Source: http://www.butler.legal/juggling-multiple-claims-with-inadequate-limits
Timestamp: 2019-04-21 09:13:51+00:00

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This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 17, #12, p. 15 (October 15, 2003). © Copyright Butler 2003.
As a general rule, if the insurer acts with reasonable conduct, the insurer does not act in bad faith when it settles a claim within policy limits.(1) This is true even if the insurer settles over the insured's objection.(2) So what is reasonable conduct?
Sounds like a trick question . . . doesn't it? Who would answer this question “No?” The more interesting questions are (1) how does an insurer, in good faith, apply its multi-faceted duties to the insured in multi-claimant situations, and (2) whether these good faith duties always involve issues of fact that cannot be resolved by summary judgment? When an insured is left with an excess judgment, do these situations (i.e., multiple claimant with inadequate limits cases) inevitably require a jury trial on the “bad faith failure to settle” allegations? The Farinas decision follows the decisions of Boston Old Colony v. Gutierrez,(5) Liberty Mutual Insurance Co. v. Davis,(6) Harmon v. State Farm Mutual Automobile Insurance Co.(7) and Shuster v. South Broward Hospital District Physician's Professional Liability Trust.(8) Each merits discussion.
Under current Florida law, whether a settlement is fair and reasonable is a fact question to be decided by a jury. Accordingly, the insurer should be ready to present medical evidence showing the nature and extent of injury and factual evidence of liability which demonstrate that the settlement was within an acceptable range. However, an insurer also has an obligation to settle as many claims as possible. Liberty Mutual Insurance Co. v. Davis.(12) Davis involved a multiple automobile accident which left seven people injured. The responsible party was insured by Liberty Mutual under a 10/20 policy. The policy limits were inadequate to meet all claims. Five of the seven claimants offered to settle for the $20,000 limits. Liberty Mutual's legal counsel advised it to settle the claims for fair value on a first come first serve basis. Liberty Mutual declined out of concern that settling for the entire policy limits would leave its insured exposed to recovery by the two other claimants. The Davises filed a lawsuit and again presented Liberty Mutual with an opportunity to settle with the Davises for policy limits. Liberty Mutual declined out of concern that it would become liable to other claimants in a bad faith suit if its limits were exhausted.
In 1970, shortly after Davis, the Florida courts decided their first bad faith case in a multiple claimant context. Harmon v. State Farm Mutual Automobile Insurance Co.(17) In Harmon, the court was asked whether an insurance company may settle with two insureds in the full amount of policy limits, thereby exhausting the limits of the policy to the exclusion of other insureds. The Florida Second District Court of Appeal held that when faced with multiple claims from one accident, the liability insurer has the right to enter into reasonable settlements with some of the claimants, regardless of whether the settlements deplete or exhaust the policy limits.(18) However, the court did not expand on the definition of reasonableness.
In a 2003 decision, the Florida Fourth District Court of Appeal addressed the impact of Boston Old Colony, Davis, Harmon and Shuster in a multiple claimant bad faith case. Farinas v. Florida Farm Bureau General Insurance Co.(21) The extracontractual action involved an automobile accident which injured seven and killed five people. The policy for the responsible person had limits of $300,000 which were inadequate to cover all claims. The Farinas court noted the following rules: (1) Under Boston Old Colony, an insurer must fully investigate all claims, (2) under Davis, an insurer should seek to settle with as many possible claimants as it can, (3) under Harmon, an insurer has primary control but settlements have to be “reasonable,” and (4) under Shuster, an insurer must avoid indiscriminate settlement of select claims.(22) Ultimately, the Farinas court, in reversing summary judgment, held that all of these issues were fact questions to be resolved by a jury.(23) If the Florida Supreme Court approves this ruling, then insurers will be forced to litigate every multiple claimant “bad faith” case to verdict or acquiesce to extortionate settlement demands.
