When engaging in settlement negotiations for a third-party claim where a verdict could exceed the relevant policy limit, insurers in West Virginia must be aware of becoming Shamblinized. This term refers to situations where an insurance company refuses an offer to settle within the policy limit and then loses at trial, resulting in a verdict that requires the insured to pay damages out of pocket. A carrier might be held liable for the amount a judgment exceeds the applicable coverage if the insurer cannot demonstrate the soundness of its decision to litigate the case.
The decision in Shamblin v. Nationwide Mut. Ins. Co., 183 W.Va. 585 (1990) places the legal burden on insurance companies to provide evidence that their actions were reasonably prudent. To determine if a carrier abided by its duty of good faith and fair dealing, courts can look at various factors, including:
- Appropriateness of the investigation — Shamblin may apply if an insurer rejects a settlement that puts its policyholder’s funds at risk, unless it shows that an appropriate investigation occurred and that an objective review supports the decision to go to trial.
- Whether a substantial liability issue existed — Though one can never be sure of a trial verdict, insurance companies may be Shamblinized if an insured’s money is placed at risk in hopes that a surprise decision finds that no or lesser liability exists.
- Amount of the potential personal liability — In some instances, even if there is a possibility of success in court, the potential amount of personal liability supports settling a case within the policy limit.
An insurer that refuses a settlement within the coverage limit and does not meet the standard necessary to support its decision could face a loss that exceeds the amount contemplated in the policy.
It’s important to remember that the Shamblin decision is designed to protect policyholders. If a plaintiff agrees not to seek a remedy personally against the defendant, that plaintiff cannot collect damages over the coverage maximum from the insurer, regardless of how the case was handled.
Whether you’re facing a Shamblin claim or need advice on how to avoid one, the experienced insurance defense attorneys at Pullin, Fowler, Flanagan, Brown & Poe, PLLC handle a full range of cases in West Virginia, Ohio and Kentucky. To schedule a consultation, call 304-344-0100 or contact us online.