In its recent decision in ACE Capital v. Eplanning,Inc., 2013 U.S. Dist. LEXIS 32613 (E.D. Cal. March 8, 2013),the United States District Court for the Eastern District ofCalifornia had occasion to consider California rules concerningsettlement of competing claims to limited insurance proceeds,particularly in a situation where some of the claims are notcovered.

Underwriters insured Eplanning under a $5 million claims madeand reported professional liability policy. A number of claims weremade and reported during the policy period, the total of which farexceeded the policy's limit of liability. While Underwritersinitially undertook the defense of Eplanning and settled some ofthe underlying claims, it eventually interpleaded the remainder ofthe policy proceeds—just in excess of $300,000—into the court to beallocated among the various remaining claimants. At issue in theinterpleader was whether Underwriters' conduct was in bad faith,pursuant to Schwartz v. State Farm, 88 Cal. App. 4th 1329(2001), for not having commenced its interpleader earlier. This bad faith claim, however, was asserted by underlyingplaintiffs who had brought four individual suits not covered underthe policy because their claims were first made after thepolicy's expiration. These plaintiffs, as the assignees of theinsured, argued that an insurer can still act in bad faith, evenwhere no policy benefits are ultimately due, “where there arenumerous covered claims asserted against the policy” and wherethere is a potential for coverage. Thus, plaintiffs argued thatUnderwriters committed bad faith in its settlement of other claims,and that this bad faith cause of action was assignablenotwithstanding the fact that plaintiffs' underlying suits were nototherwise covered under the policy. The court disagreed, noting that given the claims made andreported nature of Underwriters' policy, and given the fact thatthe four suits brought by underlying plaintiffs were commencedafter the policy's expiration, there never was a potential thatthese particular claims would be covered under the policy. Thecourt concluded that the decision in Schwartz onlyextended to claims for which insurers can have a coverageobligation and where this coverage obligation is breached. Thus,Underwriters were not required to consider plaintiffs' four suitsin making its decisions concerning settlement and interpleader. Thecourt agreed that Underwriters could have no bad faith exposure tounderlying plaintiffs given the correctness of Underwriters'disclaimer of coverage. As the court explained, “an insurer cannotbe held liable on a bad faith claim for doing what is expresslypermitted in the agreement.”