Insurance Law What’s an Insurer to Do?

By Jonathan M. Stern Multiple Competing claims for insurance-funded Claims settlements are likely to be made with threats and of bad faith to come. Insufficient Limits A single occurrence causes multiple bodily injuries, multiple instances of property damage, or both. Numer- ous claims are made, liability is reasonably clear, and the fair value of these claims far exceeds the available insurance limits of liability. What’s an offer of settlement within the available insurer to do? policy limits.”), insurers are likely to be Given the wide recognition of an action confronted with a damned if you don’t, for bad faith failure to settle (e.g., Voccio damned if you do dichotomy. See 2-5A The v. Reliance Ins. Cos., 703 F.2d 1, 2 (1st Cir. Law of Liability Insurance §5A.13 (Mat- 1983) (“Most ‘bad faith’ cases involve an thew Bender & Co. 2009) (describing it insurance company’s refusal to accept an as a “perplexing dilemma” and discuss-

n Jonathan M. Stern co-chairs Schnader Harrison Segal & Lewis LLP’s aviation group and is an active member of the firm’s insurance services and appellate groups. He is based in Washington, D.C. Mr. Stern is a member of the District of Colum- bia, Maryland, Pennsylvania, and Virginia bars and is a former chair of DRI’s Aerospace Law Committee. Mr. Stern wishes to acknowledge the assistance of Sharon M. Holahan, Senior Vice President and Deputy Director of National Accounts Claims of Global Aerospace, Inc., of Short Hills, New Jersey, in the development of the material for this article.

18 n For The Defense n September 2009 ing various approaches to the Under Florida law, for example, an 881 S.W.2d 312 (Tex. 1994), ruled that the problem). Many states’ unfair insurer has three obligations in this sce- insurer was not liable for the excess judg- claims settlement practices nario. Farinas v. Florida Farm Bureau Gen. ment, it framed the question and answer laws prohibit insurers from Ins. Co., 850 So. 2d 555 (Fla. Dist. Ct. App. with respect to evidence of bad faith, not a “[n]ot attempting in good 4th Dist. 2003), reh’g and reh’g en banc hard-and-fast rule: faith to effectuate prompt, denied and question certified (Jul. 9, 2003), The issue in this case is whether there fair and equitable settlements rev. denied, 871 So. 2d 872 (Fla. 2004). First, is any evidence that the Texas Farmers of claims in which liability the insurer is required to “fully investigate Insurance Company was negligent or has become reasonably clear.” all the claims at hand to determine how to breached a duty of good faith and fair Claimants desirous of a quick best limit the insured’s liability.” 850 So. dealing in failing to settle certain claims settlement (and they are more 2d at 560. An insurer does have some “dis- against its insured, Richard Soriano. We likely to be when available cretion in how it elects to settle claims, and hold there is no evidence of negligence insurance limits are insuf- may even choose to settle certain claims to or bad faith. ficient to satisfy all claims) the exclusion of others, provided this deci- Soriano, 881 S.W.2d at 313. It did, however, likely will use short-­deadline sion is reasonable and in keeping with its also rule that, “when faced with a settle- demands to pressure insur- good faith duty.” Id. at 561. Second, the ment demand arising out of multiple claims ers to settle or face bad faith insurer should seek “to settle as many and inadequate proceeds, an insurer may claims for failure to do so. Oth- claims as possible within the policy lim- enter into a reasonable settlement with one ers will insist that it would be its.” Id. at 560; accord Peckham v. Conti- of the several claimants even though such an act of the utmost bad faith, nental Cas. Ins. Co., 895 F.2d 830, 835 (1st settlement exhausts or diminishes the pro- for which a suit would follow, Cir. 1990). Third, the insurer has a “duty ceeds available to satisfy other claims. Such for the insurer to settle any to avoid indiscriminately settling selected an approach, we believe, promotes settle- claims and thereby dimin- claims and leaving the insured at risk of ment of lawsuits and encourages claimants ish the funds available to sat- excess judgments that could have been to make their claims promptly.” Id. at 315 isfy prospective judgments. minimized by wiser settlement practice.” (footnote omitted). The word “reasonable” The result is that the insurer is 850 So. 2d at 560. Whether these duties may be important insofar as an “unreason- whipsawed between compet- have been breached is a jury question. Id. able” settlement that exhausts a