The Blue Ridge rule states that a liability insurer may settle a plaintiff’s lawsuit on behalf of and over the objection of its policyholder and then sue the policyholder for reimbursement of the amount of a reasonable settlement attributable to non-covered liability. The rationale for this rule is to avoid “unjust enrichment.” To perfect this right, an insurer must notify its policyholder that it intends to accept a reasonable settlement offer and that it reserves the right to seek reimbursement for non-covered liability. The Blue Ridge Court stated that policyholder then has three response options: 1) to accept the settlement; 2) to assume one’s own defense; and 3) to waive bad faith failure liability for failure to settle. Additional response options exist.
A plaintiff sued a policyholder, who in turn notified a liability insurer, which in turn agreed to defend under a reservation of rights, and has decided to settle the plaintiff’s lawsuit over the policyholder(s) objection and sue the policyholder(s) for reimbursement of a non-covered settlement.
The vast majority of civil cases settle. Long before settlement negotiations begin, policyholders and plaintiffs should prepare by deciding whether they will: 1) cooperate; 2) develop admissible evidence; 3) and/or consider the benefits of the policyholder being found liable for covered wrongdoing.
Encourage a prompt and reasonable settlement of the plaintiff’s claim that equitably allocates liability among defendants while developing an evidentiary record to correctly determine whether the insurer or the policyholder must ultimately pay.
The Blue Ridge opinion identified certain prerequisites that must be satisfied for an insurer to perfect a settlement reimbursement claim, including that the settlement must be reasonable. The opinion recognizes that in response to an insurer’s assertion of a reimbursement claim, the policyholder may: 1) accept the settlement; 2) assume its own defense; or 3) waive any right to sue the insurance company for bad faith failure to settle.
Generally courts tend to find that a settlement is reasonable if it is somewhere in the “ball park” of an objective evaluation of a defendant’s exposure to liability and the plaintiff’s loss. If an insurer covers multiple policyholders, each is entitled to separate treatment so that each individual policyholder’s exposure to reimbursement liability should parallel that policyholder’s liability exposure to the injured plaintiff. “It would be inequitable to require a party insured to reimburse the insurer the policy benefits it received and also all policy benefits that every other insured party received. The right to reimbursement may run against the person who benefits from unjust enrichment, but it should do so only to the extent the person actually benefits.”
The give and take between an insurer seeking settlement reimbursement and a policyholder is a little like a game of chess: Each side makes a move and waits for the other to respond. The opening gambit by the insurer is to notify the policyholder of the insurer’s intent to settle a plaintiff’s lawsuit with an express reservation of its Blue Ridge reimbursement rights, and an offer to for the policyholder to block the settlement by assuming its own defense. In response, many policyholders simply knock over their own king and resign. Policyholders who elect to resist an insurer’s settlement reimbursement claim may consider sending adaptations of model letters identified in a companion Action Guide.
The extent to which other options are available to the policyholder may depend upon whether the policyholder and the plaintiff are cooperating, the extent to which the policyholder has previously developed admissible evidence, and the state of the evidence supporting that the policyholder is liable for covered wrongdoing. (See fn. 4, 5, 6.)
The insurer may unilaterally perfect the first two prerequisites of an express reservation and notification of intent to settle. Also, a settlement is likely to be found to be reasonable if it is not “so far ‘out of the ballpark’ . . . as to be inconsistent with the equitable objectives of” the good faith settlement statute [Code of Civ. Proc. §877.6]. Accordingly, the plaintiff’s lawsuit will settle or not and the insurer’s settlement reimbursement claim will be perfected or not depending on the policyholder’s response options mentioned in the Blue Ridge opinion: 1) to accept the settlement; 2) to assume one’s own defense; or 3) to waive any bad faith claim. However, as discussed below, the policyholder has additional response options.
Option #1: Accept the Settlement and Blue Ridge Exposure
Consenting to a reasonable settlement is a viable option for many policyholders, including: 1) a wealthy defendant facing substantial risk of liability who believes that the settlement is fair; 2) an impecunious defendant who is willing to file bankruptcy rather than pay a judgment by the plaintiff or the insurer; 3) a policyholder who craves closure; and 4) a policyholder who believes that the policy provides coverage. These policyholders may elect to send an acceptance letter.
