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Rogan v. Auto-Owners Insurance Co.8/13/1991
r, the injured parties filed suit against the insurer to recover on the judgment in excess of the policy limits. The jury returned a verdict in favor of the injured parties, but the trial court entered judgment for the insurer notwithstanding the verdict. The California Supreme Court reversed concluding that the insurer was liable for the excess judgment. Id. at 663, 328 P.2d at 203.
The decisive factor in fixing the extent of Traders' liability is not the refusal to defend; it is the refusal to accept an offer of settlement within the policy limits. Where there is no opportunity to compromise the claim and the only wrongful act of the insurer is the refusal to defend, the liability of the insurer is ordinarily limited to the amount of the policy plus attorneys' fees and costs. In such a case it is reasoned that, if the insured has employed competent counsel to represent him, there is no ground for concluding that the judgment would have been for a lesser sum had the defense been conducted by insurer's counsel, and therefore it cannot be said that the detriment suffered by the insured as the result of a judgment in excess of the policy limits was proximately caused by the insurer's refusal to defend. This reasoning, however, does not apply where the insurer wrongfully refused to accept a reasonable settlement within the policy limits.
Id. at 659-60, 328 P.2d at 201 (citations omitted).
The basis for limiting an excess judgment to the policy limits when there is no settlement offer is based on the following reasoning. When an insurer refuses to defend or denies coverage alone the insurance contract is breached, but there is no causal connection between the breach and the excess judgment. Given competent counsel to represent the insured, the judgment would be the same as if the defense had been conducted by the insurer's counsel. See George R. Winchell, Inc., 633 P.2d at 1177. But, when there is a refusal to settle within the limits of the insurance
contract, then there is a causal connection between the act of the insurer and injury to the insured, i.e. the excess judgment. Had the insurer accepted the reasonable settlement offer, it would have lessened the liability exposure to the insured.
Here, the Parkers were represented by counsel in the Gila County lawsuit and there is no claim that their counsel was incompetent. It is undisputed that Auto-Owners was never presented with a complaint in the Gila County suit, nor was it ever notified of the pending lawsuit. Furthermore, the trial court found that no offer of settlement was ever made by the plaintiffs. Plaintiffs do not challenge this finding. Instead, plaintiffs cite several cases which they contend support the proposition that an insurer's bad faith denial of coverage renders it liable for the full amount of a judgment entered against the insured. We have reviewed these cases and find that each involves a situation where the insurer, in addition to denying coverage and/or refusing to defend, refused to entertain an offer to settle. See Paynter, 122 Ariz. 198, 593 P.2d 948; State Farm Auto. Ins. Co. v. Civil Service Emp.Ins. Co., 19 Ariz. App. 594, 509 P.2d 725 (1973) (erroneous denial of coverage and consequent refusal to give consideration to a settlement offer exposes insurer to liability in excess of policy limits); General Acc. Fire & Life Assur. Corp. v. Little, 103 Ariz. 435, 443 P.2d 690 (1968) (insurer liable for $12,500.00 judgment against insured even though policy limit was $5,000.00 where insurer refused to settle fo
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