Addressing Policy Limit Challenges and Avoiding Bad Faith Claims

When reviewing the majority states' case law, several predominant general coverage themes emerge: 

• The law generally permits an insurer to settle one claim made against the insured without the consideration of other known claims existing against the insured.

• These states generally permit set offs against a claimant's final recovery in the case for any settlements received from other sources. When a settlement is made on behalf of one insured or an additional insured, the non-settling or additional insured is permitted to reduce its potential liability to the claimant based upon any other settlements paid to the claimant. Thus, the majority states find it significant that the non-settling insured or additional insured still receives some benefit of the insurer's settlement.

• In evaluating the potential bad faith committed against the non-settling defendants, the majority courts generally consider whether the non-settling insured or additional insured had other available primary or excess insurance to provide coverage for the claim. Where other insurance was available, the courts have recognized that the non-settling insured or additional insured would not be left naked by the settlement.

• These states' general duty to defend rules typically hold that once an insurer's policy limits are exhausted, the insurer's duty to defend is terminated. Thus, the insurer is permitted to withdraw from all insureds' and/or additional insureds' (even the non-settling insureds) defense once the policy limits are exhausted.

• Finally, these states generally hold that an action for bad faith against an insurer is only premised upon the failure to pursue a settlement offer, not the acceptance of one.

Practical Advice and Steps to Follow in a Majority State

When an insurer is in a state following the majority view and permitting exhaustion of a policy's limits in favor of less than all insureds, the insurer can proceed under the following steps to attempt to minimize its bad faith exposure:

• When receiving a policy limits demand, notify all involved insureds and/or additional insureds that the demand has been made and notify them of the claimant's refusal to release all insureds in exchange for the policy's limits.

• Ensure that the claimant's attorney knows and is very clear that the insurer provides coverage to multiple insureds and/or additional insureds.

• Make repeated attempts to negotiate a settlement with the claimant's counsel that includes a release of all insureds and/or additional insureds.

• Most importantly, document all notifications and settlement efforts in writing!

• If after the insurer's repeated attempts to secure a release of all insureds and/or additional insureds, the claimant still refuses to release all insureds and/or additional insureds, proceed with the payment of policy limits on behalf of just one (or less than all) insured.

Minority View: Does Not Allow the Tender of Policy Limits Unless all Insureds are Released

A minority of states addressing this issue refuse to allow an insurer facing a policy limits demand to settle for less than all of its insureds and/or additional insureds. These minority states include:

• Alaska: Williams v. Geico Cas. Co., 294 P.3d 102 (Alaska 2013);

• California: Lehto v. Allstate Ins. Co., 31 Cal. App. 4th 60, 36 Cal. Rptr. 2d 814 (1994); Palmer v. Fin. Indemn. Co., 215 Cal.App.2d 419, 30 Cal. Rptr. 2d 419 (1963); and

• New York: Smoral v. Hanover Ins. Co., 37 A.D.2d 23, 322 N.Y.S.2d 12 (1971).

Like the majority states, several predominant coverage law themes emerge in the minority states:

• The general duty to defend law generally provides that an insurer has a duty to defend ALL of its insureds.

• They generally hold that insurers owe their insureds a duty of good faith and fair dealing. If an insurer were to settle on behalf of just one insured or additional insured, it would be violating the duty of good faith and fair dealing owed to the non-settling insureds and/or additional insureds.

• The minority find that the approach of refusing to settle on behalf of less than all insureds is the best approach to avoid bad faith litigation by the insured who was left unprotected by the settlement.

Practical Advice and Steps to Follow in a Minority State

When an insurer is in a state following the minority view and prohibiting the exhaustion of a policy's limits in favor of less than all insureds, the insurer can proceed under the same steps as if in a majority state to attempt to minimize its bad faith exposure, with the exception of the final step permitting settlement. Thus, in a minority state, an insurer should follow the majority state steps 1–4. The final step to follow in a minority state is:

• If after the insurer's repeated attempts to secure a release of all insureds and/or additional insureds, the claimant still refuses to release all insureds and/or additional insureds, don't settle the case.

