Defense Digest

When Competing Claims Vie For Potentially Insufficient Policy Limits: Tips For Avoiding Bad Faith Litigation When There Are More Claims Than Money Available To Pay Them

Background

This article was prompted by efforts to settle multiple claims and lawsuits arising out of a single accident, caused by a dump truck's rear-ending a car on a bridge. This caused a chain reaction, eleven-car pile-up with extensive property damage and multiple personal injuries. There was a single policy of insurance insuring the dump truck's owner and driver. Some of the less injured victims filed claims with the insurer; those with more serious injuries, of course, filed lawsuits. As the claims and lawsuits multiplied, and as some of the claims were settled (and reserves were depleted), the insurer became concerned that its policy limits might not be sufficient to pay out all the competing claims, prompting the question: in Florida, what duties does the insurer owe its insured while resolving such competing claims situations? And what can the insurer do to minimize potential bad faith claims if the policy limits are not sufficient to satisfy all of the competing claims?

The Law

For many years, insurers in Florida had what appeared to be wide latitude to settle multiple competing claims as they saw fit, having "the right to enter reasonable settlements with some of those claimants, regardless of whether the settlements deplete or even exhaust the policy limits to the extent that one or more claimants are left without recourse against the insurance company..." Harmon v. State Farm Mutual Insurance Company, 232 So. 2nd 206, 207-208 (Fla. 2nd DCA 1970) (emphasis added). But, in Farinas v. Florida Farm Bureau General Insurance Company, 850 So. 2nd 555 (Fla. 4th DCA 2003), the Fourth District Court of Appeal held that any insurer in a multiple, competing claims scenario must fully investigate all the claims at hand to determine how to best limit the insured's liability; keep the insured informed of the claim resolution process; and minimize the magnitude of possible excess judgments against the insured by "reasoned claims settlement." In Farinas, a young man lost control of the car he was driving, causing the deaths of five teenagers and severe injuries to another seven. He was insured by a Florida Farm Bureau ("FFB") policy. FFB settled with only one survivor and two estates for the $300,000 policy limits. The remaining claimants filed third party bad faith actions, alleging that FFB had entered into the settlements without due regard for the interests of the insured. The Farinas Court held that in order to resolve the bad faith issue, the jury had to resolve many factual issues, including: (1) whether the insurer's quick settlement with three of the possible claimants was reasonable; (2) whether FFB's rejection of global and other settlement options contemplated the best interests of the insured; (3) whether FFB adequately investigated the facts of all of the claims; and (4) whether FFB properly rejected advice of legal counsel and suggested settlement strategies proposed by Farm Bureau employees. Farinas poses some interesting problems. For instance, Farinas requires the insurer to evaluate all claims in making decisions to settle. How does an insurer value an inchoate or potential claim about which the insurer may have some knowledge, but for which no formal demand has been made? How does the insurer value a claim made, then apparently abandoned, by a claimant who has moved out of state, or who is otherwise no longer reachable by the insurer or its attorney? And exactly when should the insurer settle various claims or lawsuits? Florida has a four-year statute of limitations. Under Farinas, could it be argued that where there is some potential for late-made claims, the insurer should not settle any claims or lawsuits until the statute has expired? According to one commentary, "the … Farinas rule apparently prevents an insurer from accepting individual valid settlement offers, however reasonable they might be on their own individual merits." Florida's New Good Faith Duty on an Insurer Not to Settle, 78 Fla. Bar J. 42 (November 2004)(emphasis added).

Also, the Farinas case apparently plays havoc with Florida's current case-by-case mediation process. It is argued that "[t]he same duty [imposed by Farinas] to resolve all claims would also prevent mediation of individual claims." In an abundance of caution, then, an insurer may well need to engage in a global mediation when it appears that claims and judgments may exceed policy limits.

Although Farinas was a 2003 case, there are no other Florida decisions, as of the date of this writing, which answer these questions or apply its analysis and holding. However, a federal court's 2004 opinion in General Security National Insurance Company v. Marsh, 303 F. Supp. 1321 (M.D. Fla. 2004) (applying Florida law), does provide some suggestions for insurers wishing to minimize potential bad faith exposure. Marsh involved a truck that collided with two cars. One person suffered bodily injuries and the other died. The truck driver and the truck owner were insured for a combined single accident liability policy in the amount of $300,000. The decedent's estate demanded the full $300,000 policy limits; shortly thereafter, the injured survivor made the same demand. Early on, the insurer obtained information from both the estate and the injured survivor as to each claimant's age, marital status, survivors, employment, and health at the time of the accident. The insurer also obtained information about the survivor's injuries. About one month after the demands were made, the insurer advised the estate and the survivor that its policy limit was available to both of the claimants on a global basis. The claimants failed to agree on how to divide the tendered policy limits between themselves. Thereafter, both the estate and the survivor filed separate lawsuits. A few months after the lawsuits were filed, both the estate and the survivor attended an unsuccessful mediation set by the insurer. It was only at this point that the insurer settled for full policy limits with the estate (which claim it valued as larger than that of the survivor). (It should be noted that the insurer used the services of an expert to justify its valuation of the competing claims.) Based upon the foregoing, the Middle District Federal Court found that the insured "lawfully extinguished its duties under the insurance contract…"

*Pamela, an associate in our Jacksonville, FL office, can be reached at pbower@mdwcg.com or (904) 358-4206.