The Rights and Duties of Insurers Regarding Claims with Multiple Claimants and Multiple Insureds

Settling Claims with Multiple Insureds

When attempting to settle claims involving multiple insureds or multiple claimants, it is essential that the claims professional be familiar with the law of the relevant jurisdiction, as courts have endorsed widely different approaches to settlements with multiple claimants and multiple insureds. For example, under California law, a settlement that releases one insured for payment of the policy limits but leaves other insureds without coverage is “an act of bad faith.” Lehto v. Allstate Ins. Co., 36 Cal. Rptr. 2d 814 (Cal. App. 1994). Thus, an insurer does not act in bad faith by rejecting an otherwise reasonable policy limits demand that does not include a release of all insureds. Graciano v. Mercury Gen. Corp., 179 Cal. Rptr. 3d 717 (Cal. App. 2014). Conversely, under Texas law, at least as applied by the Fifth Circuit, an insurer may act in bad faith by rejecting a reasonable policy limits demand that does not include a release of all insureds. OneBeacon Ins. Co. v. T. Wade Welch & Assoc., 841 F.3d 669 (5th Cir. 2016). In OneBeacon, an attorney and his law firm were sued by a former client for legal malpractice. The former client sent a policy limits demand, referred to as a Stowers demand under Texas law, to the insurer for the attorney and law firm, which sought to release only the law firm and not the individual attorney for payment of the policy limits. The insurer declined, a decision that a jury later found to have been grossly negligent. On appeal, the insurer argued that the Stowers demand was not proper because it did not offer a release of all insureds. The Fifth Circuit disagreed, concluding that because Texas law permits an insurer to settle suits on behalf of fewer than all insureds, an insurer also could be required to accept a settlement demand made to fewer than all insureds if reasonable under the circumstances.

Florida courts have adopted yet another approach, which requires the insurer to first attempt to settle on behalf of all insureds before accepting a settlement on behalf of fewer than all insureds. Contreras v. U.S. Sec. Ins. Co., 927 So. 2d 16 (Fla. Ct. App. 2006). In Contreras, the insurer attempted to secure a release on behalf of its two insureds. The claimant was not willing to settle with one insured due to the gravity of his misconduct and the low limits of liability, so the insurer settled only on behalf of one insured. The court held that the insurer acted in good faith by settling on behalf of fewer than all insureds because it first attempted to secure a release on behalf of all insureds and, only when it became clear that a global settlement was not possible, paid the policy limits to settle on behalf of one insured.

Settling Claims with Multiple Claimants

Florida courts require a similar approach to settling claims involving multiple claimants. Under Florida law, an insurer must first investigate all claims to determine how to best limit the insured’s liability and seek to settle as many claims as possible, choosing certain claimants in a manner that minimizes risk of an excess judgment. Farinas v. Florida Farm Bureau Gen. Ins. Co., 850 So.3d (Fla. Ct. App. 2003). Consequently, when settling with multiple claimants under Florida law, the claims professional must carefully document the file during investigation and settlement, including the claims professional’s analysis of the potential exposure and settlement value of each claim and reasons why certain claims were chosen for settlement. Most jurisdictions, on the other hand, give the insurer wide discretion in deciding how to settle multiple claims so long as the settlements are done in good faith. See In re Sept. 11 Litig., 723 F. Supp. 2d 534 (S.D.N.Y. 2010); U.S. Fire Ins. Co. v. Worcester Ins. Co., 821 N.E.2d 91 (Mass. App. Ct. 2005). Under this approach, an insurer is free to settle claims as they arise or as claimants indicate they are interest in settlement even if it will reduce or exhaust the remaining limits and leave some claimants with little or no recovery. In jurisdictions where the insurer is permitted to make its own good faith determinations regarding settlement, a charge of bad faith may arise where a settlement is grossly disproportionate to the remaining claims or done for the clear purpose of ending the insurer’s defense obligation. See Smoral v. Hanover Ins. Co., 322 N.Y.S.2d 12 (1971); Brown v. U.S. Fidelity & Guar. Co., 314 F.2d 675 (2d Cir. 1963).

Another approach is to initiate a global settlement process with all potential claimants. See Voccio v. Reliance Ins. Cos., 703 F.2d 1 (1st Cir. 1983) (finding evidence of good faith where the “carrier met together with counsel for both [claimants] and sought suggestions on how to divide the money”). This approach is well designed to protect the insured’s interests and avoid a claim of bad faith but may not be practical if not all claimants are known or it would substantially delay settlement discussions.

The Benefits and Risks of Interpleader

Considering the difficulties in settling claims involving multiple claimants or multiple insureds, the insurer may seek a “safe harbor” by filing an interpleader action and depositing the policy limits to the court. McReynolds v. American Comm. Ins. Co., 225 Ariz. 125 (Ct. App. 2010). The policy proceeds are then distributed under the authority of the court. While an interpleader action may protect the insurer from an assertion that it was not willing to pay its limits, the claims professional should proceed with caution. The insurer does not free itself of the duty to defend by filing an interpleader action and paying its limits to the court. American Service Ins. Co. v. China Ocean Shipping Co., 932 N.E.2d 8 (Ill. Ct. App. 2010). For this reason, interpleader may be especially problematic when defense costs erode the policy limits. Additionally, an interpleader action limits, to some extent, the insurer’s ability to manage the policy limits and settle claims when prudent to protect the insured, requiring court approval.

Conclusion

When settling claims involving multiple claimants or multiple insureds, the claims professional should keep the insureds informed about the case and all settlement opportunities. If the claims professional or defense counsel concludes that multiple claims are likely to substantially diminish or exhaust the policy limits, the insured/s must be notified immediately. It is essential that the claims professional gather information necessary to make an informed decision regarding settlement, including defense counsel reports on the defensibility of each case and potential exposure, and the claims professional should not to wait to obtain this information until a policy limits demand or mediation. Under the right scenario, solicit input from the insureds on how to handle settlement opportunities or even give the insured control of the policy limits. Finally, make sure that all settlement discussions are well documented in the file along with your detailed analysis and reasoning for accepting or rejecting a settlement.