Insurer Advice When a State Has Not Addressed the Issue

Both majority and minority states look to their general duty to defend and bad faith case law to evaluate what approach to take when faced with a policy limits demand where the claimant refuses to release all potential insureds and/or additional insureds. Given this background, if an insurer finds itself in a state where the law on the issue is unsettled, the best place to start the evaluation is to look at the state's general duty to defend and bad faith case law. These general principles should then be compared to the predominant themes from the majority and minority states to determine on which side of the fence the undecided state's laws most closely align.

Georgia State Law Example

Georgia has yet to address the issue, and its general duty to defend and bad faith case law provide some insight and guidance on addressing this issue.

Under Georgia law, an insurer can be liable for bad faith when it fails to settle the claim of an injured person within policy limits.¹ In making the decision to settle, the insurer must give equal consideration to both its interests and its insured's interests.² While an insurer is not automatically liable for bad faith when it fails to respond to an insurer's time limited settlement demand, the insurer still has a clear duty "to respond to a deadline to settle a claim within policy limits when the company has knowledge of clear liability and special damages exceeding the policy limits."³

"Judged by the standard of the ordinarily prudent insurer, the insurer is negligent in failing to settle if the ordinarily prudent insurer would consider choosing to try the case [over a policy limits settlement] created an unreasonable risk."⁴

Further, Georgia law permits a liability insurer to, "'in good faith, and without notification to others, settle part of multiple claims against its insured even though such settlements deplete or exhaust the policy limits so that remaining claimants have no recourse against (the) insurer.'"⁵

The Georgia Court of Appeals has recognized that "a contrary rule would put insurers at risk of being liable to remaining claimants for amounts above the coverage limits, which would necessarily result in a general policy by insurers of paying claims only after they were reduced to judgment, and would discourage the sound public policy encouraging settlements."⁶ Nonetheless, the insurer must still act in good faith when settling a part of the multiple claims.⁷

While these cases were not decided in the context of claims against both a named insured and an additional insured, they do show that a Georgia court allows the settlement of one claim, despite the insurer's knowledge of other existing claims and despite the potential that an insured may be left exposed with no coverage for the remaining claims.

Given Georgia's established bad faith settlement law, decisions holding an insurer may settle one claim when it knows of multiple claims, and the persuasive majority rule most closely aligning with Georgia's coverage principles, a Georgia court would most likely hold that an insurer acts in good faith towards its additional insured when it settles a claim on behalf of its named insured or less than all insureds. This applies where it makes reasonable attempts to also secure a settlement and release of the other insureds or additional insureds in exchange for those policy limits. Therefore, while Georgia courts have not expressly addressed the issue, it is likely that an insurer acting in this scenario under Georgia law can act in good faith provided it follows the proper cautionary steps in tendering policy limits on behalf of less than all insureds.

Whether an insurer can settle a claim or case for policy limits for less than all of its insureds is a very delicate and state specific issue that can quickly lead to a potential bad faith action if the correct approach is not utilized. Any insurer facing this situation should take the time to step back, act cautiously and reasonably, and consult the case law in the relevant state before proceeding with any settlement.

Footnotes:

¹ S. Gen. Ins. Co. v. Holt, 262 Ga. 267, 268, 416 S.E.2d 274, 276 (1992).

² Ibid.

³ Ibid.

⁴ Cotton States Mut. Ins. Co. v. Brightman, 276 Ga. 683, 685, 580 S.E.2d 519, 521 (2003).

⁵ Miller v. Ga. Interlocal Risk Mgm't Agency, 232 Ga. App. 231, 231, 501 S.E.2d 589, 590 (1998) quoting Allstate Ins. Co. v. Evans, 200 Ga. App. 713, 714-15, 409 S.E.2d 273 (1991).

⁶ Ibid.

⁷ Whiteside v. Infinity Cas. Ins. Co., No. 4:07-CV-87 (CDL), 2008 WL 3456508, at *11 n.10 (M.D. Ga. Aug. 8, 2008); Evans, 200 Ga. App. at 714, 409 S.E.2d at 274.