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Kelly v. Iowa Mutual Insurance Co.11/16/2000
one prohibiting unauthorized settlements by the insured. Id.
We agree. An insurance company cannot use its erroneous belief that it has no coverage to justify a refusal to settle. See 1 Windt § 5.05, at 310 & n.56, at 310—11 (citing cases). At the point in time that the insurer is faced with a fair and reasonable settlement demand that a reasonable and prudent insurer would pay, the insurer must either abandon its coverage defense and pay the demand or lose its right to control the conditions of settlement. If the insurer prefers to debate coverage and, accordingly, refuses to pay the settlement demand, the insured is free to either pay the settlement demand or stipulate to the entry of judgment in the amount of the demand. The insurer, if found to have coverage, will be liable for the insured's settlement if the settlement is found to be fair and reasonable.
Although our holding bears some similarity to the legal principles set forth in Wierck with respect to an insurer's liability for an excess judgment, we do not impose a bad faith standard for failure to settle a case where the defense is provided under a reservation of rights. We simply hold that when an insurer provides a defense under a reservation of rights and rejects a fair and reasonable settlement demand that a reasonable and prudent insurer would pay, the insured is free to consummate the settlement on terms that protect the insured from any personal exposure.
Applying these principles to the case before us, we think that summary judgment was premature. The record before the district court showed that settlement negotiations occurred, but the exact course of these negotiations and Iowa Mutual's involvement in them were not made clear. Therefore, we think Iowa Mutual has failed to demonstrate the absence of a genuine issue of material fact that would permit summary judgment. We recognize that the parties and the court did not have the benefit of any Iowa decision setting forth the applicable law under the circumstances of this case. Therefore, we do not mean to imply by our reversal of the summary judgment that the parties, on remand, will not be able to file properly supported motions for summary judgment that demonstrate one or the other party is entitled to judgment as a matter of law based on the legal principles set forth in this opinion. We merely hold that the information needed to test the insurer's conduct under the law we announce today is lacking in the record before us. Consequently, we reverse the district court's summary judgment ruling in favor of Iowa Mutual and remand for further proceedings.
REVERSED AND REMANDED.
McGiverin, S.J.*, participates in place of Neuman, J., who takes no part. *Senior judge assigned by order pursuant to Iowa Code section 602.9206 (1999).
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