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.”