RISKVUE ARCHIVE | FEATURE STORIES

Too Many Mouths to Feed: The Insurer’s Obligation When Multiple Policyholders Are Covered by the Same Policy

By Christopher H. Yetka, Lindquist & Vennum P.L.L.P.

Many courts find that an insurer owes an obligation of good faith and fair dealing to its policyholders. The nature of that obligation as applied to settlement of multiple claims varies depending on the jurisdiction addressing the relationship. The insurer’s obligation can be complex, indeed, when there are multiple policyholders and claims exceed policy limits.

In the cases that have addressed this situation, courts have applied two basic approaches. The first approach is to not allow the insurer to settle on behalf of only one of multiple policyholders. The second approach is to allow settlement, but only if the insurer first tries, albeit unsuccessfully, to reach a global settlement, and the settlement is reasonable from the standpoint of all policyholders. One overriding principle can be discerned from all of these cases. An insurer can usually avoid bad faith if it places the interests of each its policyholders before its own. However, the opposite is also true. Where an insurer fails to follow this guiding principle, and puts its own interests before those of its policyholders, insurers are often found guilty of bad faith.

Jurisdictions That Find Bad Faith Where an Insurer Settles on Behalf of One, but Not All, of Its Policyholders

One group of jurisdictions holds that an insurer will be guilty of bad faith if, by settling on behalf of one of its policyholders, it exhausts the policy limits and leaves its other policyholders without coverage. States that follow this principle include California, Kansas, New York and Illinois. Following this same principle, courts in these jurisdictions also tend to find that an insurer can safely refuse to settle on behalf of one insured even if there is exposure beyond policy limits if the settlement does not release all policyholders.

In a first line of cases, California courts have said that the insurer was not “entitled to pick and choose between its two insureds in its payment of benefits, ‘particularly where no detriment is demonstrated by providing equal treatment to both insureds.’” However, California courts have also said that the insurer can settle on behalf of one policyholder, and not others, if other policyholders are somehow not deprived of coverage. This second line of California cases suggests that being added as an additional insured to someone else's policy is no substitute to having your own policy of insurance.

Kansas, New York and Illinois decisions are consistent with the first line of California cases, and find an insurer is guilty of bad faith for settling on behalf of one but not other policyholders, and, conversely, an insurer is not guilty of bad faith for failing to settle a claim where all policyholders are not released.

Jurisdictions That Allow Insurer to Settle in Behalf of One Policyholder Where Global Settlement Is Not Possible, and Settlement Is Reasonable from the Standpoint of All Policyholders

A second group of jurisdictions allows an insurer to settle on behalf of one of its policyholders to the detriment of other policyholders if the insurer first attempts to obtain a global settlement on behalf of all of its policyholders and the ultimate settlement is reasonable from the standpoint of all policyholders. Courts that follow this principle include Florida, Texas, Pennsylvania, Missouri and Louisiana.

In Florida, a number of courts have allowed an insurer to settle on behalf of some but not all of its policyholders; however, the courts look closely at the actions of the insurer to be sure that it is not putting its own interest before the interests of its policyholders. Texas courts allow settlements on behalf of one, but not all, policyholders so long as the settlement is reasonable and the insurer addresses settlements on a first-come, first-served basis.

Similarly in Pennsylvania, Missouri and Louisiana, courts have held that an insurer may settle claims on behalf of some policyholders and not others, to the extent the settlement is made in good faith, all parties are represented, and the settlement provides some benefit to all of the policyholders (by reducing total liability or otherwise).

Conclusion

Courts take two approaches in situations involving multiple policyholders and claims exceeding the policy limits. One set of jurisdictions holds that an insurer cannot settle on behalf of one policyholder if it will leave another policyholder without coverage. The other set of jurisdictions more fully analyzes the motivations of the insurer and the effect on the non-settling policyholder in determining if a settlement is proper. If an insurer fails to meet the applicable settlement standards, it may be found guilty of bad faith. If a policyholder finds itself in this situation, it is important that the policyholder become familiar with the applicable jurisdiction's case law and closely monitor the insurer’s actions.

ABOUT THE AUTHOR

Christopher Yetka is a partner in the insurance coverage practice group of Lindquist & Vennum P.L.L.P., focusing his practice on representing policyholders by enforcing their coverage rights. Mr. Yetka has handled numerous complex coverage cases, including environmental, advertising injury, D&O, and commercial auto claims. He can be reached at cyetka@lindquist.com.

This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced insurance advisor for your specific situation or particular questions.

riskVue | The webzine for risk management professionals
April 2006