Some courts approach the problem of multiple claims with inadequate policy limits by applying one of two general rules: “First to Judgment” and “Pro Rata Distribution.” Other courts recognize a rule we will call “First to Settlement.” The courts also recognize a rule we will call “Knowledgeable Distribution.” Ultimately, it is all a question of what is fair, reasonable and just to everyone involved.
The First to Judgment rule provides that the first claimant to obtain a judgment against the insured will have priority to the policy funds available. Gerdes v. Travelers Insurance Co.(24) However, this rule is problematic in that it allows the claimant to collect the proceeds simply because it was first to obtain a judgment which may leave the insured exposed to further and more critical claims. The rule also contradicts public policy promoting settlement before litigation.
Pro rata distribution allows insurance proceeds to be paid based on the amount of damage each claimant has endured. For example, in Allstate Insurance Company v. Ostenson,(25) a multiple automobile accident left three individuals injured. The responsible party had insurance limits of 25/50. The policy limits were inadequate. The court noted that where several claims arising from one incident are asserted in one suit against an insurer with inadequate limits, “the proceeds are to be distributed on a pro rata basis in accordance with the amount of damage suffered by each claimant.(26)” The court further held that each claimant's portion of pro rata recovery is limited by the maximum “per person” liability proceeds available under the policy.(27) Accordingly, the “Pro Rata” approach apportions available limits based on the severity of the respective claims.
This approach has been approved by courts whether or not the claims are joined in one suit.(28) However, the theory is problematic because some claimants may wait years before presenting a claim. This typically occurs when the claimant wants to “wait-and-see” how severe and permanent his or her physical injuries may be. There may be no way of knowing whether all viable claims have been presented until all applicable statutes of limitation have run. Moreover, one or more claimants may demand insurance proceeds before other claims can be timely investigated. Under the Pro Rata rule, reasonable settlement opportunities may pass, and the insured, therefore, may be subject to greater excess exposure.
The majority rule – First to Settlement – is that an insurer may settle some of the multiple claims even if that settlement significantly lowers or even depletes policy limits. Texas Farmers Insurance Co. v. Soriano.(29) The comparative severity of the injuries to various claimants is not always the deciding factor. It all comes down to what is reasonable when confronted with an opportunity to settle some (but not all) claims. An insurer may be required to settle less severe claims – even while depleting policy limits – to act in good faith.
In Soriano, the insured, Richard Soriano, collided head-on with another vehicle. Richard Soriano's passenger, Lopez, was killed. Three of the four occupants of the other vehicle, the Medinas, were killed. Another individual in that vehicle was severely injured. The insured had a 10/20 policy which was inadequate to cover all of the potential claims. Soriano's insurer initially tried to settle with the Medinas and offered the entire policy limits. The Medinas declined.
Both the Lopez and Medina families brought suit against Soriano which were consolidated for trial. During jury selection, Soriano's insurer settled the Lopez matter for $5,000. No notice of the settlement was given to the Medina family. Soriano's insurer then offered the remaining $15,000 to the Medinas who demanded the full $20,000. The matter proceeded to trial. Judgment was obtained for $172,187 against Soriano. In exchange for a covenant not to execute on the judgment, Soriano assigned the rights he had against his insurer to the Medinas. The Medinas brought an action alleging that Soriano's insurer was negligent in handling the Medinas claim. Judgment was entered against Soriano's insurer for $520,577.24 in actual damages and prejudgment interest, and $5 million in exemplary damages.
In a lengthy discussion, the Supreme Court of Texas reversed, holding there was no evidence of any negligence or bad faith by Soriano's insurer.(34) At the supreme court level, the Medinas argued that the Lopez settlement was negligent because it reduced the amount of limits available to the Medinas and thereby exposed the insured to an excess judgment. The Medinas argued that the insurer “must weigh the seriousness of the claims and attempt to settle those claims within policy limits that are the greatest threat of liability for excess judgment.(35)” Soriano's insurer argued that it had no obligation to weigh the “comparative gravity” of the claims and that as a matter of law there was no evidence it was negligent because the settlement with Lopez was reasonable.
