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August 06.2009

Does the insured have a "duty to mitigate" if the insurer breaches its obligations to the insured? Clearly not.

by John Green

The law imposes serious consequences on insurers for breaches of their duties.  If a carrier refuses to defend a lawsuit, the insurer can be held liable for any resulting default judgment.  If the carrier refuses to accept a reasonable settlement, the carrier can be liable for the resulting judgment in excess of policy limits.  We frequently find ourselves urging carriers to perform their duties to their insureds, and having to remind the carriers of of the consequences they will face if they don't perform those duties.  Occasionally, a carrier will respond by saying that our client "has money" and is required to "mitigate" its damages by defending the lawsuit itself or paying the settlement itself and then suing the carrier for reimbursement. 

The very suggestion is galling.  The purpose of  insurance is to have the carrier protect its insured.  It turns the whole relationship on its head to argue that the insured must protect the insurer after the insurer has breached its own duty.  Who paid the premium in order to obtain protection?  Who accepted the premium and promised to protect the other?  Fortunately, not only logic but established case law rejects the notion that insureds must pay money to "mitigate" damages and  protect the carrier from the consequences of its own wrongful conduct. The California Supreme court dispelled any such notion in Commercial Union v. Safeway Stores, Inc.  26 Cal. 3d 912, 164 Cal. Rptr. 709 (1980).  There, the insured had a large self-insured retention ("SIR") and didn't settle a claim within the SIR, despite the opportunity to do so. Safeway later suffered a large judgment that invaded the Commerical Union policy above the SIR.  Commercial Union argued that the insured had failed to act reasonably to limit the exposure and that Commercial Union should not be required to pay the judgment in excess of the SIR.  The Supreme Court rejected the notion that the insured had any duty to protect the insurer.  As the Court succinctly stated,  "protection of the insurer's pecuniary interest is simply not the object of the bargain."  In Commercial Union, of course, the insurer had not even breached a duty to its policyholder. The same rule should apply even more forcefully where the risk has been created by the carrier's own breach of duty.

Posted in General Liability Policies | Permalink

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