Consent to Release of Funds Awarded in Settlement

							 Friday, April 10, 2009                                         Professional Liability                                        VOLUME 1 NUMBER 9




March 23, 2009

Practice Tips: When The Insured Refuses To Consent To Settle

I.       Introduction

The scope of this article is intended to address the tripartite relationship of the defendant, defense counsel and insurer as it pertains to the
right to control settlement decisions. It’s primary focus involves insured who are physicians but the lessons are generally applicable
elsewhere in the professional liability arena.




On more than a few occasions in malpractice litigation, an insured refuses to consent to settle despite the recommendations of defense
counsel and the insured’s insurer. For physicians in particular, the National Practitioner’s Data Bank (NPDB) is a stumbling block. They
believe that an adverse report may be a significant impediment to the renewal of staff privileges or the granting of staff privileges at institutions
where they have not practiced. More generally, some insureds believe that settlement is not warranted because the case is “defensible.”
What can be done to resolve a malpractice claim when the insured refuses to consent?




II.     Discussion

A.       General Principles


With respect to malpractice insurance, “professionals” may see policies that require the professionals consent for settlement and others that
no not require such consent. Overall, professionals are more likely than other liability policy insureds to receive policies that require the
insured’s consent to settlement of a lawsuit. The reason that malpractice insurance provides this right to insureds more often than other types
of liability insurance is that claims arising out of professional negligence “not only result in judgments or settlements against the professionals,
but may also affect the professional's reputation and future livelihood.” Saucedo v. Winger, 915 P.2d 129, 133 (Kan. Ct. App. 1996). Many
state regulatory, licensing, and credentialing bodies require reporting related to malpractice claims. Moreover, a malpractice case can result
in negative media exposure for the professional. Significantly, settlements and judgments against physicians must be reported to the National
Practitioner Data Bank. See 42 U.S.C. § 11131(a). These Data Bank reports are available to hospitals, insurance companies, and managed
care organizations. Accordingly, such a report can have an adverse impact on a physician’s ability to obtain medical staff privileges, obtain or
maintain a medical license, and/or secure medical malpractice insurance.
B.     Consent Required

In the absence of a provision to the contrary in an insurance policy, an insurer typically has no authority to settle a claim on behalf of the
insured without the insured’s consent. If the insured’s consent is required, an insured who imprudently refuses to settle may be liable to its
insurer for resulting damages. Transit Casualty Co. v. Spink Corp., 94 xml:namespace prefix = st1 ns =
"urn:schemas-microsoft-com:office:smarttags" />Cal. App. 3d 124 (Cal. Ct. App. 1979). An insured whose consent is required may withdraw a
consent given at the outset of settlement negotiations, unless the insurance policy provides that consent once given may not be withdrawn, or
there is proof that the insurer acted on the consent to its detriment. Lieberman v. Employers Ins. of Wausau, 419 A.2d 417 (N.J. 1980).




Even where an insured has a right to determine whether or not to settle a lawsuit, a “hammer clause” is often included in the insurance
contract, and will be an important consideration to the insured regarding whether or not to accept a settlement. These hammer clauses
typically provide that if an offer of settlement is recommended by the insurance company under policy limits, and the insured does not consent
to settlement, the insured will be responsible for any judgment in excess of the settlement offer. Alternatively, the hammer clause may provide
that the insured is responsible for a percentage of any judgment in excess of the amount of the rejected settlement amount.



C.     Consent Not Required

The language utilized in the insurance policy will typically control the insurer’s right to settle a liability claim on behalf of the insured. Insurance
policies often contain language providing that the insurer may settle claims as it “deems expedient” or other similar language. (Some policies
contain language stating that the insurer may settle a lawsuit within the applicable policy limits as it “thinks appropriate.” National Union Fire
                                                   .,
Ins. Co. of Pittsburgh, Pa. v. Jay Tee Equities Co 628 N.Y.S.2d 765 (N.Y. App. Div. 1995)) These clauses have been held to allow an insurer
to settle a claim within the policy limits even where the claim was frivolous, and without consideration of the insured’s interest.Shuster v.
South Broward Hospital District Physicians’ Professional Liability Trust, 591 So.2d 174 (Fla. 1992); Doe v. South Carolina Medical Malpractice
Liability Joint Underwriting Assoc., 557 S.E.2d 670, 675 (S.C. 2001).




Unless the insurance policy contains a provision requiring the insured’s consent to settlement within policy limits, the insured often cannot
prevent an insurer from settling a claim, regardless of whether the claim is meritless, fraudulent and/or frivolous. Shuster v. South Broward
Hospital District Physicians’ Professional Liability Trust, 591 So.2d 174, 177 (Fla. 1992); Transcontinental Insurance Company v. Century
Steel Erectors, Inc., 318 F.Supp.2d 276 (W.D. Pa. 2004).




