This author suggested, in an earlier May 2016 Bad Faith blog article, that an insurer can measure on a “strength scale” its insurance coverage defenses while it defends its insured against underlying claims and lawsuits under a reservation of rights. The “strength scale” of coverage defenses, especially when subject to ongoing updates, can become a useful decision-making tool during settlement negotiations. An insurer has a legitimate basis to assess its coverage defenses as part of the settlement process when the coverage issues may render it unclear whose money will be used to pay for a judgment or settlement: the insurer’s money, the insured’s money, or combined contributions of both.
“Bad faith” case law can be scarce, in many jurisdictions, regarding insurers that base their settlement decisions in whole or in part on insurance coverage considerations. Although Washington state has many reported decisions addressing “bad faith” breaches of an insurer’s duty to defend and/or its duty to indemnify, it has only a few cases specifically addressing the “duty to settle.” And, it has no case law setting forth specific guidelines or rules for an insurer’s settlement decisions based upon “mixed” evaluations of underlying tort claims versus insurance coverage disputes with the insured. But Washington’s often-cited treatise on insurance coverage law, and at least two federal judges in Washington, have stated that insurers are not prohibited from considering coverage issues when deciding how much money to contribute to a settlement. Berkshire Hathaway Homestate Ins....
