2.825 million demand. This consideration was sufficient to show that the insurer fulfilled its duty of good faith.
Based on this finding, the court also ruled in favor of the insurer on its counterclaim for breach of contract related to the insured's failure to reimburse it for the settlement payment.
This opinion outlines a strong strategy for an insurer to follow when faced with an uncooperative insured and the threat of a large verdict. Further, the import of this ruling travels beyond the borders of North Carolina, as several other jurisdictions adhere to comparable principles.
For instance, courts in Florida, Illinois and New Jersey have adopted similar, or even stronger, language to that employed by the Eastern District of North Carolina. In an April 9 decision issued by the U.S. District Court for the Southern District of Florida, Acme Barricades LC v. Hartford Fire Insurance Co., the court, applying Florida law, held that, where an insurance policy provides that an insurer has authority to investigate and settle a claim, an insurer may be guided by its own self-interest during settlement negotiations.[2]
Similarly, courts in Illinois and New Jersey have found that an insurer may settle a lawsuit within policy limits over its insured's objection when the subject policy grants the insurer the right to settle a claim or lawsuit brought against its insured.[3]
Some states, including Kansas and Pennsylvania, have adopted a stricter approach, allowing insurers to consider their own interests, but also requiring that they at least equally consider the interests of their insured when settling claims.[4]
Regardless, even under the stricter examples, these cases emphasize the power of policy language that grants an insurer the right to settle a claim or lawsuit brought against its insured.
When an insurer is involved in a scenario where it wishes to settle, but its insured does not, it is best practice for an insurer to determine the scope of its settlement authority as defined by the applicable policy language and the laws of the jurisdiction governing the interpretation of the insurance contract.
Footnotes
[1] Martin Marietta Materials Inc. v. Ace American Ins. Co. , case number 5:23-cv-313-FL, in the U.S. District Court for the Eastern District of North Carolina.
[2] Acme Barricades L.C. v. Hartford Fire Ins. Co. , No. 25-80168-CV-MIDDLEBROOKS, 2025 WL 1092311 (S.D.Fla. Apr. 9, 2025).
[3] Am. Protection Ins. Co. v. Airborne Inc. , 476 F.Supp. 2d 985 (N.D. Ill. 2007). Am. Home Assur. Co. Inc. v. Hermann's Warehouse Corp. , 563 A.2d 444 (N.J. 1989).
[4] Gruber v. Estate of Marshall , 482 P.3d 612, 618 (Kan. Ct. App. 2021) (stating that an insured may consider its own interests but also must evaluate the claim without a consideration of policy limits and as though the insurer alone would be responsible for the entire amount of any judgment entered against the insured). Cowden v. Aetna Cas. and Sur. Co., 134 A.2d 223, 228 (Pa. 1957) (stating Pennsylvania rule that the insurer must accord the interest of its insured the same faithful consideration its gives its own interest).