Importantly, however, an insurer’s right to settle a lawsuit over the insured’s objection is not absolute. Implicit in every insurance contract is a
covenant of good faith that the insurer will employ in handling any claims against its insured. However, if the insurer acts in good faith toward
the insured, then their actions will be valid.



Bad faith will not be found where an insurer merely settles for the nuisance value of the lawsuit. An example of where bad faith may be found,
                                                                                     S
however, is where an insurer settles a claim that bars the insured’s counterclaim ( huster, 591 So.2d at 177), or where an insurer settles
claims for the full amount of coverage with less than all parties, leaving the insured exposed to liability without coverage for the remaining
claims. Furthermore, bad faith can be found where an insurerfails to settle a lawsuit on behalf of an insured, where there is no reasonable
basis for failing to settle the case. Jurinko v. The Medical Protective Co., 2008 U.S. App. LEXIS 26263 (3d Cir. December 24 2008).



While insurers typically include language in their insurance policies which provide the insurer with the right to control settlement decisions,
some states have enacted legislation precluding physicians from making such settlement decisions. For example, aKansas statute precludes
physicians from controlling the defense of malpractice claims against them. See K.S.A. 40-3401 et seq. Similarly, a Florida statute provides
that a medical malpractice insurance policy cannot include a provision giving the insured veto power over a settlement within policy limits. See
                                                                        f
§ 627.4147(1) Fla. Stat. (These statutes were enacted because each o the respective states maintains funds which are responsible for any
judgment in excess of the basic insurance coverage. If physicians were able to exert full control over their defense and on decisions regarding
settlement, the purpose and financial structure of the fund would be undermined.). Pennsylvania, however, allows a physician to maintain the
right to consent to settlement upon the payment of an additional premium amount. 40 P.S. § 1303.712(n).
III.   Defense Counsel’s Ethical and Professional Obligations

Although an insurer may alter the insured’s rights regarding settlement decisions, the insurer must be cautious not to alter an attorney’s ethical
obligations. “A third party provider generally may not alter the ethical obligations imposed upon a lawyer either by litigation-management
guidelines or through its contract of insurance with its insured.” National Reporter on Legal Ethics and Professional Responsibility,
Pennsylvania Formal and Informal Opinions, Formal Opinion No. 2001-200.




Furthermore, the attorney must be cautious when representing an insurance company and its insured. Several states hold that a tripartite
relationship exists between an attorney, an insurer, and an insured. In these insurance defense situations, typically both the insurer and the
insured are the attorney’s clients.



An attorney can be placed in a difficult situation when the insured does not want to settle a lawsuit, but the insurer does. Even where the
insurance policy clearly provides that the insured’s consent to settle is not necessary, an attorney cannot merely settle the lawsuit without
consulting with the insured. To do so is a violation of his or her duties as the insured’s attorney.Rogers v. Robson, Masters, Ryan, Brumund
and Belom, 392 N.E.2d 1365 (Ill. App. 1979) aptly illustrates this point.



In Rogers, defendant attorney settled a malpractice action against plaintiff physician without the physician’s knowledge or consent. The
insurance policy provided that the physician’s consent was not required for settlement. However, the fact that the insurance policy did not
require consent did not alter the attorney’s duties to the physician:

Apart from any considerations arising from the insurance policy, we believe that when defendant [attorney] became aware that a settlement
was imminent because of the preferences of the insurance company, and that their other client, the plaintiff [physician], did not want the case
settled, a conflict arose and defendant [attorney] could not continue to represent both without a full and frank disclosure of the circumstances
to its clients. Furthermore, the general duties of the defendant in representing plaintiff were strengthened by the defendant agreeing, if it did, to
defend the case rather than settle. Having continued representing both the insurer and insured without the requisite disclosure, defendant
breached its duty to plaintiff. When an attorney attempts dual relationships without making full and frank disclosure required of him, he is liable
to the client who suffers loss caused by the lack of disclosure.

Rogers, 392 N.E.2d at 1372.




The court offered some guidance on possible courses of action that the attorney could have taken in such circumstances:

By failing to inform plaintiff [physician] of the proposed settlement, defendant [attorney] foreclosed plaintiff from alternatives that were available
to him. Plaintiff could have consented to continued representation by the defendant at the expense of the insurance company with the
accompanying likelihood that the case would be settled without his consent, for, as we have held, the insurance company by virtue of the
contract could settle without plaintiff's consent. If plaintiff believed such a course of action was not in his best interests, he could release the
insurance company from its obligation under the policy, select different counsel, defend the action at his own expense and bear the risk of an
adverse decision.

Id. at 1372.