A similar holding was reached by the First Circuit Court of Appeal, applying Rhode Island law. Voccio v. Reliance Insurance Companies.(48) The case involved an automobile accident in which a fifty-eight year old woman was killed and an eleven year old child lost the lower part of both of his legs. The responsible party had policy limits of only $25,000. The insurer settled with the decedent for one-half the policy limits. During settlement negotiations, the insurer met with counsel for both the decedent and the child seeking suggestions on how to divide the insurance proceeds. Counsel for the child refused to participate in any equitable division of the proceeds, and consistently refused to make any offer of settlement below policy limits.
Although the majority rule is that an insurer may settle some multiple claims even if that settlement significantly lowers or even depletes policy limits, some courts have found an insurer to have acted in bad faith when settling some claims involving multiple claimants.
Under Puerto Rican law, the United States Court of Appeal First Circuit found an insurer to be liable beyond policy limits for breaching its duty of good faith by failing to accurately inform the insured of remaining limits after settling with some of multiple claimants. Fireman's Fund Insurance Company v. Santoro.(75) So while an insurer may settle within policy limits when reasonableness so demands, the involvement of all claimants and the insured is crucial.
Under Farinas, the question of whether an insurer reasonably settles claims involving multiple claimants with inadequate limits is always submitted to a jury. This is one of the key issues that should be reviewed on appeal by the Florida Supreme Court. In Texas, the same questions of good faith may be disposed on summary judgment. See, e.g., Carter v. State Farm Mutual Automobile Insurance Co.(76) In Carter, there was a multiple automobile accident which left several individuals injured or dead. The tortfeasor had limits of 50/100. The insurer sent a letter to the attorney for claimant Carter, suggesting that all potential claimants meet for a settlement conference. Carter's attorney replied that a settlement conference was premature as the parties were still receiving medical treatment, even though the insurer explained that it had received a demand for $50,000 from another party which required an answer that day. The insurer accepted the $50,000 demand which decreased the available limits to $50,000. It then notified the potential claimants of that settlement by letter. Carter and one of the other claimants, Goodman, then each demanded $50,000 to settle their respective claims. The insurer stood by its decision to pay the first claimant $50,000. Nonetheless, it encouraged Carter and Goodman to participate in a settlement conference. During the conference, Carter's attorney refused to consider settling his claim for anything less than $50,000. The insurer then settled two other claims for $45,000 leaving $5,000 in policy limits. The only two remaining claimants were Carter and Goodman. The insurer unconditionally tendered a check for $4,000 to Carter and $1,000 to Goodman.
The court noted that the insurer had not delayed whatsoever but to the contrary requested that the parties come together for a settlement conference to determine a fair division of the policy proceeds.(78) It was Carter's attorney who insisted it would be premature to settle and who refused to accept settlement of any amount less than the remaining policy limits.(79) Accordingly, the insurer “did not act unreasonably in settling with the two remaining claimants who were still willing to negotiate the settlement of their claims.(80)” The court noted that when an insurer's settlement with one of several competing claimants is reasonable, there is no violation of good faith, even if the policy proceeds are exhausted as to other insureds.(81) And, the Texas court recognizes that this issue of reasonableness may be determined without resort to a trial.
The standards of good faith in both Texas and Florida are essentially the same. In each state, an insurer must exercise that degree of care and diligence which a person of reasonable care and prudence would exercise in management of its own business affairs.(84) In Florida, the reasonableness of settlement ought to be addressed on summary judgment as well. When a defendant seeks to dismiss a matter on summary judgment it must show the absence of any material fact. An insurer ought to be able to show it acted reasonably by investigating all claims, advising all claimants of the potential of inadequate limits, attempting a pro rata distribution, and seeking involvement of all claimants in settlement talks. So long as the insurer takes advantage of settlement opportunities that are reasonable, and does not squander policy proceeds on unreasonable settlements, summary judgment should be available to it.
