Not enough slices of the pie: Handling multiple claims and insufficient policy limits

Insurers often face the difficult scenario of multiple claims by third-parties under the same policy. In these situations, the reality is that no matter how many claims are settled, the available policy limits may be insufficient to satisfy all claims. It is important for insurers to be well versed in the relevant jurisdiction’s approach to settling multiple claims when there are insufficient limits to protect from potential bad faith exposure.  

Courts in jurisdictions around the United States have applied different standards to evaluate whether and how an insurer may settle multiple claims with available policy limits. An insurer should evaluate which state law applies before taking any settlement action. California, for instance, has held that an insurer could be liable for bad faith if it exhausts its policy limits through settlement for one insured, thereby leaving other insureds without coverage for pending claims arising from the same loss.^[1] 

The most common approach taken by states, including New York and New Jersey, allows the insurer to settle any or all claims on a first-come-first-served basis, even if those settlement exhaust the policy limits, provided the insurer acted reasonably and in good faith.^[2] This is often referred to as the “first to settle” approach.^[3] This approach finds support in the jurisdictions’ strong public policies in favor of settlement, as it encourages insurers to accept reasonable settlement offers in the early stage of litigation.    

A few jurisdictions, such as Oklahoma, apply an approach which allows an insurer handling multiple claims to distribute the insurance proceeds to judgment creditors in the order in which they obtained their judgments.^[4] This minority approach, often referred to as the “first to judgment rule,” could be considered contrary to public policy in favor of settlement to the extent that it may encourage a race to verdict.    

Still other states, like Washington and Wisconsin, have applied the “pro rata rule” in circumstances where several claims are joined in one suit or when multiple claimants obtain judgments in different actions against the insured.^[5] The “pro rata rule” requires the insufficient policy limits to be distributed on a pro rata basis in accordance with the amount of damages suffered by each claimant. Some states have found that an insurer’s commencement of an interpleader action requires the equitable pro rata distribution of the policy limits, even if one of the claimants was first to judgment.^[6]  In Allstate Ins. Co. v. Ostensen, the Washington Supreme Court noted that where multiple claims arising from one accident are asserted in one suit or after an interpleader action has been filed, the policy limits are to be distributed based on the parties’ pro rata share of damages.^[7]   

The states that permit an insurer to enter into a settlement that exhausts policy limits despite the existence of other claims have consistently required that the insurer act reasonably and in good faith. What constitutes “good faith” in these circumstances depends on the particular facts of the claim. However, examples of bad faith claims handling and settlement serve as a cautionary tale. Insurers should beware of precipitously entering into a settlement without a proper investigation. The Louisiana Supreme Court has noted that “[a]n insurer who hastily enters a questionable settlement simply to avoid further defense obligations under the policy is not acting in good faith and may be held liable for damages caused to its insured.”^[8] Courts have found bad faith where the insurer fails to independently investigate the potential value of a claim in relation to the other pending claims, and deviates from generally accepted claims-handling practices.^[9]  

The insurer should also strive to keep the insured abreast of settlement offers and meaningful developments. The Florida Supreme Court set forth that the insurer’s good faith duty “obligates the insurer to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn the possibility of an excess judgment, and to advise the insured of any steps he might take to avoid same.”^[10]  Applying a similar standard, the United States District Court for the Western District of Missouri rejected an insured’s claim that his insurer breached its fiduciary duty by failing to advise him of a settlement demand from one of multiple claimants.^[11]  The Western District of Missouri held that no reasonable jury could have found the insurer breached its duty to inform the insured because it sent the insured a copy of the claimant’s demand letter and several letters about the claim, the potential excess exposure, coverage issues under the policy, the right to retain personal counsel, and an invitation to reach out to the adjuster assigned to the claims.^[12] 

Comment

When faced with multiple claims and insufficient policy limits, insurers should consider taking precautions to minimize their potential bad faith exposure. Those actions include: (1) assessing the applicable state law’s approach; (2) investigating the liability and valuation of each claim; (3) evaluating the policy language governing the insurer’s right to settle and obligations upon exhaustion; (4) keeping the insured timely informed of the potentially insufficient limits, status of claims, and any settlement offers or demands; (5) communicating with counsel about reasonable settlement values; and (6) carefully documenting settlement evaluations, offers and demands, both internally and externally. The insurer should take into account whether its actions could be found contrary to the interests of its insured. While every situation will depend on the particular facts, the policy language, and the applicable state law, these recommended practices can help an insurer manage multiple claims and insufficient limits in a reasonable and good faith manner and avoid or limit the possibility of bad faith claims.

