Montana High Court Rules that Evaluation of Reasonableness of Stipulated Settlement Must Consider the Merits and Value of the Underlying Case

The Montana Supreme Court has held that, even where an insurer breaches its duty to defend and is estopped from denying coverage for a later settlement, the insurer is still entitled to challenge the reasonableness of the settlement, and the court must assess the merits and value of the underlying case in assessing the settlement amount. Tidyman’s Mgmt. Servs., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 2016 WL 4440634 (Mont. Aug. 23, 2016).

Following a merger, a corporation and its employees brought an action against directors and officers for breach of fiduciary duty. The corporation’s D&O insurer denied coverage for the claim, and the directors and officers later settled the claim by stipulating to a $29 million judgment in exchange for a covenant not to execute. In an earlier decision, the Montana high court ruled that the insurer breached its duty to defend the insureds and was therefore estopped from denying coverage for the settlement. The court remanded the case, however, to determine whether the settlement was reasonable. On remand, the trial court found that it was reasonable, looking to “whether the information relied upon possessed sufficient indicia of reliability and whether the damages might naturally have been expected to result from the breach of the duty to defend,” and ruling that the insurer had an obligation to pay the entire $29 million judgment, plus applicable interest.

On appeal, the Montana Supreme Court ruled that the district court erred in its method of assessing whether the settlement was reasonable. It ruled that the trial court “articulated its own subjective standard for assessing the reasonableness of the settlement amount” and failed to consider the merits and value of the underlying case. The court further ruled that “an objective standard of reasonableness should account for a prudent assessment of the merits and value of the plaintiff’s case, but also for the position in which the defendant has been left following an insurer’s breach of the duty to defend.” The court noted that the court’s objective should not be to “further punish the insurer for its failure to defend its insured,” but that the court should “objectively consider both the merits of the underlying case and the value to a prudent uninsured defendant of confessing judgment in exchange for a covenant not to execute.” The court remanded the case to the trial court to reassess the reasonableness of the settlement in light of those factors.