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A Stipulated Judgment Amount Is Not Necessarily the Measure of Bad Faith Damages

Draggin’ Y Cattle Company, Inc. v. Junkermier

The Supreme Court of Montana held that the measure of damages for an insurer’s alleged bad faith failure to settle is not presumed to be equal to the amount of a stipulated judgment between the insured and the plaintiff, where the insurer had accepted its obligation to defend. Where an excess judgment appears likely, or even possible, an insured may feel pressured to mitigate its risk by entering into a stipulated judgment above policy limits with the plaintiff with the additional condition that the plaintiff cannot seek to recover from the insured directly. In those circumstances, the insured will assign its rights under the insurance policy to the plaintiff. In this way, the insured is shielded from the possibility of being exposed to damages exceeding policy limits and the plaintiff is empowered to proceed directly against the insurer. However, this strategy is rife with peril for insurers and insureds alike.

Often these types of back-room deals are prohibited under the terms of the insurance policy because they deprive the insurer, the entity that will end up making payment on the claim, of input into the settlement amount. However, “[w]hen an insurer breaches the duty to defend, it loses the right to invoke insurance contract defenses or to assert policy limits.” Absent a defense by the insurer, the insured is justified in taking steps limiting personal liability through a settlement and that settlement will be recognized as presumptively reasonable. These same concerns are not implicated, however, when the insurer has accepted the duty to defend and is providing an active defense. “When the insurer has accepted the defense of the claim, and might have prevailed at trial had the insured and the claimants not settled without the insurer’s participation, no presumption of the insured’s liability generally arises from the fact or amount of settlement.”

In Draggin’ Y Cattle Co., the insurer had accepted the duty to defend and therefore, under the general rule discussed above, no presumption of reasonableness would be afforded the claimant’s settlement with the insured. The claimant sought to avoid this general rule by arguing that while the insurer had not technically breached the duty to defend, it had breached numerous other provisions of the policy, resulting in a constructive abandonment of the insured. Notably, one of the alleged duties that the plaintiffs claimed had been breached was the failure of the insurer to instigate a declaratory judgment action as to coverage, given the coverage dispute. The court rejected the invitation to create a new duty, declining “to impose as a matter of law a new obligation on a defending insurer… to file a declaratory judgment action before the resolution of the liability case…“ The claimant also argued that based upon the insurer’s behavior, the insured needed to settle to protect themselves from a judgment far in excess of policy limits. The court rejected this argument as well, noting that there are other remedies available in the event of an excess policy judgment including through a breach of contract action or an Unfair Trade Practices Action. Thus, there is no need to presume the reasonableness of the settlement. “[T]his Court has never approved a confessed judgment as the proper measure of damages where the insurer defended its insured.”

© 1998-2023 Wiggin and Dana LLPNational Law Review, Volume IX, Number 280

About this Author

Timothy Diemand Litigation Attorney Wiggin and Dana

Tim is a Partner in the Litigation Department, a member of the firm’s Executive Committee, and Co-Chair of the Insurance Practice Group. He has made his mark defending and representing clients around the country in high stakes matters such as complex insurance class actions, copyright claims against major record labels and recording artists, professional malpractice defense, catastrophic injury claims, and contractor disputes stemming from Iraq and Afghanistan war reconstruction projects.

Tim has been recognized by Chambers USA in the Commercial Litigation category,...

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Joseph Grasso Litigation Attorney Wiggin and Dana Philadelphia

Joe has spent over three decades advising and defending clients in a wide range of litigation and insurance matters, helping underwriters and other clients avoid litigation when possible and prevail when it is unavoidable. He possesses deep knowledge in particular of the marine insurance industry, as well as the London insurance market. Joe's clients describe him as pragmatic, responsive and efficient. He understands the nature of his clients' businesses and tries to add value to that business whenever possible.

Joe co-chairs Wiggin and Dana’s Insurance Practice Group. He is also a...

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Michael Menapace Insurance lawyer Wiggin Dana

Michael is an insurance lawyer, primarily a litigator defending insurance companies, reinsurers, and insured parties from a wide range of claims that threaten clients’ businesses. He is also a counselor, law school professor, and litigator in areas beyond insurance.

Michael represents insurers in state and federal courts as well as in arbitrations across the country, litigating insurance disputes concerning business practices, bad faith, insurance coverage, reinsurance, premium calculations, and allocation among policies. As a general litigator, he has tried cases concerning utility...

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Robyn Gallagher Litigation lawyer Wiggin Dana

Robyn is Counsel in Wiggin and Dana's Litigation Department.  Her litigation experience has involved a wide range of practice areas and clients, including, insurance, franchise, aviation, product liability, and education.  She has experience litigating in state and federal courts and before various government agencies and arbitral bodies.

Robyn has litigated claims under the Connecticut Product Liability Act ("CPLA"), the Connecticut Unfair Trade Practices Act ("CUTPA"), trademark infringement actions, breach of contract claims, and actions to enforce arbitration clauses. She has...