States vary in their consequences for an insurer that is found to have breached the duty to defend. When it comes to states that apply a severe sanction, Montana is certainly at or near the top of the list.  While Montana’s handling, of the breach of the duty to defend, played a part in Abbey/Land v. Glacier Construction Partners, LLC, No. DA17-0705 (Mont. Jan. 29, 2019), it was selected for the annual “Top 10” because of its potential impact nationally.  I have not seen too many cases that address the issue at hand.  Abbey/Land, from a state high court, gives insurers a very sharp tool in their fight against consent judgments.        

The Montana high court’s decision in Abbey/Land is long.  In addition, the case is very complex, both procedurally and factually.  I can skip all of that to get to the points here.

In general, Abby/Land was the developer of a project.  Glacier Construction was the general contractor.  Abby/Land and Glacier had common ownership.  There were construction defects.  Glacier sought coverage from its insurer, James River.  James River denied coverage.    

Abby/Land and Glacier entered into a settlement for $12,000,000, assignment of rights, mutual release and covenant not to execute.  James River challenged that judgment as unreasonable.  The trial court agreed that it was unreasonable and the product of collusion and reduced it to $2.4 million plus 6.75% interest.  The case went to the Montana Supreme Court.

Right off the bat the Supreme Court set out the consequences for an insurer that breaches the duty to defend: “When an insurer wrongfully refuses to defend its insured, the insured is justified in taking steps to limit his or her personal liability, including entering into a stipulated judgment with a covenant not to execute and an assignment of rights.  The insurer becomes liable to the insured for the resulting defense costs, judgments, or settlements.  A stipulated judgment is presumptively enforceable as the measure of damages. [W]e have recognized[, however,] the opportunity for mischief in settlement negotiations where the insurer has declined involvement—which may be checked by judicial review of whether the settlement amount stipulated to is reasonable. Thus, the insurer will be bound by its insured’s settlement and any resulting judgment so long as the settlement is reasonable and not the product of collusion.  The court cannot . . . surrender its duty to see that the judgment to be entered is a just one nor is the court to act as a mere puppet in the matter.” (citations and internal quotes omitted). The breaching insurer also cannot assert its policy limits, as the court observed elsewhere.

Following a lengthy review of the dealings between Abbey/Land and Glacier, the Supreme Court agreed that the settlement was collusive:  “Considering these findings—all of which have substantial grounding in the record—we affirm the District Court’s conclusion that the stipulated judgment between Abbey/Land and Glacier was the product of collusion.  The $12 million settlement was contrived to inflate Abbey’s recovery to the detriment of James River beyond what should have been a reasonable liability exposure for its insured, and the District Court did not err in concluding that it was not the product of a good-faith, arms-length transaction.”

But here is where the decision gets the most interesting.  The District Court had reduced the judgment to $2.4 million.  But the Supreme Court went much further.  It reversed the District Court and dismissed the case with prejudice.  Translation – Abby/Land took nothing.    

In general, the court concluded that the collusion was “so egregious” that dismissal was the only proper remedy. 
Essentially, there were two bases for this decision.  The insurer has suffered enough for breaching the duty to defend and fundamental justice: “The insurer has already suffered the consequence of its failure to defend by having lost the right to invoke insurance contract defenses as well as the right to assert its policy limits.  Whether to dismiss after finding that a confessed judgment is the product of collusion instead should focus on the collusive actions themselves.  Dismissal should occur not for the benefit of the insurer, but to protect the interests of justice and the integrity of the courts. District courts should consider whether allowing colluding parties to recover under the circumstances would contravene public policy or whether withholding relief would offend our system of justice to a greater extent than would allowing relief.”

The lesson here for parties that are entering into a settlement and assignment of rights against the insurer could not be clearer.  Even in a state that is harsh on insurers that breach the duty to defend, there are limits.  Collusion and an exaggerated settlement amount could result in a party nothing.

Parties entering in a settlement agreement may be tempted to reach an inflated amount on the theory that (1) the insurer, having breached the duty to defend, is not a sympathetic party in the litigation over “reasonableness” and (2) even if the settlement is too much, and the court reduces the amount to one that it believes is reasonable, it will still be an acceptable amount.  So, as the settling parties may see it, there is no risk in pushing the envelope and settling for an unreasonable amount.  But, based on Abby/Land, there is a risk, and it’s a big one.  This is a valuable tool, as well as leverage, for an insurer facing payment for a stipulated judgment.