Consent to Settle Clauses and Bad Faith

April 10, 2006

The Supreme Court recently issued American Physicians Assurance Corp. v. Schmidt, published, which dealt with the issue of “consent to settle” clauses in medical malpractice liability policies. Dr. Tabler treated the wife of Schmidt. He prescribed two psychotropic medications. Ms. Schmidt had a history of blood abnormalities and developed aplastic anemia, a fatal blood disease. She died. Schmidt claimed that the ingestion of the medicine caused the anemia. Dr. Tabler was covered by a medical malpractice liability policy with limits of one million dollars per occurrence. A trial was held and the jury awarded a verdict in excess of the limits. Schmidt had offered to settle the claim for the limits prior to trial but it was not accepted by the company nor was a counteroffer made.

The policy contained a “consent to settle” clause which required the consent of the insured before any settlement. The insurance company claimed it did not settle due to lack of consent by Dr. Tabler. After judgment, Tabler negotiated a settlement for 1.2 million dollars and demanded that the insurance company pay. Instead, the insurance company paid its limits plus interest. Tabler then assigned any claim for bad faith to Schmidt. The “bad faith” case was also tried. Tabler denied withholding his consent. He also denied that he was made aware of the ramifications of potential excess exposure. However, on cross examination, he admitted at least nine circumstances, which tended to show otherwise. Tabler’s malpractice attorneys also testified that Tabler was advised of the consequences but did not want to settle. The jury determined that Tabler had withheld his consent to settle.

The Court of Appeals reversed and remanded for a new trial citing Dr. Tabler’s direct testimony, but completely disregarding the testimony on cross examination. It also held that the jury should be able to consider whether the insurance company’s failure to settle post verdict amounted to “bad faith.”

The Supreme Court reversed the Court of Appeals and reinstated the jury verdict, holding that there was ample evidence to support the jury’s verdict and that the Court of Appeals had usurped the jury’s authority on this issue. The Court noted that here the plaintiff was willing to settle for the policy limits but the insured withheld consent, denying the opportunity to settle. As for the excess judgment, since the excess judgment was not the result of any “bad faith” on the part of the company, the company was not required to pay any portion that exceeded its limits, and ipso facto its refusal to pay that portion can not form the basis of a separate bad faith claim.

The case highlights the problems with “consent to settle” clauses so prevalent in medical malpractice policies and physician concerns that settlements will be reported to the National Practitioners Data Bank as grounds for withholding consent. What’s interesting about this case is not the handling by the trial court (which got it right on all counts) or even the ruling by the Supreme Court, but the holding by the Court of Appeals. A review of the Court of Appeals opinion, unpublished, shows that the Court looked solely at the conduct of the insurance company after the verdict in refusing to pay the excess amount. The Court found this to be bad faith, especially in light of Dr. Tabler’s testimony. As the Supreme Court noted, its the underlying conduct that results in the excess judgment that forms the basis of a claim for bad faith, not the refusal to pay any excess judgment once it is incurred. Because the failure to settle resulted from the insured’s refusal to consent and not any action by the insurance company, it could not be bad faith.

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