Insurance subrogation professionals are routinely faced with minimum limits scenarios which complicate otherwise straightforward subrogation cases. When a third-party liability carrier’s insurance limits are insufficient to pay the claims of multiple claimants, the carrier must begin to assess the hierarchy of the claimants – how to slice the insured’s pie. In order to do this, the carrier must be familiar with the specific laws and procedures in their jurisdiction regarding multiple claims in light of insufficient liability limits.
Where liability is clear and there are multiple claimants making a claim for the limited pool of liability limits, courts have chosen to deal with the dilemma differently. There are several approaches to solving the dilemma. Below are the most common approaches followed by the states to handle multiple claims in excess of policy limits. No matter how you slice it, each state has its own way of distributing the pie.
First Come, First Served
The first come, first served approach is taken by the majority of states. Connecticut, Kansas, and Texas are just a few of the states which employ this method. This approach allows the liability carrier to settle any or all claims in the order that the claims are presented. Once the carrier has exhausted the policy limits, its duties under the contract are complete and the carrier has no duty to make sure all claimants are paid. The main concern of this approach is that it is unfair to those who were late to make a claim and simply lose out.
First to Judgment
A number of states follow the first to judgment approach. This approach allows a liability carrier faced with multiple claims to distribute the proceeds of its insurance to judgment creditors in the order in which they obtain their judgments. Much like the first come, first served approach, this approach can leave those who are late to get a judgment without access to the policy limits. Serious injury cases take longer to settle and tend to leave those more seriously injured without recourse. Oklahoma has chosen to follow the first to judgment approach.
Pro-Rata
In states that have chosen to follow the pro-rata approach, a liability carrier faced with multiple claims against it must settle on a pro-rata basis in accordance with the amount of damages sustained by each claimant. Alabama, Montana, and Wisconsin follow this approach. The problem with distributing policy limits on a pro-rata basis is that this approach impedes free settlement of claims. A carrier must wait until all claims have been presented or until the statute of limitations runs before it begins making payments. This leaves claimants without redress until all claims have been made.
Good Faith
Many courts have held that an insurer must act in good faith, reasonably, and/or non-negligently in entering into settlements that deplete or exhaust the policy limits. This approach means that insurers must approach each of the multiple claimants individually and must avoid giving more weight to its own interests than to the interests of its insured. Every contract contains an implied duty of good faith and fair dealing, so even in states that don’t specifically follow the good faith model, insurers must be sure to uphold these duties, as violating them could give rise to a claim for bad faith. A few states though have decided to solely use this approach in deciding multiple claims in excess of liability policy limits. Arkansas and Florida have taken this subjective approach. When determining if a carrier has acted in bad faith, courts in Florida have stated the carrier must (1) fully investigate all the claims to determine how to best limit the insured’s liability; (2) seek to settle as many claims as possible with the policy limits; (3) make reasonable settlements; and (4) avoid indiscriminately settling select claims and leaving the insured at risk of excess judgments. Farinas v. Florida Farm Bureau General Ins. Co., 850, So.2d 555 (Fla. App. 2003). If, through either negligence or bad faith, the liability carrier fails to settle a claim against the insured within the limits of the policy, when it could have done so, it is liable to the insured for any judgment recovered against him or her in excess of the policy limits.
Interpleader
Many states allow, and some even require, a liability carrier to file an interpleader action. Interpleader is an action between multiple claimants to determine a claim or right to the policy limits. The policy limits are deposited with the court and the claimants are joined as defendants. The funds are then distributed under the authority of the court. Since filing an interpleader action is equivalent to the plaintiff admitting it is willing to pay the legitimate claimants, it is the safest way for the liability carrier to resolve multiple claims without exposing itself to bad faith claims.
When negotiating over a shrinking pie where not everyone involved can get a slice, a liability carrier’s good faith is likely to be called into question by those who did not receive a piece of the pie. So, what can a liability carrier do to make sure it is not subjected to a bad faith claim and required to pay above and beyond the policy limits? First, the liability carrier should review the policy language governing the limits and its duty to defend and right to settle. It is imperative that the carrier know what it is contractually bound to. The carrier then needs to identify what approach its jurisdiction follows when there are multiple claims in excess of the liability limits. This will be important as what may be required in one jurisdiction is frowned upon or forbidden in another jurisdiction. Next, the carrier should identify all claimants and potential claimants. It is essential that the carrier fully investigate the claims so it can make an informed decision during settlement negotiations. Once the carrier realizes the policy limits may be exceeded it should promptly notify the insured and the claimants in writing that the value of the claims may exceed the policy limits. However, the carrier should still attempt to settle the claims within the policy limits. Throughout the process the carrier must make sure it continues to keep its insured informed, in writing, of the claims negotiations and settlement process. The carrier should also make sure it promptly responds, in writing, to all communications from the claimants and keeps them advised of competing demands for policy limits. It is important that a liability carrier facing multiple claims in excess of policy limits follow these steps to avoid facing a bad faith claim and paying out beyond the insured’s pie.
MWL has published a chart detailing the law in all 50 states on the duty of a liability carrier when faced with multiple claims in excess of policy limits. It can be viewed HERE.
For more information on multi-state subrogation or handling your subrogation needs anywhere in North America, contact Ashton Kirsch at akirsch@mwl-law.com.
Ashton T. Kirsch is an insurance litigation attorney and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C., concentrating his practice on litigation of subrogation cases involving large loss casualty, commercial auto, transportation and cargo, and workers’ compensation.
