In Trotter, et al. v. American Modern Select Insurance Company, the U.S. District Court for the Western District of Oklahoma recently denied an insurer’s motion for summary judgment on bad faith claims, detailing what is and isn’t reasonable conduct in connection with an underlying settlement.

The insured faced suit from a competing business for various trademark infringement claims. The insurer defended the suit under a reservation of rights. The case eventually settled for $550,000, which was funded equally by the insured and insurer.

After the underlying settlement agreement was finalized, the insurer requested a release of all claims by the insured against the insurer. The insured rejected the proposed wording of the release. The insurer paid its portion of the settlement, apparently by mistake, while coverage counsel continued to try to obtain a release from the insured. The insured later sued the insurer, alleging bad faith during the course of the litigation and at the settlement conference, which eventually resolved the case.

The insured argued that the insurer’s adjuster improperly communicated coverage issues to the defense adjuster, though the defense adjuster testified that she did not allow coverage issues to affect the defense. The court noted that the insured offered no evidence that such communications, if they existed, hampered the defense.

The insured argued that the insurer sent an updated reservation of rights letter before the settlement conference, which “scared and unnerved” the insured by stating that certain damages were not covered. However, the evidence showed that the insurer had already detailed the policy exclusions in its prior reservation of rights letter, and that the insured’s attorney was well aware that there were coverage limitations. Further, the insurer was allowed to consider which claims were covered by the policy when it determined the amount it was willing to offer in settlement, even if the amounts offered were under policy limits. Thus, the court rejected the insured’s arguments that the insurer’s conduct prior to settlement constituted bad faith.

However, the court denied the insurer’s motion in connection with conduct relating to the settlement that was reached. Although the insurer never made a formal demand for a policy release during the negotiations, the insurer indicated it would withhold its portion of the settlement payment unless it got a release of all claims from the insured and the underlying plaintiff after the settlement agreement was signed. The court concluded that the insurer’s condition on funding of the fully executed settlement agreement created a question of fact regarding “bad faith,” precluding summary judgment.

This decision demonstrates the importance of working out coverage issues and the scope of a release relating thereto in advance of the final settlement. The insurer could have avoided the suit, or won summary judgment on all counts, had the scope of the release been addressed in an appropriate and timely manner.