Solving Interpleader and Inadequate Limit Problems

Transcription

1 Solving Interpleader and Inadequate Limit Problems By Jay W. Brown and James E. Rogers Beirne, Maynard & Parsons, L.L.P. I. INTRODUCTION A. Third Party Claims and the Stowers Doctrine. Most Texas attorneys are aware of basic Stowers liability for negligently failing to settle a third party insurance claim within policy limits. G. A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544 (Tex. Comm. App. 1929, holding approved). Over the 80 years since that case, Texas has developed a duty for the insurer to settle an insurance claim where: (1) the claim is within the insurance policy s coverage; (2) the settlement price is a sum of money that does not exceed the monetary limits of liability coverage; (3) the settlement proposed will result in a full release of the insured s obligations to the claimant; and, (4) the terms of the proposal are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured s potential exposure to an excess judgment. Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994); Am. Physicians Ins. Exch.v. Garcia, 876 S.W.2d 842, (Tex. 1994). If the insurer fails to settle a covered claim under Stowers, the insured is granted a private right of action (commonly referred to as a Stowers action ) against the insurer for the amount of judgment that exceeds the limits of the insured s liability in the policy. B. First Party Claims and the Duty of Good Faith. Likewise, most attorneys are familiar with the statutorily imposed duty of good faith on insurers to investigate, handle and promptly settle first party insurance claims. TEX. INS. CODE CHAPTER 541. Basically, the insurer has a good faith duty to handle its insured s claim and can be liable for extra-contractual damages if it fails to meet that burden. Under Texas law, that statutory duty co-exists with the normal common law concepts of good faith and fair dealing from an insurer to an insured. See Universal Life Ins. Co. v. Giles, 950 S.W.2d 48, 55 FN 4 (Tex. 1997) (noting that Chapter 541 s predecessor, Article 21.21, does not preempt the common law duty of good faith and fair dealing). C. Dealing with Inadequate Policy Limits and Judgment Proof Insureds. Dealing with a single third or first party claim that could potentially exceed policy limits and impose excess or uncovered liability is complicated enough. Indeed, at least one practitioner has compared it with threading a needle. Steven R. March, EXCESS OF LIABILITY, THREADING THE NEEDLE WHEN THERE ISN T ENOUGH INSURANCE, ADR JOURNAL (1998). Those problems, however, are exacerbated when there are either multiple insureds or multiple claimants each making significant

2 claims against a policy with insufficient limits to cover all of the claimed loss. This situation is further complicated in the third party context with a judgment proof insured or one lacking sufficient assets that can be seized to satisfy a judgment in excess of the policy limits. As an aside, if the insured is not judgment proof and maintains sufficient assets to benefit potential claimants, the insurer and appointed defense counsel should recommend that the individual obtain coverage counsel, and great care should be taken to avoid potential conflicts of interest. Likewise, significant effort should go into maintaining correspondence and open communication between the insurer, coverage counsel, appointed insurance defense counsel and the insured. The parties should attempt if reasonably possible to reach an agreed resolution of the matter. Those situations open a separate can of worms beyond the scope of this paper s mandate. Thus, those issues will not be addressed. Instead, this article will analyze third party situations where the insured is effectively judgment proof, lacks sufficient assets of any tangible benefits and the insurer must both protect its insured and avoid potential excess liability under the Stowers Doctrine. That is when interpleader can be of specific use. Finally, this paper will briefly analyze first party claims by additional insureds against a single policy with insufficient funds, as well as multiple claimants to a single life insurance policy s proceeds. D. Preliminary Issues and Potential Strategies When Faced with Inadequate Limit Problems. In considering both situations, there are numerous strategies at counsel s disposal, including: (1) simply settling claims as they are presented within the policy limits; (2) attempting to negotiate a pro-rated settlement with all current claimants; (3) attempting to settle the significant claims first and then dealing with smaller claims; or, (4) simply setting an early arbitration or mediation with all known claimants or insureds. Each of these strategies bears its own risks and rewards, and attorneys must always be wary of imposing their strategic ideas upon an insured. It is essential for the practitioner to remember that imposing any solution over the expressed wishes of an insured may result in a claim for bad faith or Stowers liability; even if the imposed solution turns out to be a complete success. Nationwide Mut. Ins. Co. v. Holmes, 842 S.W.2d 335 (Tex. App. San Antonio 1992, writ denied) (Insurer found liable for sanctions and attorneys fees for offering its insured the option of going through bankruptcy in the event he was found liable at trial). Caution must therefore be used in deciding on a course of action. Obtaining the insured s consent for that given course of action is always a wise move, but caution must be used even in obtaining that consent. The point of this paper is to highlight another mechanism that is gaining popularity in Texas state and federal courts to resolve inadequate limit problems: interpleader. Indeed, interpleader is a useful tool to deal with situations of multiple liability from competing claims in both the first and third party context where the pot of gold at the end of the insurance coverage rainbow is simply inadequate. Interpleader is useful in the third party context if the insured is judgment proof, and of no further use to the claimants. In such a situation, the claimants may agree to release the insured from liability in exchange for interpleading the policy limits into the court.

