10th Circuit Court Endorses Creative End-Around Response to Bad Faith Threat

10^th Circuit Endorses Creative End-Around Response to Bad Faith Threat
Prepared by Jim Pattillo 
March 24, 2020

James L. Pattillo

The 10^th Circuit sided with Evanston Insurance Company in its effort to obtain reimbursement from its insured for a case the insured demanded be settled at mediation in Evanston Insurance Company v. Aminokit Labs., Inc., No. 19-1065, 2020 U.S. App. LEXIS 8571 (10th Cir. Mar. 18, 2020).  The insured Aminokit Labs informed Evanston in its application that it did not perform any in-patient treatment. However, the insured was sued for acts that occurred during inpatient treatment by one of its patients.

Evanston ultimately agreed to defend under a reservation of rights and then filed a declaratory judgment action.  Subsequent to a demand from the insured, Evanston agreed to pay the entire settlement achieved at mediation, ostensibly in the face of a threat that it may face a bad faith suit for failing to do so.  While the declaratory judgment action was still pending, Evanston added claims for unjust enrichment, fraudulent misrepresentation, and fraudulent concealment. Judgment was entered against the insured, which then appealed to the 10^th Circuit.

The 10^th Circuit sided with Evanston holding that it would have been unreasonable to subject itself to a bad faith claim by refusing to pay the settlement when the coverage was obtained by a misrepresentation in the application.  In doing so, it endorsed the ability of an insurer to avoid bad faith by paying a settlement but not give up its ability to pursue its claim for misrepresentation. However, the Court did not address Evanston's ability to actually collect its judgment from the insured which could prove to be problematic in other similar situations.

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