With increasing frequency, insurers are challenging the sufficiency and clarity of settlement demands they failed to previously accept. The insurer’s challenges can take many forms but most focus on a demand not being written formal demand, not complying with an inapplicable statute or being ambiguous as to substantive terms. Rarely do these complaints surface before the extra-contractual litigation is well underway.

Fortunately, courts can see through such excuses especially when armed with contemporaneous claims file notes from the insurer casting doubt on the new defense. The N.D. Texas’ recent decision is a prime example of a court casting doubt on an insurer’s questionable position and putting substance before form.

Endurance Am. Ins. Co. v. Lloyd’s Syndicate 3624,
2024 WL 3625671, (N.D. Texas July 31, 2024)

Endurance was an equitable subrogation case brought by an excess carrier against the primary carrier of a shared insured. The action stemmed from the primary carrier’s failure to settle a liability action against the shared insured for an amount within the primary carrier’s policy limits.

Background

Endurance stemmed from the electrocution of a resident of a housing complex managed by Atlantic Housing Management, LLC (“Atlantic”). The resident suffered significant injuries and sued Atlantic for the injuries in state court.

At the time of the resident’s injury, Atlantic was insured by a primary and excess policy. The primary policy was issued by Lloyd’s Syndicate 3524 (“Hiscox”) and had a policy limit of $1,000,000. Atlantic’s excess policy was issued by Endurance American Ins. Co. (“Endurance”). No coverage issues under the policies were implicated and there did not appear to be a dispute that Hiscox had the primary coverage obligation.

Hiscox Chooses Not to Settle

After the suit was filed, Hiscox assumed the defense of Atlantic. Defense counsel retained for Atlantic began to engage in settlement discussions with the resident’s attorney. Initially, the resident attorney offered to settle the case for $3,000,000 through a written settlement offer. There was no indication of a response from Hiscox.

On July 29, 2020, the attorney for the resident issued a written demand for $1,000,000 that would expire on September 14, 2020. This amount represented the limits of the Hiscox policy and the terms contained in the demand, with the exception of the amount requested, were identical to the previous demand. During the time period in which the demand was open, the resident’s attorney informed retained counsel that the case could be settled for less than $1,000,000. Hiscox did not accept the chance to settle the case for $1,000,000.

The case against Atlantic continued on. In a phone call at the end of March 2021, counsel for the resident verbally informed Hiscox that the “real number” to settle the case was $500,000. The resident’s attorney did not put this “offer” in writing. However, the Hiscox adjuster noted in the claims file that, “[Plaintiff’s counsel] reiterates $500k to settle” and that a decision needed to be made on whether “[Hiscox] should just provide the $500k to knock this out or to continue litigation up to trial.”

Hiscox did not provide the $500,000 to settle and the case proceeded to trial. A jury returned a verdict of $3,500,000 against Atlantic. Ultimately, Hiscox paid its $1,000,000 policy limits and Endurance paid its policy obligations to settle the case against Atlantic during the appeal process.

Endurance v. Hiscox

Endurance was not thrilled that Hiscox’s failure to settle the underlying case within Hiscox’s policy limits cost Endurance a significant portion of the settlement and Endurance sued Hiscox under a theory of equitable subrogation. The thrust of Endurance’s claim was that Hiscox had acted unreasonably in failing to accept the $1,000,000 written settlement offer in July 2020 or pay $500,000 in March 2021 after the resident’s attorney told Hiscox that amount would settle the case. Had Hiscox accepted either demand, Endurance would not have been forced to pay any amount to settle the claims against Atlantic.

Naturally, Hiscox disagreed with Endurance’s claims and moved for summary judgment. Hiscox argued it acted reasonably as a matter of law in rejecting the July 2020 formal demand for $1,000,000. In support, Hiscox argued that it believed it could settle the case against Atlantic for less than $1,000,000 based on statements from the resident’s attorney. Hiscox also argued it was entitled to judgment as a matter of law on Endurance’s claim that it acted unreasonably in not settling the resident’s claim for $500,000 in March 2021. Hiscox’s arguments centered on a claim that there was no formal demand to settle the case for $500,000. Instead, the resident’s attorney had only said in a phone call that the “real number” to settle the case was $500,000.

The Court rejected Hiscox’s motion for summary judgment on both grounds. The court first determined that fact issues existed on the reasonableness of Hiscox’s rejection of the $1,000,000 demand in July 2020. This is not surprising given extra-contractual claims without coverage issues are poor candidates for summary judgment and Endurance produced expert testimony that Hiscox had acted unreasonably in rejecting the $1,000,000 formal demand.

Whether Hiscox could be liable for failing to settle the claim for $500,000 in March 2021 was far more interesting. Under Texas law, a carrier generally only faces liability for failing to accept a demand that has clear terms and seeks a release for a stated sum of money. Here, it was undisputed that no formal written demand for $500,000 was made. Instead, the resident’s attorney had only verbally relayed that $500,000 was the “real number” to settle the case.

This was immaterial to the Court as it viewed Hiscox’s understanding of the phone call as more important than a lack of a traditional written demand. The Court noted that each of the previous written settlement offers made by the resident’s attorneys contained identical terms with the exception of the amount demanded. Thus, it would be reasonable to assume that the verbal offer of $500,000 would be subject to the same substantive terms. More important to the Court were Hiscox’s own claims notes indicating that Hiscox viewed the “real number” phone call in March 2021 as an offer and opportunity to settle the case for $500,000. In this Court’s mind, this precluded summary judgment for Hiscox on its claim that there was never a demand to settle for $500,000.

Written settlement demands are recommended as they tend to avoid confusion and may eliminate many defenses an insurer will raise concerning the form or meaning of a demand. However, and as the Court seemed to acknowledge, this lack of formality can be overcome by claims documents demonstrating an insurer’s awareness of the terms of a verbal conversation.