In Farinas, the court does not discuss the process which led up to settlement with some of the multiple claimants. The case simply states that questions of fact remained because the insurer settled for limits with some of the multiple claimants and exhausted policy limits.(85) An insurer should be given an opportunity to avoid lengthy and costly bad faith litigation by showing that it (1) investigated all claims in good faith, (2) involved all claimants and the insured in the negotiations, (3) advised the claimants of the potential for inadequate limits, (4) attempted pro rata distribution, and (5) attempted to settle claims in a manner that would best limit the insured's exposure. This test will encourage settlement and conserve judicial resources while at the same time protect insureds.
1. Immediately ascertain whether there are multiple claimants.
3. Investigate all of the claims to determine their competing values.
4. Attempt pro-rata distribution within policy limits for a release of all insureds.
6. If equitable distribution for all claimants and/or interpleader are not feasible, then weigh the most severe claims against the risk of exposure on the competing claims.
8. Keep all known claimants advised of competing demands for policy proceeds.
9. Keep the insured properly advised of exposure and settlement opportunities (see the Boston Old Colony factors above).
10. Consider seeking contribution from your insureds to fully and finally resolve all claims where policy limits are insufficient and all other good faith efforts to get a complete release from all claimants has failed. (Be careful to accurately communicate your good faith intentions to the insured).
11. A liability insurer may even want to consider paying something in excess of policy limits to resolve all claims (even if you are not contractually obligated to do so) to save on litigation expenses and exposure to a bad faith suit.
In summary, the settling of multiple claims seems a fine-art of balancing the factors producing a “reasonable” settlement strategy to most effectively protect the insured from excess exposures. The best approach: get the insureds and the claimants involved from the very beginning, and place the burden on the claimants facing inadequate limits to act just as reasonably as the insurer in settlement negotiations.
1.See, Saucedo v. Winger, 915 P.2d 129, 134 (Kan. App. 1996); Marginian v. Allstate Insurance Company, 481 N.E.2d 600, 603 (Ohio 1985).
3.2003 WL 1916837 (Fla. 4th DCA April 23, 2003). For more detailed analysis of the Farinas decision, see Rawls and Patten, What Is A 'Reasonable' Settlement When There Are Multiple Claimants?, Mealey's Litigation Report: Insurance Bad Faith, Vol. 17, No. 6 (July 16, 2003).
5.386 So. 2d 783 (Fla. 1980).
7.232 So. 2d 206 (Fla. 2d DCA 1970).
9.386 So. 2d 783, 785 (Fla. 1980).
12.412 F.2d 475 (5th Cir. 1969).
17.232 So. 2d 206 (Fla. 2d DCA 1970).
18.232 So. 2d at 207-08.
20.591 So. 2d at 177.
21.2003 WL 1916837 (Fla. 4th DCA April 23, 2003).
22.2003 WL 1916837 at 4-5.
23.2003 WL 1916837 at 5.
24.440 N.Y.S.2d 976, 978 (N.Y. Sup. Ct. 1981).
25.713 P.2d 733 (Wash. 1986).
28.See, Weihmuller and Weill, Multiple Claims Exceeding The Policy Limits, Mealey's Litigation Report: Insurance Bad Faith, Vol. 13, No. 8 (August 17, 1999).
For courts which have applied the pro rata rule when multiple claimants are in different actions against the insured, see Burchfield v. Bevans, 242 F.2d 239 (10th Cir. 1957) (applying Oklahoma law); State Farm Mut. Auto. Ins. Co. v. Hamilton, 326 F. Supp. 931 (D. S.C. 1971); Century Indemnity Co. v. Kofsky, 161 A. 101 (Conn. 1932); Underwriters for Lloyds of London v. Jones, 261 S.W.2d 686 (Ky.1953). For courts applying the pro rata rule where several claims are joined in one suit, see Sheehan v. Liberty Mut. Fire. Ins. Co., 258 So. 2d 719 (Ala. 1972); Johnson v. State, 450 So. 2d 1311 (La. 1984); State Farm Mut. Auto. Ins. Co. v. Sampson, 324 So. 2d 739 (Miss. 1975); Christlieb v. Luten, 633 S.W.2d 139 (Mo. App. 1982); Wasserman v. Glen Falls Ins. Co., 240 N.Y.S.2d 917 (N.Y. App. Div. 1963); Wondrowitz v. Swenson, 392 N.W.2d 449 (Wis. Ct. App. 1986).