policy with ing claimants, all threatening The Farinas court held that it was for a jury other claims unresolved might be held in an endless supply of lawsuits to decide whether the insurer’s failure to Texas to expose the insurer to liability in for bad faith. pursue global and other settlement options excess of policy limits. was in the insured’s best interests, whether Cases recognizing these duties of an The Insurer’s Obligations the insurer’s quick settlement with three insurer typically conclude that there is no Depending on the jurisdiction claimants was reasonable, and whether evidence of bad faith (and thus grant sum- whose law applies, the insurer’s obligations the insurer investigated the facts of all the mary judgment to the insurer) or hold that vary. Most jurisdictions subscribe to the claims. Id. at 561; accord Dadeland Depot, a jury question is presented. One case in view that the insurer may settle fewer than Inc. v. St. Paul Fire & Marine Ins. Co., 483 which the court decided as a matter of law all of the claims regardless of the fact that F.3d 1265 (11th Cir. 2007). Lest one think that the insurer had acted in bad faith and, claims will remain when the insurance pro- that these requirements are of recent con- therefore, that an adverse summary judg- ceeds are exhausted. 4-21 The Law of Lia- coction or limited to Florida, the Second ment for liability in excess of the policy’s bility Insurance §21.02 (Matthew Bender & Circuit, applying New York law, reached limit of liability was warranted is DeMarco Co. 2009); e.g., Miller v. Georgia Interlocal a similar conclusion in 1963 in Brown v. v. Travelers Ins. Co., No. PC 2006-6103, 2008 Risk Management Agency, 501 S.E.2d 589 United States Fidelity & Guaranty Co., 314 R.I. Super. LEXIS 125 (R.I. Super. 2008). (Ga. App. 1998). Most of these courts have F.2d 675 (2d Cir. 1963), and the Fifth Cir- Describing the facts before it as unique, the noted that, in the absence of a claim of bad cuit, applying Florida law, reached a similar court explained: faith, the permissibility of the settlement of conclusion in 1969 in Liberty Mut. Ins. Co. [T]he legal analysis and fact questions one claim leaving another potentially ex- v. Davis, 412 F.2d 475 (5th Cir. 1969). relevant to an insurer’s obligations in cess claim open could not be questioned. Most of the published cases leave open multi-­claimant cases are beside the E.g., State Farm Mut. Auto. Ins. Co. v. Mur- the possibility that exhaustion of a poli- point. It is undisputed that Travelers did phy, 348 N.E.2d 491, 494 (Ill. App. Ct. 2d cy’s limits through one or more settlements not attempt to negotiate any of the claims Dist. 1976); Liguori v. Allstate Ins. Co., 184 entered in bad faith (e.g., with the clear until days before the DeMarco trial was A.2d 12, 16 (N.J. Super. Ch. Div. 1962); Al- purpose of discontinuing the provision of locked on to begin and, instead, refused ford v. Textile Ins. Co., 103 S.E.2d 8, 13 (N.C. defense by paying more than necessary in to consider all of the three claimants’ 1958). Others hold the insurer to a higher order to exhaust limits of liability) could settlement offers, relying on the claim- standard, requiring it to seek to maximize expose the insurer to excess liability. For ants to negotiate their claims vis-à-vis the benefit to the insured for each dollar of example, although the Supreme Court of each other and reach a global settlement insurance money expended in settlement. Texas in Texas Farmers Ins. Co. v. Soriano, within the policy limits. Furthermore,

For The Defense n September 2009 n 19 Insurance Law

Travelers refused to make any uncondi- Barry R. Ostrager and Thomas R. Newman, money is interpleaded, it likely is inacces- tional individual settlements until after Handbook on Insurance Coverage Disputes sible to the insurer (or the insureds) to use the DeMarco claim had been reduced to §5.03[a] (14th ed. 2008). The duty to defend to settle cases. As a result, cases necessar- a judgment, and the insureds’ liability typically does not terminate when the lim- ily would have to proceed to trial and judg- on it and the accumulated interest had its are exhausted by other means, such as ment. In most situations involving multiple attached. It was only then that Travelers interpleader, payment under an “advanced claims and insufficient insurance, inter- settled one of the claims and, therefore, payment program” to the claimants, or pay- pleader does not serve the interests of the questions concerning its use of profes- ment to the insured. See, e.g., Emcasco Ins. insured. The effect would be the same as a sional skill and