UNITED STATES
Claims Journal
By Steven Plitt | April 16, 2014
Some courts have adopted the so-called “potential liability standard” in determining whether an insurance company is obligated to indemnify the insured for a settled claim. As an example, the Second Circuit Court of Appeals in Luria Bros. & Co. v. Alliance Assur. Co., 780 F.2d 1082, 1091 (2nd Cir. 1986) explained the potential liability standard as follows:
In order to recover the amount of the settlement from the insurer, the insured need not establish actual liability to the party with whom it has “settled so long as … a potential liability on the facts known to the [insured is] shown to exist, culminating in a settlement in an amount reasonable in view of the size of possible recovery and degree of probability of claimants success against the [insured].”
Under the potential liability standard, “[i]f an insured settles an underlying claim prior to verdict, it must show that it settled an otherwise covered loss in ‘reasonable anticipation of liability.’” Federal Ins. Co. v. Binney & Smith, Inc., 393 Ill.App.3d 277, 332 Ill.Dec. 448, 913 N.E.2d 43, 48 (2009); Hyatt Corp. v. Occidental Fire & Cas. Co. of North Carolina, 801 S.W.2d 382, 388 (Mo. App. W.D. 1990).
Without finding that Missouri jurisprudence adopted the potential liability standard for settlement indemnification, the Eighth Circuit U.S. Court of Appeals, recently used that analysis to reject an insured’s claim for indemnification. In Chicago Ins. Co. v. Archdiocese of St. Louis, 740 F.3d 1197 (8th Cir. 2014), a secondary excess liability insurer brought a declaratory judgment action against the St. Louis Archdiocese of the Roman Catholic Church, seeking a judicial declaration that its policy did not cover a settlement paid to a family of an alleged victim of sexual abuse perpetrated by one of the Diocese’s priests. The District Court had granted the insurer’s motion for summary judgment against the Arch Diocese, which was affirmed by the Eighth Circuit Court of Appeals.
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