3 Then, the claimants can each present their cases for their respective portions of those proceeds to the court and obtain payment for their respective amount of judgment. Further, in the first party context, interpleader brings the insureds into one proceeding and allows them to present their claims to the court, as opposed to their insurer. Thus, interpleader grants a certain amount of judicial approval to the final payment of multiple first party claims that exceed the policy limits when taken together. In that manner, interpleader can effectively allow an insurer to protect its insured and avoid potential excess liability under Stowers in the third party context, as well as potentially resolve contractual claims by insureds for excess damages in an attempt to avoid liability for bad faith claim under common law and TEX. INS. CODE CHAPTER 541. This paper introduces the general use of interpleader under both Texas state and federal court practice, points out several idiosyncrasies in that process and concludes by highlighting the pros and cons of interpleader, along with the interplay between it and general notions of excess liability in the third and first party context. II. BASIC PROCEDURE FOR FILING INTERPLEADER SUITS IN TEXAS STATE AND FEDERAL COURT A. Interpleader Suits Under TEX. R. CIV. P. 43. An insurer that is the subject of multiple claims under a single policy may file a petition in interpleader, joining the competing claimants to the lawsuit as individual defendants. TEX. R. CIV. P. 43. In such an instance, the insurer must show that it is the subject of rival claims to the same policy, that it did not occasion unreasonable delay in filing its action in interpleader, and that it is unconditionally tendering the entire policy limits into the registry of the court. See Jones v. Standard Fire Ins. Co., 825 S.W.2d 242 (Tex. App. Fort Worth 1992, writ denied). After filing a petition in interpleader, the defendants are permitted to file a response in opposition. However, the only recognized defenses are: (1) a lack of rival claims; (2) that there has been unreasonable delay; (3) that the entire policy limit has not been unconditionally tendered; and (4) that the interpleader is actually an interested stakeholder and is the cause of the various conflicting claims. See Olmos v. Pecan Grove Mun. Util. Dist., 857 S.W.2d 734, 741 (Tex. App. Houston [14 th Dist.], no writ); Davis v. East Tex. S & L Ass n., 354 S.W.2d 926, 930 (Tex. 1962); Tri-State Pipe and Equipment v. Southern Mut. Ins. Co., 8 S.W.3d 394, 402 (Tex. App. Texarkana 1999, no pet.). After filing a response, the court must conduct a hearing to initially determine whether the interpleader action is appropriate. At such a hearing, the interpleader must introduce evidence to support its petition, and the claimants are entitled to present controverting evidence for the court s consideration. Thereafter, if the court determines the suit is proper, it will ordinarily order the interpleader to deposit the policy limits into the court registry, discharge the interpleader from the suit and enjoin the rival claimants from taking any action against the interpleader. TEX. R. CIV. P. 43. After the interpleader is dismissed, the suit continues on the merits for the rival claimants to determine their respective rights to the policy limits. See Taliaferro v. Texas

