Insurer Controls Settlement Within Deductible
With limited exceptions, liability insurance policies grant exclusive discretion to the insurer to settle cases as they see fit. This makes sense given that the insurer is typically the party funding the settlement through its indemnity obligation and at least ostensibly is the claim’s handling professional. The insurer’s discretion is only tempered by the insurer’s obligation to exercise good faith or act without negligence in deciding whether to settle claims made against an insured. Most extra-contractual cases arise when the insurer fails to settle claims against the insured within the limits and either negligently or in bad faith exposes the insured to an excess judgment.
Less common, at least outside of professional liability policies, is litigation against an insurer that chooses to settle a claim and secures a release of its insured. Such a settlement would normally be viewed as benefiting the insured. This is not always true and particularly not when the insurer seeks reimbursement from the insured for the entirety of the settlement negotiated by the insurer.
Martin Marietta Materials, Inc. v. Ace American Ins. Co., 2025 WL 1944020
(E.D. N.C. July 15, 2025)
Martin arose from a collision between a train and a front-end loader owned by Martin Marietta Materials (MM Materials) and operated by one of its employees. At the time of the collision, Travis Eckert was riding on the train. Unfortunately, Eckert suffered extensive injuries in the collision including three amputated toes, a broken ankle and a shoulder injury that required surgery.
Eckert and his wife ended up filing suit against MM Materials and others in Texas state court. (“Underlying Case”). Through the Underlying Case, the Eckerts alleged $2.1 million in economic damages and sought recovery for non-economic damages.
MM Materials Coverage With ACE
At the time of Eckert’s injuries, MM Materials was insured by ACE American Insurance under a “primary” CGL policy with ACE. In addition, MM Materials carried an umbrella policy with ACE that provided $25,000,000 in coverage above the limits of the CGL policy.
In theory, the limits of the primary CGL policy were $3,000,000. However, the policy appears to just provide coverage for defense costs as the policy was subject to a $3,000,000 deductible that MM Materials would need to reimburse to ACE if ACE made any payments to a claimant. Under the policy, ACE would only be required to expend its own funds on indemnity payments exceeding $3,000,000. ACE might front the deductible but could ultimately seek full reimbursement from MM Materials.
Additionally, the terms of the ACE primary CGL policy provided:
“…[ACE] may, at its discretion, investigate any “occurrence” and settle any claim or “suit” that may result.”
“[ACE] will pay all sums that [MM Materials] become legally obligated to pay up to the Limits of Insurance under this Policy.”
“[MM Materials] must reimburse [ACE] up to the Deductible Amount for any amounts [ACE] has paid under this policy.”
Progression of Underlying Case
The Underlying Case was ultimately tendered to ACE. ACE did not appear to raise any coverage disputes and allowed MM Materials to choose its defense counsel with whom it had a long relationship. ACE apparently did not impose its own retained counsel on MM Materials.
Initially, the Eckerts offered to settle the Underlying Case for $4.4 million. MM Materials’ counsel provided ACE with an evaluation in which he stated that he believed a verdict under $1 million was a reasonable goal. Additionally, he intended to argue Mr. Eckert had comparative fault for his injuries that would ultimately reduce any damages.
In an unusual turn of events, ACE believed the evaluation submitted by MM Materials’ defense counsel was too low. ACE hired additional outside counsel to assist in the Underlying Case and provide ACE with a second evaluation of the likely jury verdict. This new outside counsel sided with ACE. He eventually reported there was a “very slight chance” of a verdict under $1 million and a “slight chance” of a verdict in excess of $4 million. Additionally, he stated that a “reasonable verdict value for [the Underlying Case] falls in the $2 to $3 million range.” Of course, this amount was within the deductible of the primary CGL policy.
About 10 days before trial, the Eckerts made a $2.85 million settlement demand. After receiving the demand, ACE sent a letter to MM Materials informing them that if MM Materials did not offer substantial funds in response, that ACE would exercise its right to settle the Underlying Case for an amount within the deductible and essentially cut MM Materials out of the settlement negotiations. MM Materials then offered $500,000. This was countered by the Eckerts reducing their demand to $2.75 million. MM Materials did not respond to the newest offer.
