Tenth Circuit Finds Oklahoma Law Doesn’t Require Excess Insurer to Proactively Seek Settlement

The Tenth Circuit Court of Appeals in SRM, Inc. v. Great American Ins. Co., 2015 WL 5011719 (10th Cir., Aug. 25, 2015), recently considered whether excess insurers, under Oklahoma law, were required to proactively initiate settlement discussions before the primary limits of coverage were exhausted in situations where there was no policy limits demand on the excess insurer.

The Great American excess policy contained standard policy provisions requiring the exhaustion of primary insurance before the Great American policy was required to contribute toward a settlement. Under the facts of the case, a substantial exposure existed to Great American’s insured. However, the claimants had not yet made a policy limits demand on either the primary or excess policies. At mediation the primary insurer offered its $1 million policy limits. Plaintiffs had initially demanded more than the combined limits of the primary and excess layers. However, as the mediation proceeded, the plaintiffs dropped their settlement demand to an amount that could be satisfied by the participation of the primary and excess policies plus a small participation by the insured. The insured agreed to that participation. Within one week the case was settled for the combined amount pf $6.5 million.

The insured argued that Great American was required to proactively initiate settlement discussions and if Great American had done so, it would have realized that it was obligated to pay its policy limits and the insured would not have had to contribute to the total settlement amount to bring a claim resolution.

The Tenth Circuit began its analysis by recognizing that an excess insurer, like Great American, has a reasonable economic expectation that it will not be responsible on its policy until the insurance at the level lower to it has been exhausted in accordance with the express provisions and obligations in the policy. The duty of the excess insurer to participate in insured’s defense is triggered by exhaustion of the primary policy even though a claim against the insured may be for a sum greater than the primary coverage. Reviewing the various case authorities cited by the parties, the Court found that none of the cases suggested that the excess insurer was required to investigate, initiate settlement negotiations, or proactively tender its policy limits in the face of unambiguous policy language requiring exhaustion of the primary layer and absent a settlement demand from the plaintiffs or proposed settlement agreement from the primary insurer bringing the loss within the combined limits of the primary and excess policy limits.