Your insured is sued, along with several other additional or named insureds. You receive a policy limits demand that is reasonable, but the limit is insufficient to settle all claims against all of the defendants. What do you do? Who gets the money? Is interpleader the answer?
Situations often arise where an insurance policy is the subject of conflicting claims for policy limits. These problems arise where: (1) a suit names as defendants the named insured and additional insureds or the former subsidiary and the parent; (2) separate unrelated suits are pending against different insureds or policy beneficiaries; or (3) third-party claimants, including state and local governments, seek coverage.
There is scant case law to provide guidance to insurers as to what its duties and obligations are in these situations. The cases that do exist tend to be fact-specific. Not only is there a lack of clear guidance in the case law, but it is also impossible to develop hard-and-fast rules for how to handle these "competing rights" claim situations in light of the number of variables involved. Numerous questions may need to be answered before a decision can be made about how to handle the situation.
These may include: What was the nature of the relationship between the named insured and additional insured or the nature of the acquisition in the predecessor/successor liability situation? What is the insurance program of each entity? Are there other insurance policies or programs implicated? If so, do they have express “other insurance” provisions? Is the policy at issue occurrence-based or claims made? Is there a retrospective premium agreement or a similar provision in which the amount of the premium may be directly impacted by any payments? Is the insurer providing a defense to both insureds? If so, who retained defense counsel and who is “controlling” the defense? Are defense costs within limits? What jurisdiction’s law governs? What is the primary carrier’s duty, if any, to the excess carrier to advise it of the status of its policy limits and the “competing rights” claim situations?
Some insurers may assume that these issues will never need to be addressed because, when faced with competing claims, they believe they have the option of filing an interpleader action and depositing the policy limits into the court, which will then entitle them to walk away from the dispute without further obligation or potential liability. Although such stakeholder actions are well-recognized in first-party situations, their application to liability insurance disputes may be much more limited.
What Can an Insurer Do When Faced with Claims by Competing Insureds?
Where coverage is uncontested, the dispute as to which entity has the right to the available insurance proceeds is essentially a dispute between the two entities claiming entitlement to those proceeds. Thus, the insurer may have no legal duty, contractual or otherwise, to affirmatively take steps to assist the two entities in resolving their dispute. Even so, it ultimately may be in everyone’s best interest — both the insurer and the insureds — to attempt to resolve the dispute without litigation. One option would be to request a meeting with the competing insureds to attempt to resolve the dispute. The insurer should communicate clearly to the insureds its position in the matter. In many cases, that position will be that the insurer has no opinion as to how the insured entities divide the policy proceeds between them, but that in the event they cannot resolve their dispute, it may be necessary to commence an interpleader action and have a court decide how the policy proceeds should be distributed.
Courts have recognized the need to efficiently and fairly adjudicate competing claims to money or property. Through an interpleader action, an insurer can join the competing insureds in a single action, which will protect the insurer from inconsistent verdicts that might exceed the overall amount of the policy limits. Most jurisdictions provide for interpleader by rule or statute and both are available for actions filed in federal court.[1] Insurers must realize, however, that the type of policy at issue (and the applicable law) may dictate whether an interpleader action will resolve all of the insurer’s obligations to the competing insureds.
For First-Party Insurers, an Interpleader Action is an Effective and Fair Means to Sort Out Competing Claims
First-party insurers, such as those that issue property and life policies, may regularly find themselves subject to competing claims for policy proceeds. Where coverage for the claim is otherwise undisputed by the insurer, interpleader provides a fair and effective means to protect the insurer from inconsistent verdicts and to adjudicate which insured is, in fact, entitled to the policy proceeds.[2] Promptly bringing an interpleader action may also shield an insurer from claims for breach of contract, bad faith and fraud brought by a disgruntled insured.[3]
For Liability Insurers, an Interpleader Action May Not Completely Resolve the Liability Insurer’s Obligations Under the Policy
Where a liability policy is at issue, the insurer may not have only the duty to indemnify a judgment or settlement up to the liability limits. Rather, the insurer also often has the duty to defend the insured in the suit brought by the third party. In that situation, an interpleader action may not completely discharge the insurer from further obligations under the policy, if the defense obligation is unaffected by paying the policy limits into court, or if an insurer is otherwise precluded from paying out its limits.[4] The filing of an interpleader action and depositing the limits into court will not necessarily cut off the insurer’s defense obligation if the suit against the insured is ongoing.
