FEATURE ARTICLE
Interpleader of Multiple Claimants, a Single Insured at Fault, All from the Same Occurrence: a Proposed Solutionwith its Own Problems 597
by Dennis J. Wall, Esquire
CASES
Agents & Brokers
American Building Supply Corp. v. Petrocelli Group, Inc
(N.Y.) 601
Failure to read policy not a bar to suing broker for failing to procure the correct coverage
Prest v. Louisiana Citizens Property Ins. Corp. (La.) 602 Insurance agents who attempt to procure insurance coverage for their clients must follow up with the insurance company to make sure the insurance company received the purchase request
ERISA/Disability Insurance
Raybourne v. Cigna Life Ins. Co. of New York (7th Cir.) 604
Seventh Circuit finds that plan administrator’s structural conflict of interest led to arbitrary and capricious denial of benefits
Assignments
In re Wehr Constructors, Inc. v. Assurance Company of
America (Ky.) 606
Kentucky public policy precludes insurer from invoking “builder’s risk” policy’s
anti-assignment clause to deny coverage for pre-assignment loss
Liability Insurance/Collateral Estoppel
Manganella v. Evanston Ins. Co. (1st Cir. [Mass.]) 608 First Circuit: Arbitration ruling was binding on later coverage suit
Liability Insurance/Construction Defects
Harleysville Mutual Ins. Co. v. State (S.C.) 609 South Carolina Supreme Court declares retroactive application of statute requiring liability insurance coverage for injury or damage caused by construction defects unconstitutional
Liability Insurance/Environmental Claims
Nucor Corp. v. Employers Insurance Co. of Wausau
(Ariz. App.) 612
Liability policies do not cover “stigma” of underground contamination plume that does not cause damage property; administrative order triggers insurer’s duty to defend
Interpleader of Multiple Claimants, a Single Insured at Fault, All from the
Same Occurrence: a Proposed Solution with its Own Problems
by
Dennis J. Wall, Esquire
Dennis Wall is a sole practitioner with a unique practice. For thirty-four (34) years, his expertise and knowledge in Insurance Coverage and Bad Faith have led attorneys and companies across the United States to retain his services as an Expert Witness, Counsel and Consultant concerning Insurance Questions. Elected to the American Law Institute in 2009, he is selected by his peers as a Florida Super Lawyer in “Insurance Coverage”. Dennis Wall is the author of the leading book on Bad Faith, “Litigation and Prevention of Insurer Bad Faith” (West Publishing Company Third Edition 2011; 2012 Supplement in process). This Book is the product of three decades of research and analysis. Updated annually, to date DENNIS WALL evaluates 4,000 cases, statutes and other authorities in two Volumes, in print and Online. The Third Edition of “Litigation and Prevention of Insurer Bad Faith” totals 1,383 pages and 368 sections in two Volumes, cover to cover.
A preeminent insurance commentator, Robert E. Keeton, long ago advanced two novel ideas. First, he suggested that where a single occurrence gives rise to multiple claims against an insured, then a liability insurer which issued only a single policy should owe that insured a duty to attempt to settle as many of those claims as can be settled before exhausting the aggregate policy limits.1
Second, he suggested that to effectuate these attempts, liability insurers faced with multiple claimants should be allowed to sue them all, along with their policyholders-insureds, in a single interpleader action. The interpleader action would thus present a forum, it was suggested, for liability insurers faced with multiple claims and claimants arrayed against a single insured, to exercise their settlement duties toward the single insured in good faith after that insured’s fault is established.2
Interpleader has been regularly available to first-party insurance carriers, or insurance carriers which face claims against themselves and made by or in the name of their policyholder for benefits under the first-party policy, such as life insurance companies concerned with the distribution among multiple claimants of the proceeds of a variable annuity contract upon the death of the policyholder.3 In those
cases, the insurance companies are concerned with paying benefits. Third-party or liability insurance companies faced with multiple claims face additional duties of good faith and fair dealing in settlement which simply do not confront first-party insurance carriers. The claims that third-party liability insurance companies face are generally claims by third parties against the policyholder-insured, the negotiation and compromise of which require the liability insurance company to act in good faith and to deal fairly, not with the claimant necessarily, but always to act in good faith and to deal fairly with the insured.
One case has been found involving the good-faith settlement obligations of a liability insurer, in which a court seemingly accepted either of the twin suggestions summarized above, that (1) the existence of multiple claimants against an insured under a single policy triggers a good-faith duty by the liability insurer to settle as many of those claims as possible, and (2) accordingly the liability insurer should have available an interpleader action in which it can tender its policy limits into court, sue all the claimants and the insured in one lawsuit, and ask the court to settle as many of the claims as possible up to the aggregate policy limits.
That one decision was by the Arizona Court of
1. Keeton, Preferential Settlement of Liability-Insurance Claims, 70 Harv. L. Rev. 27, 28-35 (1956), under the heading, “I. Relationship Between the Company and the Insured”. Professor Keeton later became U.S. District Judge Keeton.