According to the Rogers court, the best course of action for the attorney when an insurance company desires to settle a lawsuit, while the
insured does not want to settle, is for the attorney to fully explain the conflict regarding settlement to his or her clients. This course of action
allows the insured to determine whether to continue with the representation by the attorney with the likelihood that the case will be settled, or
whether to release the insurance company from its obligation to defend the insured in the matter, and seek other counsel. Unless such
disclosure is made, the attorney will have violated his ethical duties, and may be liable in damages.




IV.    Practice Pointers

If the stumbling block to settlement is the insured’s concern that the case will be reported to a regulatory agency such as the NPDB, then a
high-low agreement may be considered. Although high-low agreements may vary, the typical agreement provides for a ceiling to recovery if
the plaintiff is awarded damages and a guaranteed minimum payment in the event of a defense verdict or award for the plaintiff less than the
stated minimum. The agreement may appeal to an insured who will not consent to settle where favorable verdicts are not reportable events.
The payment is being made pursuant to an agreement between the carrier and the plaintiff. The benefit to the insurer is the limitation of its
liability even if the plaintiff wins at trial and is awarded a higher amount than the stated limit. The benefit to the plaintiff is a guaranteed
payment, even if there is no finding of liability against the insured. In the physician realm, the NPDB Guidebook, Chapter E Reports,
September 2001, E-13, states:

A payment made at the low end of high-low agreement that is in place prior to a verdict or an arbitration would not be reportable to the NPDB
only if the fact-finder rules in favor of the defendant and assigns no liability to the defendant practitioner.

A discussion of high-low agreements is found at the NPDB website:www.npdb-hipdb.hrsa.gov.

       The following example of a non-reportable high-low agreement is found in the January, 2007 NPDB-HIPDB Data Bank News:

Example 4: A high-low agreement is in place prior to binding arbitration. The parties agree to a low-end payment of $50,000 and a high-end
payment of $150,000. The arbitrator finds in favor of the defendant practitioner with no liability on the part of the practitioner. However, given
the existence of the high-low agreement, the defendant’s insurer makes a payment of $50,000 to the plaintiff (the low-end payment). This
payment is not reportable because the arbitrator (the fact-finder) found no liability and the payment is being made at the low-end of a high-low
agreement, pursuant to an independent contract between the defendant’s insurer and the plaintiff.

See, www.npdb-hipdb.hrsa.gov/npdbguidebook.html.




The advantages of a high-low agreement may be undercut by the disclosure of the agreement to juries. There is no consensus on this issue.
                                                                                                                                               ,
See, Gulf Industries, Inc. v. Nair, 953 So.2d 590, D.C. App. Fla. (2007) and Matter of Eight Jud. Dist. Asbestos Litig. v. Amchen Products, Inc.
8 N.Y.3d 717, 872 N.E.2d 232 (2007). Plaintiffs and insurers are usually amenable to the high-low concept.




Of course, the difficulty is agreeing on the numbers. In all cases, the high-low agreement should be memorialized in a written document. If
the case proceeds to trial, the agreement should be placed on the record. Mediation is recommended for negotiation of the “numbers.”
Further, ground rules for the admission of evidence and other parameters may be fixed during mediation. The earlier the parties can agree to
mediate the case and resolve ground rules for implementation of a high-low agreement, the greater the cost savings to the insured as well as
plaintiff and carrier. In the case of a claim of probable liability involving multiple carriers and insured, but no consent, a mediation could be
held to explore a likely settlement range (i.e., the “numbers” for a high-low agreement), with an agreement to a subsequent arbitration or
summary trial to determine liability and to apportion the award among the defendants.




High-low agreements work well in conjunction with alternative dispute resolution (ADR). In both arbitration and summary trial, the insured will
appreciate the time and cost savings to his or her practice. The insured will also appreciate the fact that a court appearance before a jury may
be avoided through implementation of the high-low agreement.




Defense counsel should consider the difference between a self-insurer’s approach to insured consent to settle as opposed to a commercial
carrier. Commercial carriers are more likely to be motivated solely by the financial impact of the settlement decision regardless of the opinion
of the insured. With self-insurers however, the insured may be an employee of the insurer’s parent or a valued member of the medical staff of
one of the insurer’s (hospital) owner’s. While the policy may give the self-insurer the right to settle a case without the consent of the insured
physician, other considerations may make a discussion with the insured physician advisable before any settlement decision is made.

When the insured rejects counsel’s advice, it may be helpful to ask the insured to consult with her own personal counsel and to invite personal
counsel to meet and discuss the merits of settlement. The sooner that discussions concerning potential resolution of a case that should be
settled are broached, the more likely the insured will consider the merits and the less likely he or she will feel put upon by defense counsel
and/or the insurer.



Stephen M. Houghton

J. Brian Lynn

Dickie, McCarney & Chilcote

Pittsburgh, Pennsylvania

shoughton@dmclaw.com

jlynn@dmclaw.com