When Does a Primary Insurer Have a Duty to Advise an Insured of Potential Excess Policy Exposure

An insurance company’s duty to its insured does not end with the appointment of counsel.  Rather, it extends past that and requires a primary insurer keep their insured abreast of the litigation progress, status and, as described in length in R.C. Wegman Construction Co. v. Admiral Insurance Co., that there would be excess insurance exposure above the policy limit.  Specifically, in R.C. Wegman Construction Co. v. Admiral Insurance Co., 629 F.3d 724 (7th Cir. 2011), the Seventh Circuit held that Wegman construction company’s primary insurer carrier, Admiral, had a duty to notify Wegman that it would have excess insurance exposure above its $1 million commercial general liability (CGL) policy limit.

In Wegman, a construction worker sued Wegman for injuries sustained while working. Wegman notified Admiral of the suit, and Admiral, pursuant to its duty to defend, provided an attorney to represent Wegman in the matter. At no time prior to the trial did Wegman seek excess policy coverage in case the construction worker’s judgment exceeded the $1 million policy limit.  The construction worker was awarded a verdict of just over $2 million against Wegman, leaving Wegman liable for over a million dollars.  Wegman then filed a declaratory judgment action against Admiral claiming Admiral breached its duty of good faith when its appointed attorney failed to keep Wegman abreast of the case and, as a result, Wegman failed to acquire the excess policy coverage it ultimately needed.

Wegman contended that Admiral knew excess policy coverage would be necessary when, during the injured construction worker’s deposition in May of 2005, it was revealed that his damages, including pain and suffering, loss of wages, and medical expenses, were substantial and would likely exceed the $1 million policy. Additionally, Wegman contended that Admiral knew “as early as May 2005 and no later than April 2007,” that the injured construction worker was demanding nearly $6 million to settle the suit. Despite this information, Admiral never notified Wegman of the potential excess policy exposure. In September of 2007, a Wegman executive finally realized the possibility of the loss exceeding the Admiral CGL policy while discussing the case with a relative who was an attorney. At that point, however, Wegman’s excess insurance carrier denied coverage based on late notice.

While the trial court dismissed Wegman’s complaint against Admiral, finding that Admiral did not breach its duty, the Seventh Circuit reversed and remanded the case, holding the complaint stated a claim for breach of Admiral’s implied contractual duty of good faith.

First, the Court observed that, under Illinois law, Admiral’s duty to defend Wegman gave Admiral the right to assume control over the litigation, which it exercised by selecting and appointing an attorney to represent Wegman. However, by virtue of Admiral’s control, it also incurred a duty to keep Wegman abreast of the litigation’s progress and status.

Second, the Court pointed out that the “nontrivial probability” of the injured construction worker’s claim exceeding $1 million created a conflict between Admiral and Wegman’s respective interests. On the one hand, Admiral would not have to pay more than $1 million for any judgment over $1 million; thus, it had an incentive to “gamble” by going to trial and hoping for a judgment below $1 million. If the judgment ultimately did exceed $1 million, it would make no difference to Admiral. On the other hand, Wegman’s interest was to have excess policy coverage in the likely event the judgment exceeding $1million. Under Illinois law, when such a potential conflict of interest arises between an insurer and its insured, the insurer has a duty of good faith to notify the insured. Additionally, gambling with an insured’s money is a breach of the insurer’s fiduciary duty. Applying these principles to the facts presented in Wegman, the Seventh Circuit held that the conflict of interest gave rise to Admiral’s duty to notify Wegman of potential excess policy exposure.

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