2. Keeton, Preferential Settlement of Liability-Insurance Claims, 70 Harv. L. Rev. 27, 36-46 (1956)(located under the heading, “II. Rela-tionships Among the Company and the Several Claimants”).
Appeals in the case of McReynolds v. American Commerce Ins. Co.4 In that case, the court clearly
expressed a preference in cases which involve “managing multiple claims in excess of the policy limits,” for “(1) the prompt, good faith filing of an interpleader as to all known claimants with (2) payment of the policy limits into court,” all the while continuing to defend the insured with a defense against all the claims.
In cases involving multiple claimants which have been decided since 1956 when these twin suggestions apparently were first made, the general rule is not that the liability insurer owes a duty in such cases to settle as many claims as possible. Rather, the near-unanimous view of the courts in such cases is instead that the liability insurer may compromise such claims as it sees fit in the exercise of its reasoned settlement discretion so long as it exercises good faith toward its insured and deals fairly with it.5
With regard to the second suggestion, the courts have otherwise been reluctant as a general rule to permit consolidating all claims into a single interpleader action arising from a single occurrence, so as to afford liability insurers of an insured defendant the opportunity to request a court to apportion the proceeds of their single liability insurance policy among the multiple claimants.6 Under the Federal Interpleader Statute, the theory has enjoyed some success in some cases.7
Moreover, in order to try to save on defense costs, a liability insurer with limits too low to pay all potential or pending claims may choose to explore the possibility of voluntarily paying its limits into court where its insured’s liability is probable, and joining all available claimants in an interpleader action.8 The success rate of such attempts in that particular situation is not especially great.9
Fulfillment of the duty of good faith and fair
4. McReynolds v. American Commerce Ins. Co. ¶26, 225 Ariz. 125 ¶26, 235 P.3d 278, 284 ¶26 (Ariz. Ct. App. Div. I, Dep't A, 2010), review denied (unreported) (Ariz. March 15, 2011).
5. E.g., Liberty Mut. Ins. Co. v. Davis, 412 F.2d 475, 478, 480 (5th Cir. 1969)(applying Florida law); Farinas v. Florida Farm Bureau Gen. Ins. Co., 850 So. 2d 555, 561 (Fla. 4th DCA 2003), review denied, 871 So. 2d 872 (Fla. 2004); see, e.g., De Walt v. Ohio Cas. Ins. Co., 513 F. Supp. 2d 287, 300-01 (E.D. Pa. 2007)(not bad faith under 42 Pa. Cons. Stat. § 8371, the Pennsylvania Bad Faith Statute, to
delay investigation so as to obtain medical records which the liability carrier had previously requested several times but never received, nor does such conduct “support a contract-based claim for bad faith”); Redcross v. Aetna Cas. & Sur. Co., 260 A.D.2d 908, 911-12, 688
N.Y.S.2d 817, 820-21 (N.Y. App. Div. 3d Dep't 1999)(“However, an insurer confronted with multiple claims arising out of the same ac-cident is not required—in order to forestall a bad-faith settlement claim—to accept a 'package deal' within the overall policy limits if, in doing so, it would be overpaying on some of the claims in order that in the other claims, as to which the insurer is ready to pay the full policy limit, the insured not be exposed to liability that exceeds the policy limit”); STV Group Inc. v. American Continental Props. Inc., 234 A.D.2d 50, 51, 650 N.Y.S.2d 204, 205 (App. Div. 1st Dep't 1996), app. denied, 90 N.Y.2d 806, 686 N.E.2d 223, 663 N.Y.S.2d 511
(1997)(“An insurer may settle with less than all of the claimants under a particular policy even if such settlement exhausts the policy proceeds ...., especially where, as here, there is a bona fide issue as to whether the disfavored claim is covered under the policy.”). See also Dennis J. Wall & W. Michael Latzo, “Construction-Defect Claims” Claims Magazine March, 2010 50–53; Dennis J. Wall & W. Michael
Latzo, “Handling Construction-Defect Claims” Claims Magazine October 2009 47–49, advance publication online in June, 2009. 6.In 1969, a federal appellate court quoted from a memorandum of claim handling options drawn up by a liability insurance company's in-house counsel with a view toward exposure to bad-faith claims, in the case of Liberty Mut. Ins. Co. v. Davis, 412 F.2d 475, 478 (5th
Cir. 1969): "Miller [whom the court described as "house counsel for Liberty Mutual"] was aware of Professor Keeton's suggestion that in cases involving multiple claims the courts ought to recognize some form of allocation proceeding to determine percentages of avail-able limits of coverage applicavail-able to the several claims. Miller observed, however, that ‘no court has yet followed (Professor Keeton's) suggestion’ and the company ‘would be under no duty to initiate such proceedings'." The judicial reluctance to adopt "Professor Kee-ton's suggestion" seems to be as pronounced in 2012 as it was in 1969. See generally Dennis J. Wall, 1 "Litigation and Prevention of
Insurer Bad Faith" § 3:45, "Multiple Claimants" (West Third Edition, 2012 Supplement).