Option #2: Assume One’s Own Defense
The Blue Ridge opinion implicitly assumes that prior to receiving a settlement offer the insurer is entitled to control the policyholders defense. This assumption may be incorrect for two reasons: 1) the policyholder has an initial statutory right to conduct one’s own defense; and 2) the policyholder has a common law right to control one’s own defense whenever the insurer’s reservation of rights creates a disqualifying conflict of interest. If the policyholder is already controlling the conduct of the defense, then “assuming” the defense simply means that the policyholder, not the insurer, will have to front the costs of defense. It does not mean that the policyholder relieves the insurer of any contractual obligations. Nothing in the Blue Ridge opinion suggests that assuming one’s own defense forecloses the future possibility of holding the insurer liable for costs of defense, costs of settlement, or an adverse judgment.
As a practical matter, opting to assume one’s own defense forecloses any future bad faith exposure of the insurer for a failure to settle. The rationale of the Blue Ridge opinion is that an insurer fulfills its duty to settle by offering to accept a plaintiff’s reasonable settlement offer. By assuming one’s own defense, the policyholder may prevent the settlement from closing. Policyholders who choose this response option may: 1) believe that coverage is weak; 2) believe that the settlement amount too rich for one’s perceived exposure; 3) find value in gaining unfettered control of the defense and settlement; and/or 4) have other reasons to stop the settlement. These policyholders may agree to assume the cost of the defense, while denying liability to the
plaintiff, challenging the reasonableness of the settlement, and reserving the policyholder’s right to recover from the insurer the future costs of defense and settlement.
Option #3: Waive Bad Faith Liability
A concurring opinion by Justice Mosk, joined by Justice Werdegar, explains that a policyholder may avoid reimbursement by waiving bad faith liability if the insurer rejects the settlement. “[T]he majority suggest that the insured has basically two options when it disagrees with an insurer about whether to settle a case for which the insurer claims noncoverage: (1) to accept the settlement anyway, including the insurer’s reservation of rights that may make the insured liable; or (2) to assume its own defense, however financially burdensome that may be. ¶ A third option, that would neither place the insurer in a ‘Catch-22’ position nor place an undue burden on the insured is to allow the insured to refuse settlement and still retain the insurance defense, but, consistent with that refusal, waive any right to sue the insurance company for bad faith failure to refuse a settlement. This third option would not allow a windfall for the insured, but it would permit the insured the discretion of refusing a settlement it considers unfair and for which it may ultimately be financially responsible. Indeed, the insurer offered this option in the present case. This option is in harmony with the principle that the insured should truly consent to a settlement in such a situation.” These policyholders may opt to send a waiver letter.
Option #4: Negotiate an Equitable Allocation of Liability
When an insurer intends to settle on behalf of multiple policyholders, an issue may arise (not address in Blue Ridge) whether each separate policyholder’s reimbursement liability to the settling insurer will be joint and several or allocated consistent with the exposure each had to the injured plaintiff. Since standard liability policies have no express right of reimbursement, Blue Ridge recognized “a right of reimbursement that is implied in law” as a matter of equity. Thus each policyholder’s exposure to settlement reimbursement liability should be equitably allocated among multiple policyholders to reflect their respective exposure to the injured plaintiff. Some policyholders may consider negotiating with the insurer to apportion each settling policyholder’s liability to the insurer. These policyholders may opt to start the negotiation with a letter.
Option #5: Accept and Reject the Settlement
When an insurer intends to settle on behalf of multiple policyholders, another issue may arise (not address in Blue Ridge) whether each policyholder may respond differently. For example, one policyholder accepting the settlement, a second policyholder assuming one’s own defense, a third policyholder waiving bad faith liability, a fourth policyholder negotiating for equitable apportionment. Such multiplicity of response options may produce opportunities for creative, coordinated responses among multiple policyholders to protect their interests against the settling insurer. However, an insurer may not settle on behalf of less than all policyholders without the consent of the non-settling policyholders. Non-settling policyholders may opt to expressly consent to the insurer settling on behalf of other policyholders.
Option #6: Assume Control and Settle Without Insurer Consent
When an insurer intends to accept a plaintiff’s settlement offer and seek to perfect a Blue Ridge right of reimbursement, one very simple option is for the policyholder to co-opt the insurer’s efforts by negotiating directly with the plaintiff for an independent settlement. Such a settlement may be independent of or coordinated with the insurer’s intended settlement. This option may be appropriate for a peripheral defendant. The ability to choose this option may be influenced by whether the policyholder is cooperating (see fn. 4) with the plaintiff and their counsel have developed a good working relationship.
