Insurance Law Update - Duty to Defend Held to Include the Duty to Notify Insureds of Potential for Excess Liability - February 2011


U.S. Court of Appeals for the Seventh Circuit

In R.C. Wegman Const. Co. v. Admiral Ins. Co., 629 F.3d 724 (7th Cir. (Ill.) January 14, 2011), the Seventh Circuit Court of Appeals held that when a potential conflict of interest between the insured and insurer arises, the duty of good faith requires the insurer to notify the insured in order to give the insured an opportunity to best protect its own interests. This duty includes situations where a potential conflict of interest arises from the possibility that the insured may be exposed to liability in excess of the policy limits.

Admiral issued a liability insurance policy to Wegman that provided a per occurrence limit of $1 million. During the policy period, a worker at a construction site managed by Wegman was injured. The worker sued Wegman and other entities for negligence, and was ultimately awarded approximately $2 million at trial. Wegman filed suit against Admiral for bad faith, alleging that it would not have been liable for damages in excess of the $1 million policy limit if Admiral had acted in good faith in handling its defense and settling the case before trial. Wegman asserted that Admiral failed to warn it of the possibility that a judgment could exceed the policy limits, and that this failure prevented Wegman from providing timely notice to its excess insurer ( which denied coverage as a result).

The district court dismissed Wegman’s action for failure to state a claim, but the Seventh Circuit reversed.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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