Sonnenschein Nath & Rosenthal, LLP on R.C. Wegman Construction Co. v. Admiral Insurance Co.: When Must An Insured Be Warned About Excess Exposure and Who Must Do It?
R.C. Wegman Construction Co., a construction manager, was sued for injuries suffered by Brian Budrick, an employee of one of the contractors working at the site. The contractor’s policy with Admiral Insurance Co. named Wegman as an additional insured and Admiral defended. While Wegman’s claim exceeded Admiral’s $1 million limit, Wegman claims not to have been told this until a few days before trial. It immediately put its excess carrier on notice, but coverage was denied because the notice came too late. Wegman sued Admiral for not informing it sooner. In R.C. Wegman Construction Co v. Admiral Insurance Co., 2009 U.S. Dist. LEXIS 22546 (N.D. Ill. Mar. 20, 2009), an Illinois federal court dismissed Wegman’s claim, finding that Admiral had breached no duty to notify. This commentary examines that decision and the exposures it may signal for insurance defense counsel.
Wegman argued that failure to notify the insured of possible excess exposure creates risks similar to refusing a within-limits settlement, so the duty of good faith should require such notice. But Wegman did not claim that Admiral could have done anything to prevent the excess judgment. Wegman claimed only that, with notice, it might have retained independent counsel and could have notified its excess insurer.
The court rejected that claim as “too attenuated to fit the [Illinois] courts’ circumscribed application of the duty of good faith.” Moreover, the court found that “the duty of the insure[r] to consider the interest of the insured at least equal to its own is rooted in the possibility that a conflict of interest [regarding settlement] may arise where the insured is a defendant in a suit in which potential recovery may exceed policy limits.”
As the commentary explains,
no conflict arose because there were no within-limits demands and the only demand was clearly excessive, so there was no reasonable prospect that Wegman might have wanted to accept that (and Wegman did not allege that it would have been interested in doing so).
The commentary summarizes the court’s conclusion as follows:
No case supported a duty of the insurer to tell the insured what had occurred at a deposition or in anything other than settlement negotiations (which a single unreasonable demand did not constitute). Defense counsel might have such a duty, but defense counsel were not sued and an Illinois insurer is not vicariously liable for defense counsel’s errors. Moreover, the very fact that the insurer had provided counsel who presumably did have a duty to keep Wegman informed counseled against imposing any duty to inform on the insurer itself.
The commentary then examines what responsibilities defense counsel might have and how defense counsel can limit or comply with those responsibilities.