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Insurer off hook for settlement where there was no lawsuit

Posted On: Aug. 4, 2022 2:10 PM CST


A federal appeals court on Wednesday affirmed a lower court ruling and held an insurer is not obligated to pay for a settlement where a lawsuit was never filed.

Grand Rapids, Michigan-based Trident Fasteners Inc., an automotive supplier that makes customized screws, bolts and other fasteners for use as component parts, received complaints about defective fasteners, according to the ruling by the 6th U.S. Circuit Court of Appeals in Cincinnati in Trident Fasteners Inc. v. Selective Insurance Co. of South Carolina.

The company had commercial liability and umbrella coverage with Carmel, Indiana-based Selective Insurance, under which Selective agreed to pay sums it was legally obligated to pay as damages, but said the insured could not voluntarily make a payment without the insurer’s consent.

In October 2018, TFI reached out to Selective for coverage related to an alleged product defect after a customer complained about receiving defective fasters.

After several months of not hearing from the insurer as to whether it would provide coverage, it reached out again in February 2019, and Selective responded by assigning a new adjuster to the claim.

After hearing nothing else, the company reached out once again and Selective responded with a request for additional information before it would consent to TFI entering into settlement negotiations, the ruling said.

In May 2019, Selective denied consent for TFI to send a settlement letter and instructed it to not engage in any settlement negotiations, but TFI settled the dispute instead.

Selective then denied coverage, stating TFI had breached its policy when it voluntarily paid the settlement.

TFI filed suit against the insurer in U.S. District Court in Lansing, Michigan, alleging Selective had materially breached the policy by acting in bad faith and seeking more than $1.3 million in damages. 

The district court ruled in the insurer’s favor and was affirmed by the 6th Circuit panel.

Michigan courts “require the filing of a lawsuit against the insured or an agency demand letter to the insured that is the functional equivalent of a complaint” for coverage, but no third-party complaint was filed in this case, the decision said.

“Because Selective’s duty of good faith under Michigan law would not arise until after the filing of lawsuit against TFI, and given that there was no such lawsuit ever filed, the Insurance Claims is precluded under the Policy,” the decision said, in affirming the lower court.

Attorneys in the case did not respond to requests for comment.