Within days, ACE chose to take over all settlement negotiations. When ACE did so, MM Materials informed ACE that it believed ACE’s evaluation of the Underlying Case was too high and any settlement without MM Materials consent would be a voluntary payment by ACE and not recoverable from MM Materials.
During trial, Eckerts’ counsel asked the jury to award between $9-11 million dollars for actual damages. ACE and the Eckerts agreed to settle the Underlying Lawsuit for $2.5 million without MM Materials’ consent. ACE paid the settlement and requested reimbursement from MM Materials. MM Materials refused to reimburse ACE and took the position that ACE had made a voluntary payment.
MM Materials Lawsuit Against ACE
Following the settlement of the Underlying Case, MM Materials brought a lawsuit against ACE for the actions it took in settling the Underlying Case. MM Materials claimed that ACE had acted in bad faith when it settled the Underlying Case and that any payment made by ACE was a voluntary payment and not subject to reimbursement under the primary CGL policy. At the core of each of MM Materials’ claims was its argument that ACE paid an excessive amount to the Eckerts in order to settle the case within the deductible amount. Doing so served only ACE’s interests as ACE would be reimbursed by MM Materials and ACE would not actually be out any funds for the settlement.
ACE filed a counter-claim against MM Materials for breach of contract based on MM Materials’ refusal to reimburse ACE for the settlement amount. ACE argued the terms of the primary CGL policy required MM Materials to reimburse the full amount of the settlement in the Underlying Case and that MM Materials owed ACE interest on the full amount of the settlement.
District Court Decision
After a period of discovery, ACE moved for summary judgment on MM Materials claims and on its counter-claims for breach of contract. MM Materials opposed ACE’s motion but did not independently move for summary judgment. After briefing, the district court sided with ACE entirely and granted summary judgment to ACE on all of its claims.
In ruling on MM Materials’ claim for breach of the covenant of good faith, the district court accepted the general principle that every contract contains an implied duty of good faith. The district court summarized this duty as requiring the insurer to consider the interests of the insured when settling a claim but not requiring the insurer to give equal or greater consideration to the interests of the insured. In applying this principle to the facts, the district court determined that ACE considered MM Materials’ interest by not accepting the first settlement demand of $2.85 million that fell within the $3,000,000 deductible. Instead, the Court found that ACE negotiating the settlement down to $2.5 million was sufficient to show ACE considered MM Materials’ interest and satisfied its good faith obligation. This was despite MM Materials objecting to the settlement and being potentially obligated to reimburse ACE for the entirety of the amount.
Similarly, the district court rejected MM Materials’ argument that ACE’s decision to settle and pay the Underlying Case was a voluntary payment by ACE and not subject to reimbursement. The district court’s reasoning was somewhat circular. The district court stated that ACE’s actual payment to the Eckerts was not “voluntary” as ACE was compelled by the settlement agreement entered into with the Eckerts to make the payment. While theoretically correct, this did ignore that ACE negotiated the settlement agreement that compelled the ultimate payment for which it was seeking reimbursement.
The driving force behind the district court’s decision appears to be the language of the primary CGL policy granting ACE the discretion to settle any claims as it sees fit. According to the district court, MM Materials was on the hook to reimburse ACE for the entirety of the settlement.
The settlement language in the primary CGL policy is admittedly common and typically not an issue when the carrier is solely or primarily funding the settlement with its own funds. Of course, that was not the case in Martin as the primary policy contained no indemnity benefit and the insured was responsible for paying the entirety of the policy limits either to the claimant or reimbursing the carrier. While not discussed by the Court, neither the insureds counsel nor the counsel hired by ACE evaluated the case to exceed the $3,000,000 limit/deductible. In such circumstances, it is difficult to see how ACE deciding to settle a case when it didn’t appear to have any financial exposure of its own did not present a fact question on good faith and on whether the settlement constituted a voluntary payment on ACE’s part. In this case, ACE used the house money to fund the settlement and avoid the potential of exposure into its indemnity layer. Had that occurred, it would be interesting to know how both ACE and MM Materials would have reacted to such a scenario.
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