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Insurer Did Not Breach Defense Duty by Failing to Retain Counsel for the Insured for a Pre-Lawsuit Mediation
Insurance Law Update
Montana Supreme Court
The Montana Supreme Court held that an insurer did not breach its duty to defend or commit an unfair claims practice by sending a claims adjuster, rather than an attorney, to a voluntary pre-lawsuit mediation.
In Farmers Ins. Exchange v. Johnson, ___P.3d ___, 2009 WL 4981857 (Mont. S. Ct. December 23, 2009), Farmers' insured was in a physical altercation and charged with assault. The injured party's attorney sent a letter to the insured demanding payment of $154,000 for his client's injuries. The insured forwarded the letter to Farmers, which assigned an adjuster to attempt a settlement. Ultimately, the parties agreed to participate in a voluntary mediation prior to commencement of litigation. Farmers did not assign defense counsel, but had its claims adjuster attend the mediation. The mediation produced a settlement whereby Farmers would pay $40,000 in exchange for a release of all civil claims against the insured, and the insured would personally pay the remaining $60,000.
After the settlement was concluded, the insured demanded approximately $80,000 from Farmers, including his $60,000 share of the settlement and fees for his private attorney. Farmers, in turn, filed an action for a determination of its obligations under the policy. The insured counterclaimed, asserting breach of the duty to defend, breach of the duty to indemnify, constructive fraud, and violations of the Montana Trade Practices Act.
The insured argued that the mediation was a “suit” that triggered Farmers’ duty to defend, and that the duty to defend could only be satisfied by appointment of counsel. Farmers argued that prior to the commencement of litigation it was entitled to investigate and try to resolve the claim through an adjuster, rather than an attorney.
The trial court granted summary judgment for Farmers, and the Montana Supreme Court affirmed. The court found that Farmers satisfied its duty to defend by negotiating and obtaining a full release, even though it did not retain counsel for the insured. The court stated that although the duty to defend undoubtedly encompasses functions that can only be fulfilled by a licensed attorney, “insurance adjusters play a vital role in the resolution of claims prior to the initiation of litigation.” The court found that this conclusion was consistent with the public policy of “encouraging settlements and avoiding unnecessary litigation.”
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