The Federal Interpleader Statute Will Not Enjoin Proceedings Against the Tortfeasor Insured
One of the tools available to a court in an interpleader action is the ability to enjoin other proceedings involving the stake. This safeguards against inconsistent verdicts. The authority to enjoin other proceedings, however, is only as to those proceedings involving the interpleaded stake itself. The interpleader court cannot enjoin proceedings against the tortfeasor insured.[5] The interpleader court, however, can enjoin underlying claimants from seeking to enforce any judgment against the tortfeasor insured except in the interpleader action itself.[6] Thus, the insurer can prevent the policy limits from being subject to collection proceedings in various jurisdictions, but it cannot use an interpleader action to prevent the plaintiffs in those underlying cases from adjudicating their claims against the insured.[7]
Approaches for Resolving Competing Insureds’ Claims for Liability Coverage
There is a dearth of case law addressing how insurers should approach claims for liability coverage involving competing insureds, where there are insufficient policy limits to satisfy all of the settlements or judgments. Some guidance may be found in how courts have dealt with multiple claims against a single insured where the amount of available insurance was insufficient to pay all of the claims in full.
The majority of courts that have addressed the issue have held that the rule is “first in time, first in right.” Under this rule, liability insurers may distribute the insurance proceeds on the basis of priority of judgment.[8] A few courts have permitted all of the claimants to be joined in a single suit, akin to a stakeholder action. In that situation, the court distributed the policy proceeds on a pro rata basis in accordance with the amount of damage suffered by each claimant.[9]
Both of these approaches have their strengths and drawbacks. The pro rata approach guarantees that all of the injured parties will collect something. This method, however, seems most applicable in fairly simple cases, such as an automobile accident, where the culpable and injured parties are readily identifiable and usually subject to the jurisdiction of a single court. The procedure is far more cumbersome where a number of claimants have each suffered a progressive injury, such as exposure to a toxic product. In addition, under this approach, the distribution of the policy proceeds must await identification of all of the potential claimants, which may be a difficult task.
The “first in time, first in right” method provides a certain method of distribution. However, it also means that some claimants are left without any compensation at all. This approach fails to take into consideration that the vast majority of claims are settled, many before the matter reaches the courthouse steps. Public policy encourages settlements, yet the manner in which a multiple-claimant matter is settled may open the insurer to allegations that it was acting unfairly and in bad faith. Thus, an insurer facing multiple claims which exceed its policy limits may not be well-protected by a “first in time, first in right” approach. If some of the claims could have been settled within the policy limits, then those insureds that might have been released by those settlements are likely to assert that the insurer had a duty to enter into them, regardless of whether the insurer faced competing claims for the policy proceeds.
Most courts that have considered the issue have held that an insurer may settle a claim in good faith even though the settlement exhausts the policy limits, leaving no money available to other insureds. In such a situation, the insurer should be prepared to demonstrate that the settlement on behalf of one insured was fair, reasonable and in good faith. Because litigation with the “competing insured” may not be avoidable, the insurer must be able to show that it acted fairly, that the settlement was not an inequitable preference, and that it paid out the full amount of its policy limits to settle the claim. Where an insurer can do that, courts will agree that it acted in good faith.