good faith in selecting Co. v. Davis, 753 F. Supp. 1458, 1461 (W.D. rule precluding any settlement that would which of the multiple claims should be Ark. 1990) (“The insurance carrier’s con- exhaust insurance limits without resolv- settled in order to “relieve its insured of tract does not by its terms permit it to ar- ing all claims, which was described by one so much of his or her potential liability tificially exhaust the limits of liability by court as follows: as is reasonably possible” are extrane- paying them into the registry of the court [A]n insurer would be precluded from ous in the context of the narrow circum- and walking away, leaving the insured with- settling any claims against its insured stances of this case. As far as its strategy out the carrier’s assistance to accomplish all in such a situation and would instead went, Travelers well may have been act- of those things that they rightfully thought be required to await the reduction of all ing within the technical meaning of that they had hired the insurance company claims to judgment before paying any of its policy provisions when it refused to do for them.”); Ostrager §5.03[a]. There- them, no matter how favorable to its in- to consider any settlement offers and fore, it is likely that the duty to defend would sured the terms of a proposed settlement invited DeMarco to prove his damages not terminate upon interpleader of policy might be. Such a policy would obvi- at trial, but it also assumed the conse- limits with a court. See, e.g., Charles Alan ously promote litigation and would also quences of its decision to stand firm on Wright, Arthur R. Miller, and Mary Kay increase the likelihood, in many cases, those rights. Kane, Federal Practice and Procedure: Civil that the insured would be left with a total Id. at *25–26. 3d §1713 (2001). adjudicated liability in excess of his pol- The act of interpleading does, perhaps, icy limits. Interpleader Typically Is prevent anyone from successfully claim- Allstate Ins. Co. v. Evans, 409 S.E.2d 273, 274 Not a Good Answer ing that the insurer was unwilling to pay (Ga. App. 1991); see also DeMarco v. Trav- Many practitioners confronted with the in- the full amount of its coverage. See Mon- elers Ins. Co., No. PC 2006-6103, 2008 R.I. surer’s predicament in this scenario advo- umental Life Ins. Co. v. Lyons-Neder, 140 Super. LEXIS 125, at *9 (R.I. Super. 2008) cate the use of interpleader, a procedure by F. Supp. 2d 1265, 1270 (N.D. Ala. 2001) (describing an insurer’s insistence on try- which the amount of money representing (“Because filing an interpleader action is ing cases rather than settling fewer than all the policy’s limits of liability is deposited equivalent to the plaintiff’s admitting that of them as “trying to squeeze five pounds with a court and the competing claimants it is willing to pay the legitimate claim- of flour into a two-pound sack”). are joined as defendants to present their ant, an interpleading stakeholder cannot In any case, a liability insurer has duties competing claims to the pot. The proto- logically be subjected to a claim alleging of good faith that go beyond paying—or typical interpleader situation is where there bad faith refusal to pay….”); Texas Farm- offering to pay—indemnity. There also are is a fixed amount owed by the insurer but ers Ins. Co. v. Soriano, 844 S.W.2d 808, 833 the duties to defend and the duty to settle. uncertainty as to whom it should be paid (Tex. App. 1992) (concurring op.) (“Even See Soriano, 844 S.W.2d at 843 (Tex. App.) (e.g., a life insurance policy with competing though interpleading of the funds would (dissenting op.; footnote omitted) (“The claimants). While there are cases in which not discharge the carrier of its responsi- majority suggests that the insurer might liability policy limits have successfully been bility to provide a defense and otherwise avoid this Hobson’s choice by interplead- interpleaded, many states limit such prac- remain involved until the disposition of ing its policy limits into court, for distribu- tice. Interpleader in cases of third-party lia- the claims, it would certainly be per se evi- tion by the court. But the majority does not bility insurance proceeds is more likely to dence of good faith intentions and would say that interpleading all the policy limits be successfully invoked in cases of defunct, negate any inference that the carrier was would end the insurer’s liability as a mat- dead, or bankrupt insureds. trying to increase its profits by not pay- ter of law or end the insurer’s duty to pro- One reason that insurers may consider ing the full amount of