This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Bad Faith, Vol. 13, #8, p. 22 (Aug. 17, 1999). Copyright Butler 1999.
When courts and state legislatures expand the duties owed by liability insurers to insureds there is a commensurate expansion of the grounds for extracontractual claims. One area of expansion has been in cases involving multiple third-party claimants – with liability clear and damages exceeding the policy limits. These cases make difficult issues for claims professionals.
This article will outline the major judicial approaches to the problem and then will brief the leading cases. Although most of the cases discussed below did not decide bad faith issues, many created or defined the duties of an insurance company in the division of policy proceeds among multiple claimants. Adherence to the approved approach will reduce bad faith exposure for the insurer.
The overarching duty of the insurer in multiple claimant/excess exposure cases is to minimize the insured’s exposure. This requires a thorough investigation and evaluation of all claims, knowledge of the approach taken by the governing court, and the formulation of a settlement strategy that achieves the objective. Extracontractual exposure can be reduced by fulfilling this duty and by frequent and meaningful communications with the insured atevery stage.
The insured had a policy of insurance with Liberty Mutual with limits of $10,000 per person and $20,000 per accident. It was evident to the insurer that the claims would exceed the policy limits; the insurer also could not expect any contribution from the insured since he was insolvent. The Davises’ attorney offered to settle for the policy limits. Liberty Mutual refused the settlement offer fearing that it would be liable to the remaining claimants if it depleted the entire amount of the insurance proceeds by settling with only two of the seven injured parties.
The Davises sued and obtained a judgment for $48,500. Their attorney then reasserted their offer to compromise their claims for the policy limits of $20,000. The insurer “took no action.” The Davises next petitioned for a writ of garnishment and eventually obtained the full policy limits. They then obtained an assignment from the insured and asserted a bad faith claimin order to collect the excess portion of their judgment.
In closing, the court found that there was substantial evidence from which a jury could conclude that the insurer was guilty ofbad faith in giving more weight to its own interests than to the interests of the insured. The court then delineated what the jury could have reasonably found, including: (1) that the insurer failed to exercise proper diligence to determine the facts as to damages; (2) that the insurer failed to explore the possibility of settling with all of the claimants; (3) that the insurer failed to settle with the Davises, when the insurer had conceded the insured’s liability and knew that his exposure to damages would far exceed the policy limits.
The jury found Soriano negligent and awarded the Medinas$172,187. Soriano assigned his rights against Texas Farmers to the Medinas in exchange for a covenant not to execute, and the Medinas sued Texas Farmers for negligence and bad faith. The trial court awarded the Medinas $520,577.24 in compensatory damages and $5 million in punitive damages. The appellate court reduced the punitive damages award to $1million but otherwise affirmed the judgment. See 844 S.W.2d808 (Tex. Ct. App. 1992).
The Medinas separately argued that Texas Farmers had breached its duty of good faith and fair dealing. Without deciding whether the first-party duty of good faith and fair dealing extends to third-party cases, the court held that the Medinas’ failure to make a settlement demand within the policy limits provided Texas Farmers with a reasonable basis for not settling with them.
“Evans is a screwy decision. A liability insurer owes no duty of good faith to third-party claimants. There was no need for the court to address the problem of multiple claimants: Allstate’s exhaustion of the policy limits breached no duty that Allstate owed to Evans and Branch, for Allstate owed them no duty. The more interesting question is whether Allstate breached the duty of good faith that it owed to its insured. In general, an insurer incurs no liability to the insured if it exhausts the policy limits through a series of good faith settlements with some claimants, leaving no money with which to protect the insured from an unsettled claim. The important fact in this case, however, is that Allstate had an opportunity to protect its insured from all the claims but failed to take advantage of it. If Evans and Branch had taken an assignment from the insured, they might have had better luck.”