29.881 S.W.2d 312 (Tex. 1994).
30.844 S.W.2d 808 (Tex. App. 1993).
33.844 S.W.2d at 817, n.6.
36.881 S.W.2d at 314 citing Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544, 547-48 (Tex. Comm'n App. 1929).
40.881 S.W.2d at 316. Other jurisdictions considering multiple claims issues have reached a similar conclusion. Holtzclaw v. Falco, Inc., 355 So. 2d 1279, 1286-87 (La. 1978); Alford v. Textile Ins. Co., 248 N.C. 224, 103 S.E.2d 8, 13 (1958); Bennett v. Conrady, 180 Kan. 485, 305 P.2d 823, 827-28 (1957); Allstate Ins. Co. v. Evans, 200 Ga. App. 713, 409 S.E.2d 273, 274 (1991); Harmon v. State Farm Mutual Automobile Ins. Co., 232 So. 2d 206, 207-8 (Fla. App. 1970); State Farm Mutual Automobile Ins. Co. v. Murphy, 38 Ill. App. 3d 709, 348 N.E.2d 491, 493-4 (1976); Negron v. Eveready Ins. Co., 53 A.D.2d 815, 385 N.Y.S.2d 87, 88, appeal dism'd, 40 N.Y.2d 970, 390 N.Y.S.2d 921, 359 N.E.2d 429 (1976); Liguori v. Allstate Ins. Co., 76 N.J. Super. 204, 184 A.2d 12, 16-17 (1962).
42.184 A.2d 12 (N.J. Super. Ct. Ch. Div. 1962).
48.703 F.2d 1 (1st Cir. 1983) (applying Rhode Island law).
51.684 So. 2d 546, 548 (La. App. 1997).
52.684 So. 2d at 547.
55.684 So. 2d at 548.
56.343 N.E.2d 36, 39 (Ill. App. 1976).
61.416 F. Supp. 1216 (D.C. Maryland 1976).
62.416 F. Supp. at 1218.
64.416 F. Supp. at 1219.
65.416 F. Supp. at 1220.
66.416 F. Supp. at 1219-20.
67.416 F. Supp. at 1220.
68.567 P.2d 1359 (Kan. 1977).
73.314 F.2d 675 (2d Cir. 1963).
75.376 F.2d 157, 159-60 (1st. Cir. 1967).
76.33 S.W.3d 369 (Tex. App. 2000).
81.33 S.W.3d at 373 citing Texas Soriano's Insurer Insurance Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994); see also Mid Century Insurance Company of Texas v. Childs, 15 S.W.3d 187 (Tex. App. 2000).
82.See Texas Farmers Insurance Co. v. Soriano, 881 S.W.2d 312 n.29 (Tex. 1994) and the discussion therein and Carter v. State Farm Mutual Automobile Insurance Co., 33 S.W.2d 369 n.76 (Tex. App. 2000) and the discussion therein.
83.See Texas Farmers Insurance Co. v Soriano, 881 S.W.2d 312 n.29 (Tex. 1994) and the discussion therein and Carter v. State Farm Mutual Automobile Insurance Co., 33 S.W.2d 369 n.76 (Tex. App. 2000) and the discussion therein.
84.See Boston Old Colony v. Gutierrez, 386 So. 2d 783, 785 n.9 (Fla. 1980) and the discussion therein and Texas Farmers Insurance Co. v. Soriano, 881 S.W.2d 312 n.36 (Tex. 1994) and the discussion therein.
85.See Farinas v. Florida Farm Bureau General Insurance Co., 2003 WL 1916837 at 1 (Fla. 4th DCA April 23, 2003).

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