Tidyman's Management Services Inc. v. National Union Fire Insurance , 384 Mont. 335 ( 2016 )

JUSTICE SHEA,

concurring in part and dissenting in part.

¶27 I concur with the Court’s disposition of Issues 2 and 3.1 also agree with the standard the Court establishes for assessing the reasonableness of a stipulated settlement when there has been a breach of the duty to defend. Opinion, ¶ 15. However, I agree with Justice Wheat’s observation that the standard the Court articulates here is only a slight degree of separation from the standard applied by the District Court in the first reasonableness hearing. I also disagree with the Court’s conclusion that the District Court failed to consider the challenges to reasonableness raised by NUFI and highlighted in our opinion in Tidyman’s I. Therefore, I dissent from the Court’s conclusion on Issue 1 that this case should be remanded for a second reasonableness hearing.

¶28 The Court begins its analysis of Issue 1 by noting that in Tidyman’s I we concluded that “further consideration is necessary to determine whether the 29 million dollar stipulated settlement is reasonable, in light of the questions NUFI has raised.” Opinion, f 10 (quoting Tidyman’s I, ¶ 44). The Court then states that “[i]nstead of considering the challenges to reasonableness raised by NUFI and highlighted in our opinion in Tidyman’s I, the District Court based its conclusion that the settlement was reasonable on its assessment that ‘[t]he materials relied up[on] by Plaintiffs and Maxwell and Davis possess sufficient indicia of reliability.’ ” Opinion, ¶ 12. In fact, the District Court specifically noted its obligation to consider the reasonableness of the stipulated settlement in light of the challenges raised by NUFI and highlighted in Tidyman’s I, 4th Judicial Dist. Ct., Or., p. 4 (May 12, 2015) (hereinafter, “Order”), and addressed those challenges in Findings of Fact 89 through 92, Order, pp. 39-42. I believe the Court’s characterization of the District Court’s reasonableness assessment gives short shrift to the work the District Court did in the first reasonableness hearing.

¶29 To the extent that the Court suggests that the standard applied by the District Court in the first reasonableness hearing was deficient as compared to the standard the Court articulates in this Opinion, I submit the differences are, at most, semantic. In the first reasonableness hearing, the District Court applied the following standard for assessing the reasonableness of the settlement amount:

To determine whether the stipulated settlement is within the range of reasonableness, the Court has considered reasonableness from the perspective of the insured at the time of the stipulation, whether the information relied upon possessed sufficient indicia of reliability and whether the damages represented might naturally have been expected to result from the breach of the duty to defend.

Order, p. 7. The Court criticizes this standard as “subjective” and instructs the District Court to employ the following standard when conducting yet another reasonableness hearing on remand:

[I]n assessing the reasonableness of a stipulated settlement when there has been a breach of the insurer’s duty to defend, a district court should obj ectively 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.

Opinion, ¶ 15. A comparison of the two standards, however, evinces little, if any, substantive difference.

¶30 Broken down to its discrete elements, the reasonableness standard the District Court applied in the first reasonableness hearing has three parts: (1) consider reasonableness from the perspective of the insured at the time of the stipulation; (2) assess whether the information relied upon in arriving at the stipulated settlement amount possessed sufficient indicia of reliability; and (3) determine whether the damages represented might naturally have been expected to result from the breach of the duty to defend. So how do these elements compare to the standard the Court instructs the District Court to apply in the second reasonableness hearing?

¶31 First, if considering reasonableness from the perspective of the insured at the time of the stipulation is a subjective standard, I fail to see how it is any more subjective than determining reasonableness by considering “the value to a prudent uninsured defendant of confessing judgment in exchange for a covenant not to execute,” which is what the Court instructs the District Court to do in the second reasonableness hearing. The perspective that the District Court considered in the first reasonableness hearing was Maxwell and Davis’s perspective as defendants who were left without “the benefit of insurance coverage” due to NUFI’s breach, a factor this Court says is an appropriate consideration, Opinion, ¶ 15. The District Court considered Maxwell and Davis’s perspective “at the time of the stipulation,” because that is the time when, to borrow the language the Court uses in the new standard, Maxwell and Davis “confess[ed] judgment in exchange for a covenant not to execute.” I view these elements as substantively the same.

¶32 Second, the District Court considered whether the information relied upon in arriving at the stipulated settlement possessed “sufficient indicia of reliability.” Again, I view this as substantively the same as the Court’s directive that the District Court should “objectively consider ... the merits of the underlying case.” The information relied upon by the parties in arriving at the stipulated settlement included the merits of the underlying case, at least as those merits had been developed by the time Maxwell and Davis “confess[ed] judgment in exchange for a covenant not to execute.” In that regard, it should be borne in mind that among the “benefit[s] of insurance coverage” that Maxwell and Davis were denied because of NUFI’s breach was the provision of defense costs necessary to develop the merits of the underlying case. Since NUFI’s breach deprived Maxwell and Davis of the means and wherewithal to develop the merits of their defense, they had to play the cards they were dealt. Nevertheless, the District Court recognized that it would be unreasonable to allow Maxwell and Davis to just sign off on any amount in exchange for a covenant not to execute. This is why the District Court objectively evaluated the information upon which the settlement was based to confirm that it “possessed sufficient indicia of reliability.”

¶33 Finally, the District Court assessed “whether the damages represented might naturally have been expected to result from the breach of the duty to defend.” By incorporating this element into its reasonableness analysis, the District Court was merely incorporating the well-established principle that when an insurer breaches the duty to defend, it is liable for all damages flowing from the breach, including consequential damages, which we have defined as damages “such as might naturally be expected to result from” the breach. Freyer, ¶ 42 (quoting Mont. Petroleum Tank Release Comp. Bd. v. Crumleys, Inc., 2008 MT 2, ¶ 64, 341 Mont. 33, 174 P.3d 948). This third element does not have a corollary requirement in the standard the Court instructs the District Court to use in the second reasonableness hearing. I would submit, therefore, that the District Court’s incorporation of a consequential damages element if anything made the District Court’s reasonableness standard more demanding than the standard it is now instructed to use in the second reasonableness hearing. Therefore, I cannot see how this provides a basis for reversal.

¶34 After this matter was remanded the first time, the District Court followed our instructions and allowed additional discovery, conducted a three day reasonableness hearing, and then issued a thorough Order in which it answered the questions that were set forth in Tidyman’s I. Now, the Court remands for a second reasonableness hearing with instructions to apply a standard I find to be either substantively the same as, or less stringent than, the standard the District Court applied during the first reasonableness hearing. Therefore I dissent as to the Court’s resolution of Issue 1. I concur with the Court’s resolution of Issues 2 and 3.