Property & Casualty Insurers: Multiple Claims Beyond Settlement Limits
Approaches Taken by Florida, California, Texas, Illinois & Pennsylvania
At a Glance
- While the first-come, first-served approach appears to be the common method applied by courts, insurers are still obligated to act in good faith.
- The satisfaction of this standard can vary state by state, and it is important to research local laws or consult local counsel prior to taking action.
When a policyholder is at fault, their insurer is often faced with multiple claims. These claims add up quickly and can easily surpass policy limits. With clear fault and insufficient policy limits, what is an insurer to do? While insurers are required to act in good faith and in the best interest of their insureds, states have taken different approaches on how to satisfy the good faith standard when facing multiple claimants for insufficient funds. This article briefly discusses the approaches taken by Florida, California, Texas, Illinois and Pennsylvania.
Florida
Florida requires insurers to act in good faith. Within this standard, the insurer has discretion in its decision to settle claims and “may even choose to settle certain claims to the exclusion of others, provided this decision is reasonable and in keeping with its good faith duty.”1 To comply with its good faith duty, the insurer must: “(1) fully investigate all claims arising from a multiple claim accident; (2) seek to settle as many claims as possible within the policy limit; (3) minimize the magnitude of possible excess judgments against the insured by reasoned claim settlement; and (4) keep the insured informed of the claim resolution process.”2
California
California does not have a clear rule or standard, but leans towards a good faith approach. The California Insurance Law Handbook states the following: “When the insured’s policy limits are insufficient to pay all claims of multiple injured parties in full, the insurer must endeavor to settle in a way that avoids exposing the insured to any personal liability. … When a liability insurer is faced with the problem of too many claims, and too little money, the insurer should use leverage to purchase greatest release of liability for the insured.”3 The use of interpleader has received mixed reception in California. While some courts have found interpleader to be proper when there are multiple reasonable claims,4 the California Insurance Law Handbook warns against it, stating that the “[u]se of interpleader is arguably a dereliction of the insurer’s duty to [the] insured because the interpleader does not extinguish [the] insured’s liability, only the insurers.5
Texas
Texas applies a first-come, first-served standard. “[W]hen faced with a settlement demand arising out of multiple claims and inadequate proceeds, an insurer may enter into a reasonable settlement with one of the several claimants even though such settlement exhausts or diminishes the proceeds available to satisfy other claims.”6 A pro-rata sharing of policy limits among claimants is not required.7
Illinois
Illinois applies a first-come, first-served standard. When there are several claimants, “the insurer has the right to settle claims in good faith even though such payments exhaust the policy limits of the insured’s policy so that a subsequent judgment creditor cannot collect on the policy.”8
Pennsylvania
Pennsylvania applies a first-come, first-served standard. The Superior Court of Pennsylvania has stated that “where several claims arise from a single insured event but where judgments for those claims were or are to be obtained against an insured in different actions, the insurance company may distribute the proceeds on a first-come-first-served basis according to priority of judgment, even if the insurer’s maximum liability under the policy is inadequate to compensate all claimants.”9
Conclusions
While the first-come, first-served approach appears to be the common method applied by courts, insurers are still obligated to act in good faith. The satisfaction of this standard can vary state by state, and it is important to research local laws or consult local counsel prior to taking action.
- Farinas v. Florida Farm Bureau General Ins. Co., 850 So. 2d 55, 561 (Fla. 4th Dist. Ct. App. 2003).
- General Security Nat. Ins. Co. v. Marsh, 303 F. Supp. 2d 1321, 1325 (M.D. Fla. 2004) (citing Farinas, 850 So. 2d at 560–61).
- California Insurance Law Handbook, § 11:203 Insurer’s duty to settle when there are multiple claimants and insufficient policy limits.
- See, e.g., Society Ins. Co. v. Nystrom, 718 Fed. Appx. 482 (9th Cir. 2017) (finding that interpleader was proper when “at the time of filing there were multiple claimants with colorable claims to the insurance proceeds and Society had conceded coverage by depositing the funds.”).
- California Insurance Law Handbook, § 11:203 Insurer’s duty to settle when there are multiple claimants and insufficient policy limits.
- Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312, 315 (Tex. 1994).
- Zapata Corp. v. Zapata Gulf Marine Corp., 986 S.W.2d 785, 787–88 (Tex. App. Houston 1999) (finding that, outside of an agreement stating otherwise, parties sharing an insurance policy are not owed a pro rata share of the policy when they each have a claim to the proceeds).
- State Farm Mut. Auto. Ins. Co. v. Murphy, 348 N.E.2d 491, 494 (Ill. App. Ct. 1976).
- Scharnitzki v. Bienenfeld, 534 A.2d 825, 827 (Pa. Super. Ct. 1987).
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