7. See Metropolitan Prop. & Cas. Ins. Co. v. Shan Trac, Inc., 324 F.3d 20, 23-24 (1st Cir. 2003)(case involved Massachusetts substantive
law)("Long ago, in a somewhat comparable automobile accident case, the Supreme Court brushed aside the Ninth Circuit's concern that the claimants had no direct claim against the insurer. The Court held instead that the federal interpleader embraced an insurer's action against the insured's claimants. State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 532-34, 87 S.Ct. 1199, 18 L.Ed.2d 270 (1967).
Whether or not this practice reflects precisely the original theory of the interpleader statute, it has the court's approval and serves a practical purpose in cases like this one.").
8. See Morris, The Use of an Interpleader Action to Resolve Multiple Claims From One Accident, 51 Ins. Couns. J. 99, 100, 102–03
(1984).
9. See, e.g., Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 3:45, "Multiple Claimants" (West Third Edition, 2012
Supplement); Irvin E. Schermer and William Schermer, § 11:2 "The Florida Multiple Claimant Good Faith Settlement Process" Auto-mobile Liability Insurance 4th (Database Updated November, 2012).
dealing in settlement is the key to further development of bad faith law in situations involving multiple claimants. The important factor is for liability insurers to apply their informed business judgment in the settlement of claims so as to further the best interests of the insured in the given situation.10 Under principles recognized in most if not all jurisdictions, it has been held that either failing to arrange a global
settlement of multiple claims, or instead insisting on
arranging a global settlement to the exclusion of settling individual claims along the way, can constitute bad faith and unfair dealing settlement conduct by a liability insurer:
Insured defendants will want their policy funds to blot out as large a share of the potential claim against them as possible. It follows that, insofar as the insured’s interest governs, the fund should not be exhausted without an attempt to settle as many claims as possible. But where the insurance proceeds are so slight compared with the totality of claims as to preclude any chance of comprehensive settlement, the insurer’s insistence upon such a settlement profits the insured nothing. He would do better to have the leverage of his insurance money applied to at least some of the claims, to the end of reducing his ultimate judgment debt.
We conclude therefore that efforts to achieve a prorated, comprehensive settlement may excuse an insurer’s reluctance to settle with less than all of the claimants, but need not do so. The question is for the jury to decide.11 Another federal court has recently summarized these universal principles. Applying Florida law in this particular case, the court granted the automobile liability insurance carrier’s motion for summary judgment:
Florida law provides that where multiple
claims arise out of one accident the liability insurer may exercise its discretion in how it elects to settle claims, “and may even choose to settle certain claims to the exclusion of others, provided [that] this decision is reasonable and in keeping with its good faith duty.” In order to satisfy these requirements the insurer must: (1) fully investigate all claims arising from a multiple claim accident; (2) seek to settle as many claims as possible within the policy limit; (3) minimize the magnitude of possible excess judgments against the insured by reasoned claim settlement; and (4) keep the insured informed of the claim resolution process. The Plaintiff has met these requirements.12
The Supreme Court of Louisiana has summarized this situation in the following way:
When multiple claims are filed against the insured that have the potential for exceeding the insurer’s policy limits, the insurer must act in good faith and with due regard for the insured’s best interest in considering whether to settle one or more of the claims … An insurer which hastily enters a questionable settlement simply to avoid further defense obligations under the policy clearly is not acting in good faith and may be held liable for damages caused to its insured …
If in fact an insurer enters into a good faith settlement for policy limits and thereby terminates its defense obligations under the express terms of the policy, the insurer must make every effort to avoid prejudicing the insured by the timing of its withdrawal from the litigation. The insurer should make allowances for the time that the insured will need to retain new counsel, and should continue to represent the insured after the settlement, if necessary, until new counsel can be retained.13
10. Dennis J. Wall, “Litigation and Prevention of Insurer Bad Faith” § 3:45, “Multiple Claimants” (West Third Edition, 2012
Supple-ment).
11. Liberty Mut. Ins. Co. v. Davis, 412 F.2d 475, 481 (5th Cir. 1969)(case involved Florida substantive law).
CONCLUSION
It is worth repeating that a liability insurance company’s fulfillment of its duty of good faith and fair dealing in settlement is the key to further development of bad faith law in situations involving multiple claimants. The liability insurer’s settlement conduct must allow it to apply its informed business judgment in the settlement of claims in such a way that furthers the best interests of its policyholder-insured. Failure is not an option, as they say, if a liability insurance company desires to avoid exposure to extracontractual liability. Nor is it an option in most
cases in most jurisdictions for a liability insurer to file an interpleader action, sue all the claimants and its insured, and ask a court to apportion its policy limits among the claimants if the insured is at fault. Good faith-bad faith claims have of course worked themselves out in cases decided over the course of the last nearly six decades since a suggestion of interpleader appears to have been made for the first time. The courts deciding those cases have simply not allowed liability insurance companies to shift their good-faith settlement duties to the courts.
