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Sometimes the black letter law passed by the legislature is unclear. The legislature can’t anticipate every possible fact scenario when they pass a law, so it lay to the courts to interpret the law and give guidance to what it means. This interpretation is called case law. When the court decides a certain meeting to the law it essentially answers a legal question. Lawyers and other courts then can rely on that ruling when they have a similar issue in their case. The following case answers the question above.

Whitehead v. Lakeside Hospital Association, 844 S.W.2d 475 (Mo. Ct. App. 1993).

This case addresses the following issue:

Can an insurer refuse to pay a settlement that was entered into by the insured while coverage for that claim was being denied?

Normally, an insurer has control over the defense of a claim. Id. at 480. However, when a claim is denied or the claim is being defended under reservation of rights, the insured is the party that directs the defense. Id. In this case, the court decided that the when rights are reserved, an “insured is free to go its own way, and to make a reasonable settlement or compromise without the loss of the right to recover on the policy.” Id. Thus, once the claim had been found to fall within the scope of the insurance agreement, the insurance company was required to pay the agreed upon settlement amount, even though the company itself had not agreed to such a deal. Id.

This matter was a consolidation of three cases, all arising from a medical malpractice suit that had resulted in brain damage to a patient. Id. at 477. The insurer denied the claim, citing the effective date of the policy. Id. The insurer agreed to defend the case under a reservation of rights, which the insured accepted. Id. This led to a second action, whereby the insured attempt to prove the claim was within the coverage period. Id. Ultimately, the insured and the malpractice plaintiff entered into a settlement agreement, where recovery was limited to the policy limits of insurance policy or any claim for a bad-faith claim the insured may have against the insurance company, if the award exceeded the policy limits. Id. at 477-78. This caused the attorneys being provided under rights to withdraw, and the insured hiring its own attorneys. Id. at 478. The matter ultimately resulted in a huge verdict and the malpractice plaintiff brought a third suit against the insurance company for bad-faith denial of defense. Id. The court joined all three matter because they largely dealt with the same issue: was the claim covered? Id.

The court left the matter of coverage open, because it was better decided by a trial court, after hearing evidence of the matter. Id. at 479. However, it did decide the issue of what obligation the insurance company would have pursuant to the terms of the settlement. Id. The court noted that “an insurer may not reserve the right to disclaim coverage and at the same time insist upon controlling the defense.” Id. at 480. Thus, the insured was well within its rights to enter into the terms of the agreement regarding its claim. Id.

The court noted that refusal to defend based on the interpretation of the policy “is attended with risk” and—even when it is an honest mistake—the insurer is liable for all resulting damages: it breached the insurance contract. Id. at 481. Here, the insurance company took a risk when it decided that the claim would be defended under a reservation of rights. Id. It took another risk by not requesting a stay of the underlying suit while the issue of coverage was being litigated. Id. These risks may or may not ultimately be costly, but the terms of the agreement made by the insured is binding upon the insurance company. Id.