For example, in Millers Mutual Ins. Ass’n of Illinois v. Shell Oil Co., 959 S.W.2d 864 (Mo. Ct. App. 1997), the named insured leased and operated a service station from the additional insured, a petroleum company. Both were sued when a patron was abducted at gunpoint from the service station. The plaintiffs made a demand for the full policy limits but would agree only to release the service station operator, not the petroleum company. The service station, facing a potential verdict in excess of the policy limits, demanded that the insurer settle. The insurer then filed a declaratory judgment action to seek a declaration that it no longer had a duty to defend the petroleum company. The petroleum company did not dispute that the settlement was reasonable, but asserted that the insurer still had a duty to defend it in the litigation. The court disagreed and held that since the settlement was reasonable and the insurer acted in good faith, the exhaustion of the policy limits through the payment of a settlement that released one of the insureds discharged the insurer’s duty to defend, even though the action continued against the other insured.[10]
One Approach to Minimizing Claims by Competing Insureds
In many situations, it is the policyholder and not the insurer that is in the best position to protect itself from a “competing rights” claim situation. Indeed, it is the policyholder that made the decision to change its corporate status, sell a portion of its business or add other entities as additional insureds. A qualified risk manager should anticipate the competing claim situation and the issue should be raised with the policyholder’s broker as to how to minimize or avoid this problem. It may be advisable for the broker to propose an endorsement that would specify “first claim in/first dollar out” or, alternatively, set forth the named insured’s preference for the priority of payment of the policy limits.
The insurer will likely be receptive to any policy language suggested by the broker or the policyholder that attempts to avoid or minimize any potential problems created by the competing insureds situation. Since, however, the policyholder is the entity which has created the competing claim situation, it may be in the better position to suggest how it wants any resulting problems addressed.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] See Fed. R. Civ. P. 22 and 28 U.S.C. § 1335.
[2] See, e.g., Aetna Life & Cas. Co. v. Wise, 184 F.3d 660 (7th Cir. 1999); Prudential Ins. Co. v. Boyd, 781 F.2d 1494 (11th Cir. 1986); State of Missouri ex rel. Cresswell v. Scott, 491 S.W.2d 343 (Mo. Ct. App. 1973).
[3] Maddux v. Philadelphia Life Ins. Co., 77 F. Supp. 2d 1123 (S.D. Cal. 1999).
[4] See, e.g., Am. Standard Ins. Co. v. Basbagill, 775 N.E.2d 255 (Ill. App. Ct. 2002); Am. Serv. Ins. Co. v. China Ocean Shipping Co. (Americas) Inc., 932 N.E.2d 8 (Ill. App. Ct. 2010); but see Carolina Cas. Ins. Co. v. Estate of Studer, 555 F. Supp. 2d 972 (S.D. Ind. 2008).
[5] State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523 (1967).
[6] Id. at 535.
[7] Oak Cas. Ins. Co. v. Lechliter, 524 S.E.2d 704 (W. Va. 1999); Carolina Cas. Ins. Co. v. Mares, 826 F. Supp. 149 (E.D. Va. 1993); Mid-American Indemnity Co. v. McMahan, 666 F. Supp. 926 (S.D. Miss. 1987); Maryland Cas. Co. v. Sauter, 344 F. Supp. 433 (W.D. Miss. 1972).
[8] In re Sept. 11 Litig., 723 F. Supp. 2d 534 (S.D.N.Y. 2010); Boris v. Flaherty, 672 N.Y.S.2d 177 (N.Y. App. Div. 1998); Sampson v. Cape Industries, 540 N.E.2d 1143 (Ill. App. Ct. 1989).
[9] See, e.g., Allstate Ins. Co. v. Ostenson, 713 P.2d 733 (Wash. 1986); Sheehan v. Liberty Mut. Fire Ins. Co., 258 So.2d 719 (Ala. 1972); State Farm Mutual Auto. Ins. Co. v. Sampson, 324 So.2d 739 (Miss. 1975).
[10] See also, Country Mutual Ins. Co. v. Anderson, 628 N.E.2d 499 (Ill. App. Ct. 1993); Bohn v. Sentry Ins. Co., 681 F. Supp. 357 (E.D. La. 1988), aff’d, 868 F.2d 1269 (5th Cir. 1989); Anglo-American Ins. Co. v. Molin, 670 A.2d 194 (Pa. Comm. Ct. 1995). But see, Smoral v. Hanover Ins. Co., 322 N.Y.S.2d 12 (N.Y. App. Div. 1971).