A settlement that an insurer intends to accept may be thwarted by the policyholder’s parry to waive bad faith liability or assume one’s own defense. Both responses are likely to have value to the insurer. The policyholder’s waiver stops the settlement, defers the insurer’s payment, and absolves the insurer of bad faith liability. The policyholder’s assumption of the defense ends the insurer’s obligation to fund the defense currently. However, if the policyholder assumes the defense, the insurer will lose control of the conduct of the defense and may lose control of settlement. The insurer should agree to allocate settlement reimbursement liability among multiple policyholders to reflect their respective liability exposure to the injured plaintiff. Perfecting a Blue Ridge settlement reimbursement claim can get complicated. Insurers should consider whether perfecting the right is a pyrrhic victory. “Although the insurer may preserve its right to seek reimbursement from its insured, as a practical matter the insured may not have the assets necessary to compensate the insurer in full or even in part.”
The ramifications of Blue Ridge settlement reimbursement arise only after the plaintiff has negotiated a settlement with the policyholder’s insurer. The plaintiff will likely be affected by, but unable to influence the policyholder’s decision to accept the settlement, assume the defense, or waive bad faith liability. The plaintiff may be able to lubricate a settlement by negotiating with the insurer and multiple policyholders how to allocate liability among the several policyholders.
DEPENDENT COUNSEL’S PERSPECTIVE
Conflicts of interest may become acute during settlement, especially since “[t]he attorney’s primary duty has been said to be to further the best interests of the insured.” When an insurer/client is actively reserving rights against a policyholder/client, dependent counsel has an “‘enhanced’ obligation of fairness on reserving insurers to retain competent defense counsel who fully informs and loyally represents the insured and who refrains from any action that demonstrates a greater concern for the insurer’s financial interests than for the insured’s potential exposure.” Dependent counsel’s evaluation of the plaintiff’s claims may influence both the advisability of settlement and the relative exposures of various defendants, including multiple policyholders of the same insurer. Dependent counsel should be cognizant that its two clients are likely to have different interests in settlement and should be careful not to favor the insurer over the policyholder. If multiple policyholders are offered settlement, each may need separate representation.
 Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 501 (Blue Ridge).
 See, Article: Reservation of Rights Changes Traditional Relationships.
 See, Practice Pointer: Rule of 49 The Insurer Is Much More Dangerous Than the Plaintiff.
 Tech-Bilt, Inc. v. Woodward-Clyde & Associates (1985) 38 Cal.3d 488, 499-500 (Tech-Bilt)
 LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co. (2007) 156 Cal.App.4th 1259, 1273 (LA Sound) (citations, quotation marks, and ellipses omitted).
 “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.” (Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 870.)
 “Thus the assured may find himself and his goods in the position of a passenger on a voyage to an unknown destination on a vessel under the exclusive management of the crew.” (Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 870) See, Practice Pointer: Acquiescence Is Dangerous.
 See, Action Guide: Blue Ridge Settlement Reimbursement Response Options.
 Tech-Bilt, supra, 38 Cal.3d at 499-500.
 The insurer “is bound, on request of the [policyholder], to defend actions or proceedings brought against [the policyholder] in respect to the matters embraced by the indemnity, but [the policyholder] has the right to conduct such defenses, if he chooses to do so.” (Civil Code §2778(4) (emphasis added).)
 “In actions in which . . . the insurer and insured have conflicting interests, the insurer may not compel the insured to surrender control of the litigation.” (San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 369; see also, Tomerlin v. Canadian Indemnity Co. (1964) 61 Cal.2d 638, 648; Nike, Inc. v. Atlantic Mut. Ins. Co. (N.D.Cal. 1983) 578 F.Supp. 948, 949); and see, Article: Cumis Rule.
 “[T]he insured is forced to . . . pay its own legal expenses up front.” (Blue Ridge, supra, 25 Cal.4th at 506.)
 Blue Ridge, supra, 25 Cal.4th at 506-07 (citation and ellipses omitted).
 See, Model Letter: Waive Bad Faith to Avoid Settlement Reimbursement Liability.
 Blue Ridge, supra, 25 Cal.4th at 501.
 LA Sound, supra, 156 Cal.App.4th at 1273.
 See, Model Letter: Equitably Allocate Liability Among Multiple Policyholders.
 See, Practice Pointer: How to Make a Policy Limit Settlement Offer Properly.
 LA Sound, supra, 156 Cal.App.4th at 1273.
 Blue Ridge, supra, 25 Cal.4th at 503.
 See, fn. 10; Barney v. Aetna Casualty & Surety Co. (1986) 185 Cal.App.3d 966, 976.
 Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 582; Outboard Marine Corp. v. Liberty Mut. Ins. Co. (7th Cir. 1976) 536 F.2d 730, 737; Purdy v. Pacific Auto. Ins. Co. (1984) 157 Cal.App.3d 59, 76.
 Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 1008-09.