coverage.”), rev’d on tect its insured’s interest. Even if Farmers interpleading their limits is the belief that other grounds, 881 S.W.2d 312 (Tex. 1994). had interpleaded the $20,000 and the trial doing so will bring their duty to defend to Yet, the same result can be achieved with an court had allowed it, that would not have an end, preclude any chance of being held early offer to pay policy limits to achieve a solved Soriano’s under insurance problem. to have acted in bad faith, or both. While global settlement. Farmers had a duty to try to protect its in- most courts agree that the insurer’s duty More importantly, interpleader argu- sured, not simply to interplead and turn to defend ends upon the exhaustion of pol- ably constitutes an abdication of the insur- things over to the insured.”). The dissent- icy limits, the exhaustion must be in ac- er’s responsibility to prudently manage ing judge explained: cord with the policy terms—typically “by the policy to remove as much exposure Interpleader does not solve th[e] kind payment of judgments or settlements.” E.g., as possible from the insured. Once the of predicament [where there are multi-

20 n For The Defense n September 2009 ple claims and insufficient proceeds]. It on Allstate’s continued good faith repre- the insured’s interests. Yet, what is clear in accomplishes nothing at all unless there sentation of its insureds in the underly- the law is that the insurer must give equal is a settlement or a trial, because the ing lawsuit now in progress.”). And it may consideration to the insured’s interests as claimants are claiming more than the not immunize the insurer from any bad it gives to its own. An argument could, interpleaded funds. Interpleader does faith inherent in its institution of the inter- therefore, be made that the interpleading not settle the various tort cases unless all pleader proceeding. Prudential Ins. Co. of of policy limits places the insurers’ inter- claimants agree on how to distribute the Am. v. Hovis, 553 F.3d 258 (3d Cir. 2009); ests above those of the insured. limited funds. And certainly the court Kelly v. Farmers Ins. Exchange, 194 Cal. That is not to say that there may not could not deny litigants a jury trial and App. 3d 1, 9 (Cal. App. 1st Dist. 1987). come a time where it becomes prudent to parcel out the interpleaded insurance No case we found has held that a liability coverage without a settlement agree- insurer acted in bad faith by interpleading ment. The claimants have a right not its policy limits. To the contrary, the few to take the limited insurance money, cases on this point we have found have held In any case, a liability but instead to take an excess judgment in favor of insurers facing similar claims. against the insured and try to collect it. See Schwartz v. State Farm Fire & Casualty insurer has duties of Unless there is a settlement, interplead- Co., 88 Cal. App. 4th 1329 (Cal. App. 2d Dist. ing the policy limits into court simply 2001), and Lehto v. Allstate Ins. Co., 31 Cal. good faith that go beyond does not change the fact that there would App. 4th 60 (Cal. App. 2d Dist. 1994) (both have to be a trial. The general rule is that holding that an insurer’s interpleader of pol- paying—or offering after such a trial the court should dis- icy limits did not or would not constitute an tribute the limited funds proportionately act of bad faith); Bowers v. State Farm Mut. to pay—indemnity. among the claimants, according to the Auto. Ins. Co., 460 So. 2d 1288, 1290 (Ala. percentage of damages suffered in com- 1984) (uninsured motorist claim) (“[A] parison to the whole.… Nevertheless, bsent some evidence to the contrary, the interplead the policy limits. For example, after such a pro rata distribution, the mere filing of an action of interpleader does if all efforts at settlement are unsuccessful insured would still face several excess not amount to evidence of bad faith dealing and the cases are going to mature to judg- judgments instead of one, as in the pres- on its part. But see Araiza-­Klier v. Teachers ment at about the same time, it may make ent case. An insurer that interpleaded its Ins. & Annuity Ass’n of Am., 2004 Cal. App. sense to interplead the limits to achieve an policy limits in a multiple-­claimant case, Unpub. LEXIS 4381 (April 29, 2004) (hold- equitable distribution. See, e.g., National as the majority recommends, was held ing insurer’s initiation of interpleader ac- Union Fire Ins. Co. v. Coric, 924 F. Supp. 373 liable for an excess judgment in Farmers tion could be one factor establishing the (N.D.N.Y. 1996). Insurance Exchange v. Schropp, 222 Kan. bad faith