 

[1]  Strauss v. Farmers Ins. Exch., 26 Cal. App. 4th 1017 (Cal. Dist. Ct. App. 1994).

[2]  See, e.g., Liguori v. Allstate Ins. Co., 184 A.2d 12 (N.J. Super. Ct. Ch. Div. 1962); World Trade Ctr. Props. LLC v. Certain Underwriters at Lloyd’s London, 650 F.3d 145, 153 (2d Cir. 2011) (New York law); Vaccio v. Reliance Ins. Cos., 702 F.2d 1 (1st Cir. 1983); Hartford Cas. Ins. Co. v. Dodd, 416 F. Supp. 1216 (D. Md. 1976); Millers Mut. Ins. Ass’n of Ill. v. Shell Oil Co., 959 S.W.2d 864 (Mo. Ct. App. 1997); Allstate Ins. Co. v. Evans, 409 S.E.2d 273 (Ga. 1991): Carter v. State Farm Mut. Auto., 33 S.W.3d 369 (Tx. Ct. App. 2000); Maguire v. Ohio Cas. Ins. Co., 602 A.2d 893 (Pa. Sup. Ct. 1992); Combetta v. Ordoyne, 934 So. 2d 836 (La. Ct. App. 2006), State Farm Mut. Ins. Co. v. Murphy, 348 N.E.2d 491 (Ill. Ct. App. 1976); Castoreno v. Western Indem. Co., 515 P. 2d 789 (Kan. 1973), Cont’l Cas. Ins. Co. v. Peckham, 895 F.2d 830, 835 (1st Cir. 1990) (Massachusetts law); Voccio v. Reliance Ins. Co., 703 F.2d 1 (1st Cir. 1983); Ellicot Co. v. Liberty Mut. Ins. Co., 434 F. Supp. 2d 483, 499 (N.D. Ohio 2006); Stryker Corp. v. XL Ins. Am., Inc., No. 1:17-cv-66, 2018 U.S. Dist. LEXIS 140216 (W.D. Mich. Aug. 17, 2018); Harmon v. State Farm Mut. Auto. Ins. Co., 232 So.2d 206 (Fla. Dist. Ct. App. 1970). 

[3]  See Exec. Risk Specialty Ins. Co. v. Rutter Hobbs & Davidoff, Inc., No. 11-4828-GAF (FFMx), 2012 U.S. Dist. LEXIS 193007 (C.D. Cal. Sept. 12, 2012) (refraining from applying the rule but using the “first to settle” nomenclature); see also Cruz v. Covert, No. 09-4802, 2013 N.Y. Misc. LEXIS 1739 (N.Y. Sup. Ct. Apr. 15, 2013) (applying the rule and referring to it as the “first to settle” approach). 

[4]  Burchfield v. Bevans, 242 F.2d 239 (Okla. 1957); Scharnitzki v. Bienenfeld, 368 Pa. Super. 610, 614-15 (Pa. Sup. Ct. 1987). 

[5]  Wondrowitz v. Wisconsin Physicians Serv. Ins. Corp., 132 Wis. 2d 251 (Wis. Ct. App. 1986); Allstate Ins. Co. v. Ostensen, 713 P.2d 733 (Wash. 1986); Augustine v. Simonson, 940 P.2d 116 (Mont. 1997); State Farm Mut. Auto Ins. Co. v. Sampson, 324 So. 2d 739 (Miss. 1975).

[6]  Moore v. McDowell, 54 Mich. App. 657, 662-63 (Mich. Ct. App. 1974); Sheehan v. Liberty Mut. Fire Ins. Co., 288 Ala. 137, 144 (Ala. 1972).

[7] 713 P.2d 733 (Wash. 1986).

[8]  Pareti v. Sentry Indem. Co., 536 So. 2d 417, 423 (La. 1998). 

[9]  Singh v. Zurich Am. Ins. Co., 428 P.3d 1237, 1245 (Wash. Ct. App. 2018).  

[10]  Boston Old Colony v. Gutierrez, 396 So. 2d 783, 785 (Fla. 1980). 

[11]  Purschell v. TICO Ins. Co., 959 F. Supp. 2d 1195, 1203-04 (W.D. Mo. 2013).

[12]  Id. at 1204.