BLUE RIDGE SETTLEMENT REIMBURSEMENT RESPONSE OPTIONS
THE BLUE RIDGE RULE
“[A]n insurer may be reimbursed for a reasonable settlement payment made over the objection of its insureds.” The insurer may start the process of perfecting a reimbursement claims against its policyholder by: 1) notifying the policyholder that it intents to accept a proposed; 2) reasonable settlement offer; 3) it timely expressly reserves its rights; and 4) it expressly offers to block the settlement if the policyholder assume one’s own defense.
“When an offer is made to settle a claim in excess of policy limits for an amount within policy limits, a genuine and immediate conflict of interest arises between carrier and assured. The normal legal remedy for conflicts in interest is separate representation for the conflicting interests.”
When the insurer has completed these four prerequisites, then like a game of chess, it becomes the policyholder’s turn to move. In doing so, the policyholder may protect one’s own interests. “Through reservation, the insurer gives the insured notice of how [the insurer] will, or at least may, proceed and thereby provides [the insured] an opportunity to take any steps that it may deem reasonable or necessary in response.”
There are seven standard response options the policyholder may consider:
1. The most common response by a policyholder to an insurer’s gambit to perfect a reimbursement claim is to do nothing. Most policyholder meekly acquiesce to whatever the insurer chooses to do.
2. The policyholder may accept the settlement and exposure to a Blue Ridge settlement reimbursement claim.
If the policyholder either does not want the settlement to be consummated or does not want to be exposed to the potential liability of insurer’s settlement reimbursement claim, one may choose among several other options:
3. The policyholder may assume one’s own defense. Doing so may result in the insurer ceasing to fund the defense and ceding control of the defense and settlement to the policyholder. The policyholder does not necessarily forfeit all rights under the policy by selecting this option, but at a minimum the penalty for thwarting the settlement is assuming the ongoing costs of defense.
4. The policyholder may waive any future claim that the insurer acted in bad faith by failing to accept a reasonable settlement offer. Because an insurer has an implied duty to settle, breach of which may expose it to tort damages, the policyholder may block the settlement by relieving the insurer of its duty to settle by an express waiver. If the policyholder chooses this response option, the insurer’s next move includes settling at its own expense or continuing to fund the defense.
5. If the insurer covers multiple policyholders, each policyholder may negotiate with the insurer and/or the plaintiff to equitably allocate liability among several policyholders so that the exposure of each to the insurer’s settlement reimbursement claim mirrors the liability exposure each had to the injured plaintiff.
6. When an insurer notifies multiple policyholders of its intention to accept a reasonable settlement, each policyholder may independently choose how to respond. If the several policyholders respond differently from other policyholders, the insurer’s commitment to consummating the settlement with the plaintiff and to perfecting its settlement reimbursement claim(s) may be challenged.
7. The policyholder may settle independently of the insurer. Often the availability of liability insurance drives settlements so that when an insurer reaches an agreement with an injured plaintiff to pay an agreed upon sum (often the policy limit), then peripheral defendant may succeed in negotiation independent settlements at the same time.
 Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 493.
 Id. at 502.
 Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 870.
 See, Practice Pointer: Blue Ridge Settlement Reimbursement – Response Options.
 Id. at 501.
 See, Model Letter: Equitably Allocate Liability Among Multiple Policyholders.