required to award attorney’s fees 612, 567 P.2d 1359 (Kan. 1977). Inter- under ERISA); Farmers Ins. Exchange v. The Right Answer pleader “merely passes the buck from Schropp, 567 P.2d 1359 (Kan. 1977) (hold- Our view is that insurers should seek to the insurer to the court and provides lit- ing insurer who interpleaded limits liable maximize the insured’s bang for the set- tle protection for the insured.” for excess judgment but not tying the lia- tlement buck but that the insurer should be Soriano, 844 S.W.2d at 843 (dissenting bility to the decision to interplead). protected from liability under something opinion). Our belief that interpleading in this sce- in the nature of the business judgment rule The act of interpleading the policy lim- nario could bring a viable bad faith claim is that applies to corporate directors. See, e.g., its may not provide any real benefit to the based on logic and anecdote. Anecdotally, Peckham v. Continental Cas. Ins. Co., 895 insurers. It probably will not immunize we hear of insureds suing their insurers F.2d 830, 835 (1st Cir. 1990) (“So long as it insurers from any bad faith that exists for interpleading funds that could other- acts in good faith, the insurer is not held to before the money is interpleaded. See Men- wise be used to reduce potential liabilities standards of omniscience or perfection; it dez v. Teachers Ins. & Annuity Ass’n & Col- at a discount. From a logical perspective, has leeway to use, and should consistently lege Retirement Equities Fund, 982 F.2d 783 the decision to interplead would be for the employ, its honest business judgment.”); (2d Cir. 1992) (holding insurer liable for insurers’ benefit. There is no real bene- Liberty Mut. Ins. Co. v. Davis, 412 F.2d 475, bad faith for delaying the filing of the inter- fit to the insured when the insurer inter- 481 (5th Cir. 1969) (“Considerable leeway, pleader). It also may not preclude a finding pleads the policy limits. The insureds have of course, must be made for the insurer’s of bad faith subsequent to the interpleader. no interest in who gets the insurance pro- honest business judgment, short of mis- See, e.g., Allstate Ins. Co. v. Johnson, 1993 ceeds if their total liability is not thereby management tantamount to bad faith.”). U.S. Dist. LEXIS 8740 (E.D. Pa. 1993) (“All- reduced. Because the insured’s total lia- Thus, an insurer that has demonstrated state asks the court to declare that its lia- bility could be reduced by entering into its willingness to pay its full limits of lia- bility to indemnify its insured is limited to prudent settlements of some of the claims, bility to resolve claims against one or more the amount of coverage under the applica- the interpleader—which likely will pre- insureds should not be second-guessed ble automobile insurance policy. The court vent subsequent settlements that do not for the exercise of its judgment in settling cannot do that, because it depends in part resolve all claims—may be a detriment to claims. In such a case, there should be a

For The Defense n September 2009 n 21 Insurance Law presumption that the insurer acted on an for example, should be evaluated no differ- for the insurer to offer control to the informed basis, in good faith, and in the ently from claims with $1 billion in coverage insureds if and only if they can reach honest belief that the action taken was in (except perhaps that insurers should err on unanimous agreement on what to do the best interests of the insureds. Extra-­ the side of caution with the smaller policies with the money. Moreover, the insureds contractual liability should be reserved for given the greater difficulty they may have in may refuse to take control of the money cases in which the insured proves that the proving they acted disinterestedly). for settlement. insurer was grossly negligent or acted with The law with respect to how an insurer 5. If control of the policy limits is not actual bad faith in discharging its duties to should handle the multiple claim excess turned over to the insureds, the insurer its insured. exposure scenario is not well developed should solicit their input on how to han- in most jurisdictions. A synthesis of the dle settlement opportunities. If the input case law suggests that the insurer should received is not followed, the insurer must exercise good judgment to best protect the be prepared to articulate reasons for fol- Insurers should seek to insured’s assets, what we described above lowing a different course of action. as getting the most bang for the buck. The 6. The insurer should not unfairly favor maximize the insured’s bang following