A federal court applying Pennsylvania law recently dismissed a case against an insurer seeking damages for breach of contract and bad faith following the insurer’s settlement of some but not all claims against an insured. The insurer in that case followed a first-in-first-out (FIFO) approach to settling claims and, in the process, it exhausted the coverage available under the policy. The court held that the exhaustion of limits permitted the insurer to refuse to defend a late-blooming claim. Further, the court held that the insurer did not commit any common law or statutory bad faith in paying the claims as they were presented.
In NIA Learning Center, Inc. v. Empire Fire & Marine Insurance Co., 2009 WL 3245424 (E.D. Pa. October 1, 2009), the insurer had issued a commercial auto policy with a combined single limit of $100,000. The policy contained a provision that allowed the insurer to terminate its duties of defense or settlement after it exhausted limits by payment of judgments or settlements.
An insured driver was involved in a collision that resulted in damage to another vehicle and injuries to a pedestrian. The insurer settled the property damage claim for about $13,000 and it paid the balance of the policy limits to the pedestrian. Shortly before the statute of limitations expired, the other driver sued for bodily injuries sustained in the accident.
The insured driver tendered the defense of that action to the insurer. The insurer declined, noting the exhaustion of limits in the prior settlements. After the named insured was added to the suit as a defendant, it engaged counsel to defend the suit against it and the driver. That suit ended in an arbitration award of $20,000.
In the coverage case, the insured sought contractual and extra-contractual damages on several theories, including breach of contract and common law and statutory bad faith.
In rejecting the breach of contract claim, the court explained that, once invoked, the insurer’s duties to defend and indemnify are not limitless. Here, the policy contained a provision that allowed the insurer to terminate its duties of defense and settlement upon exhaustion of policy limits.
Nonetheless, the insured asserted that the insurer acted in bad faith when it settled the first two claims when it knew or should have known that there were other potential claims. It maintained that the insurer knowingly exposed the insured to losses that would not be indemnified under the policy.
With regard to the common law bad faith claim, the court noted that the policy carried with it an implied duty to act in good faith. The court recognized that the insurer acted in good faith because its settlement of the early claims occurred before the assertion of the final claim and because the insurer obtained releases for the insured. It elaborated that, in the multiple claim scenario, the insurer has an obligation to entertain seriously and to accept reasonable settlement offers to avoid litigation, even if that means that the insured may remain exposed for other claims. The insurer cannot disregard the interests of the insured by refusing to negotiate.
With regard to statutory bad faith, the court explained that the focus is upon the reasonableness of the insurer’s action. For example, did the insurer have a reasonable basis to deny benefits available under the policy? Further, did the insurer know of or recklessly disregard its lack of a reasonable basis to deny the claim? As such, the court considered the manner in which the insurer discharged its obligations of defense and indemnification. As such, the court permitted limited discovery of the adequacy of investigation and any failures of communications during the adjustment of the claims.
In disposing of the common law and statutory bad faith claims, the court perceived the insurer’s actions to be reasonable. There appeared to be no reason to challenge the insured’s liability and the settlement payments seemed to be justified by the injuries and damages incurred. Based upon its review of the claim file log and the claim file, the insured could point to no evidence of any bad faith on the part of the insurer. The court commented that the insurer was under no obligation to delay the settlement of the first two claims until all possible claims were presented. The insurer did not have to risk incurring liability in excess of its limits by delaying settlement of the claims in the order of presentation.
Although NIA Learning Center v. Empire Fire does exonerate an insurer of potential liability for adopting the FIFO approach to settlement of multiple claims, insurers must be mindful of the fact that the case represents the view of one trial judge on a novel and complex issue that has yet to be addressed by any Pennsylvania appellate court. Further, the likelihood of a favorable outcome in this case was enhanced by the objectively reasonable approach taken by the insurer and the absence of any specific criticism by the insured.
In addition, insurers should be aware that, in some circumstances, interpleader may be a viable remedy to invoke in cases involving multiple claimants. Significantly, the insured never asserted that the insurer should have utilized that remedy instead of paying the claims under the FIFO approach.