I have a confession to make. I like Judge Posner of the Seventh Circuit. In my view, he will go down as one of the greatest legal minds of the twentieth and twenty first century. So when Judge Posner writes an opinion on insurance law, I tend to listen.
In Wegman Const. Co. v. Admiral Ins. Co., the insurer (Admiral) failed to disclose a potential conflict of interest to its insured (Wegman). Admiral sold Wegman an insurance policy with limits of $1,000,000. When the policy was in effect, a worker at Wegman’s construction site personally injured himself. The worker subsequently sued Wegman, an event that triggered coverage under its policy. Admiral then appointed defense counsel for Wegman.
During the litigation, Admiral got wind that the worker was demanding $6,000,000, a figure well above the policy limits of $1,000,000. This created a potential conflict of interest between Wegman and Admiral because Admiral controlled the defense and litigation strategy. Admiral, however, never informed Wegman that it would not cover a money judgment above $1,000,000.
The case proceeded to trial without Wegman understanding that it could be liable for any verdict above $1,000,000. The Jury awarded the worker $2,000,000 against Wegman. Thus, Wegman would have to pay $1,000,000 of the $2,000,000 verdict.
Wegman then sued Admiral, alleging that Admiral breached its implied duty of good faith and fair dealing. Admiral’s main argument was that it did not have to disclose potential conflicts of interest. Apparently, the worker never made an official demand for $6,000,000.
Judge Posner dismissed Admiral’s main argument, noting that “[g]ambling with an insured’s money is a breach of fiduciary duty.” A insured must be notified even of potential conflict of interests. Judge Posner stressed that notice is “costless” to the insurance company. “The insurance company can satisfy its duty of good faith at the price of a phone call.”
Next, Admiral tried to blame the defense counsel it retained for Wegman, stating that it was his duty to disclose the potential conflict of interest. Judge Posner waived this argument away, stating that Admiral also owed a duty to Wegman to disclose the conflict and that it could not contract the duty to another person.
Judge Posner subsequently remanded the matter back to the district court.
- There’ll Always Be Posner: Spin Cycle (druganddevicelaw.blogspot.com)