Bad Faith: Insurer’s Refusal Of Policy-Limits Demand Ends With Excess Judgement

As the Fifth Circuit reminded us in a December 21 decision, primary insurers can find themselves in excess insurers’ shoes if they reject settlement demands within their policy limits.

In American Guaranty & Liability Insurance Co. v. ACE American Insurance Co., the Fifth Circuit upheld a lower court ruling requiring a primary insurer that rejected a $2 million policy-limits demand to pay the entire judgment because ‘a prudent insurer would have accepted’ the settlement demand.

Before trial, the primary insurer rejected a $2 million policy-limits demand that would have insulated the excess insurer from liability.

During jury deliberations, the primary insurer rejected another $2 million policy-limits demand after two adverse evidentiary rulings ‘aggravated [the insured’s] greatest known weaknesses in this case.’

The primary insurer did so even though its own case manager recognized the possibility of an excess verdict due to the adverse evidentiary rulings.