steps can be prudent ones to take one insured over another. In most juris- to act in, and to make a record that the dictions, an omnibus insured will have for the settlement buck insurer is acting in, “good faith”: as much right to protection as a named 1. The insurer should keep the insureds insured. This can become an issue if but… the insurer should be informed about the case(s) and about there are separate suits against sepa- all settlement opportunities. A common rate insureds and they are not settled as protected from liability under complaint in bad faith litigation is that a group. If there are good justifications the insurer failed to apprise the insured for such settlements, the reasons should something in the nature of of settlement opportunities. be documented. 2. The insurer should gather the informa- 7. The insurer should engage separate coun- the business judgment rule. tion necessary to make informed deci- sel to advise it. In addition to helping sions respecting settlement. This can sort out the law and determining what include obtaining case evaluations from is required based on the involved juris- The insured, obviously, is best protected defense counsel or from a third party dictions, an advice of counsel defense if all of the claims can be settled within the and obtaining defense counsel reports may—in some cases—be appropriate. limits of liability of the policy. Therefore, on the defensibility of the case and the 8. The insurer should carefully consider before resorting to individual settlements, likelihood of an adverse judgment. the advisability or inadvisability of the insurer should engage the claimants in 3. The insurer should seek a global settle- interpleader. an effort to achieve a global settlement. The ment where the available limits of lia- 9. The insurer should document every- First Circuit in Voccio v. Reliance Ins. Cos., bility are used to settle all of the claims. thing. This should include the convey- 703 F.2d 1 (1st Cir. 1983), found the fact This can be accomplished through indi- ance of information to the insureds, that “the carrier met together with coun- vidual negotiations or by advising the confirmation of input received, and rea- sel for both [claimants] and sought sug- claimants that the insurer is prepared to sons for the approach ultimately fol- gestions on how to divide the money” was pay its limits if the claimants can agree lowed. Memories fade quickly and evidence of the insurer’s good faith. Id. at 3. on a division of those limits to settle all memos to the file should be used gen- The effort to assemble a global settlement is of the claims. erously in cases of this type. At the end widely supported in the case law. See, e.g., 4. If the insurer is prepared to pay its lim- of the day, the most important thing for Kinder v. Western Pioneer Ins. Co., 231 Cal. its to settle the cases and a global settle- the insurer will be the ability to convinc- App. 2d 894, 902 (1965); Bartlett v. Travel- ment proves unattainable, it can offer ingly articulate a reasoned basis for each ers Ins. Co., 167 A. 180, 184 (Conn. 1933). If the insured control of the available lim- step along the way. this effort proves unsuccessful, the insurer its to settle cases as it deems fit. This must resort to “Plan B.” can transfer the responsibility for exer- Conclusion While the law varies from state to state, the cising good judgment to the insured, The multiple claims and insufficient limits general rule is that the insurer must assess which presumably will seek to mini- scenario is a difficult one for the insurer. settlement opportunities as though it alone mize its uninsured loss. This approach Competing claims for insurance-­funded would be responsible for any judgment irre- would provide clear evidence that no settlements are likely to be made with spective of its limits of liability. E.g., Brown attempt was made to place the insur- threats of bad faith claims to come. The v. United States Fidelity & Guaranty Co., 314 ers’ interests ahead of the insureds. The insurer is sure to be pushed and pulled in F.2d 675, 678 (2d Cir. 1963). This approach, approach, however, is complicated when all directions. But there are logical steps to then, requires the insurer to act in good faith there are multiple insureds, whether as take to best protect the insureds and, at the for the protection of its insured’s assets. named insureds or omnibus insureds. same time, avoid—or be well-­positioned to Claims with $100,000 of available coverage, In such a case, the approach may be defend—claims of bad faith.

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