August 01, 2012 Articles

Settling with Limited Funds

How an insurer complies with its obligation to settle when there are too many claims or too many insureds and insufficient limits depends on which jurisdiction's law applies

by Duana J. Grage and Suzanne L. Jones *

How does an insurer comply with its obligation to settle when there are too many claims or too many insureds and insufficient limits? It depends on which jurisdiction's law applies. An approach that is safe from liability for bad faith in one jurisdiction may constitute bad faith in another. An insurer usually has to consider two issues: whether or not an insurer is allowed to resolve only some covered claims or claims against some insureds within its policy limits and, if it does, whether or not the insurer can withdraw from the defense of the remaining claims and insureds.

Unfortunately, very few courts have identified a bright-line rule for insurers to follow in these circumstances to protect itself from extra-contractual liability. In the most general terms, courts have adopted three approaches: (1) resolve claims on a first-come, first-served basis, (2) pay limits to all successful claimants on a pro rata basis, or (3) file an interpleader action. As for withdrawing the defense, an insurer should only withdraw from the defense upon payment of the limits if allowed by the policy language and applicable case law and if the insurer can demonstrate that its policy limits were paid to resolve claims against the insured, not merely paid into court in an interpleader action.

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