You Can Lead an Insured to Water but Can You Make Him Settle?

January 27th, 2019 By Eric S. Peabody

Policy Creates Agency Relationship for Settlement

An unpublished Texas opinion that has received some national attention in “case roundups” at the end of 2018, McCain v. Promise House, Inc., No. 05-16-00714-CV, 2018 WL 2042009 (Tex. App.–Dallas, May 2, 2018, no pet.), addressed the effect of an insured’s refusal to sign off on a settlement agreement desired and approved by its liability carrier. Glen McCain sued Promise House, a residential social services care facility, after his eleven-year-old son was physically and sexually abused by an “older male individual” at the facility. Arch Insurance covered Promise House under a commercial general liability insurance policy with a “sexual or physical abuse liability endorsement,” and Arch retained counsel to defend Promise House.  Shortly after filing an answer, counsel for Promise House sent a Rule 11 letter to McCain’s counsel, confirming a $400,000 settlement, which counsel for both parties signed.

Promise House objected, refused to sign the full settlement agreement, and directed its counsel to send an email withdrawing from the Rule 11 agreement. McCain amended his petition to enforce the Rule 11 agreement against Promise House and Arch.  Both sides filed motions for summary judgment.

Reversing the trial court’s judgment in favor of Promise House, the Dallas Court of Appeals held that the Rule 11 agreement was enforceable despite Promise House’s objection. Because the policy did not contain a “consent clause,” it vested Arch “with an absolute right to settle third-party claims in its own discretion and without the insured’s consent.” Id. at *4. “An insurer which, under the terms of its policy, assumes control of a claim, investigates the claim and hires an attorney to defend the insured, becomes the agent of the insured and the attorney becomes the sub-agent of the insured.”   Id.

Takeaways:  The rights and duties assigned by an insurance policy are not wholly one-sided. While we often focus on the contractual and extra-contractual burdens the insurance relationship imposes on carriers, McCain reminds us that the policy is a contract that involves duties—and the relinquishment of certain rights—for the insured as well.