4 Commerce Bank, 669 S.W.2d 172, 174 (Tex. App. Fort Worth 1984, no writ). For appellate purposes, if the order granting the interpleader disposes of all issues regarding the interpleader, it is final and subject to immediate appeal by the multiple claimants. K&S Interests v. Texas AM Bank/Dallas, 749 S.W.2d 887, (Tex.App. Dallas 1988, writ denied). Likewise, an ordering denying interpleader dismisses the entire proceeding and is immediately ripe for appeal. Taliaferro v. Texas Commerce Bank, 660 S.W.2d 151, 155 (Tex.App. Fort Worth 1983, no writ). After the interpleader is dismissed and the order is entered, the insurer has given up all claims to the policy funds, and the only remaining issue is for the various claimants to litigate how the funds should be distributed. Thus, the first obvious limitation is that the insurer has tendered the entire policy limit and effectively waived all claims to any amount that may be remaining after the claimants are paid. That being said, there some benefits to this course of action, including a cap on legal expenses and full notice to all claimants that their efforts in litigating the matter will only result in a reduced recovery (i.e., there is no more than the policy limits). Thus, further litigation only spends the claimants attorney s fees in an effort to collect a set amount of money. Finally, in some instances, Texas law may permit the interpleader to collect its attorney s fees spent in defending a proper interpleader action from objecting claimants. U.S. v. Ray Thomas Travel Co., 80 S.W.2d 21, 24 (Tex. 1964). To recover its fees, the interpleader must be completely innocent and not responsible for the conflicting claims and it must prevail in a contested interpleader suit. Olsmos, 857 S.W.2d at 742. However, to date, no cases were found granting an insurer its attorney s fees for interpleading policy limits in either the first or third party context. On the whole, Texas Courts have favored the use of interpleader in resolving inadequate limits issues, particularly in the first party context. See Stephen R. Marsh, SHALLOW POCKETS: MULTIPLE CLAIMANTS ON AN UNDERINSURED DEFENDANT (2000). The same should hold true in the third party context so long as the insured s interests are adequately protected. B. Interpleader in Federal Court Under Either FED. R. CIV. P. 22 or 28 U.S.C In a similar manner, Fed. R. Civ. P. 22 and 28 U.S.C allow an insurer or insured exposed to multiple claims for a single policy to consolidate and settle all of those claims in one proceeding. Federal interpleader is intended to protect against multiple lawsuits with inconsistent results and indefinite liability. See State Farm Fire and Cas. Co. v. Tashire, 386 U.S. 523, 534 (1967). Interpleader, however, is not meant to confer independent subject matter jurisdiction for the federal courts, and the insurer must show that the matter falls within one of the general statutory grants of federal jurisdiction: diversity of citizenship jurisdiction under 28 U.S.C (as modified by statutory interpleader under U.S.C. 1335(a)), or federal question jurisdiction under 28 U.S.C See Commercial Ins. Co. v. U.S., 999 F.2d, 581, 583 (D.C. Cir. 1993). Thus, before filing a federal court action in interpleader, counsel must ensure that there is an adequate basis for subject matter jurisdiction or the action is at risk of being summarily dismissed. See Morongo Band of Mission Indians v. California State Bd. Of Equalization, 858 F.2d 1376,

5 (finding jurisdiction improper because parties were not diverse). 1. Statutory and Rule Based Jurisdiction for Federal Interpleader Actions. First, rule based jurisdiction derives its federal basis from normal diversity jurisdiction procedures under 28 U.S.C There, the interpleading stakeholder must show that it is diverse from each claimant and that the amount in controversy exceeds $75,000. See 28 U.S.C. 1332(a); Track-a-Tune, Inc. v. Re, 23 F.3d 60, 62 (2d Cir. 1994). If the court has jurisdiction when the suit is filed, it may dismiss the stakeholder without losing that jurisdiction, even though technically that dismissal destroys diversity jurisdiction under 28 U.S.C Phoenix v. Mut. Life Ins. Co. v. Adams, 30 F.3d 554, 558 FN 3 (4 th Cir. 1994). Second, statutory based jurisdiction grants Federal District Courts original jurisdiction over interpleader actions that meet certain requirements. 28 U.S.C That section is remedial and intended to be liberally construed. Tashire, 386 U.S. at 533. In sum, it grants original jurisdiction over interpleader actions where: (1) the stakeholder is disinterested in the fund; (2) there are two or more adverse claimants with diversity of citizenship between them; (3) there is a fund of $500 or more; and, (4) the fund has been deposited with or a bond has been given in that amount to the Court. 28 U.S.C. 1335(a). In essence, that statute allows the court to disregard the citizenship of the interpleading stakeholder, so long as the claimants are diverse. Because the parties will eventually be diverse once the stakeholder is dismissed, the stakeholder s citizenship is ignored for interpleading purposes. 2. Federal Question Jurisdiction. Finally, if neither the stakeholder is diverse from the claimants under 28 U.S.C. 1332(a), nor the claimants themselves sufficiently diverse under 28 U.S.C. 1335, then jurisdiction must arise from either a federal statute or federal question. Federal question jurisdiction arising under 28 U.S.C is limited, and in general courts have held that the well plead complaint rule effectively limits the number of interpleader complaints that actually qualify for federal question jurisdiction. See Morongo Band of Mission Indians, 858 F.2d at Simply put, interpleader is generally thought of as a procedural device seeking discharge of the stakeholder s claim, as opposed to a substantive ground for a party to make a claim in federal court. Thus, it is generally difficult to characterize either an insured s or an insurer s attempt to interplead policy limits as impugning a federal statute or creating a federal question. A few courts have held that federal question jurisdiction is sufficient so long as the face of the complaint shows that the stakeholder s right to relief depends upon the resolution of a substantial question of federal law. See generally, Commercial and At l Bank v. Demos, 18 F.3d 45, 487 (7 th Cir. 1994); Wausau Ins. Co., 954 F.2d at Those cases are the exception, however, rather than the rule. 3. General Procedure for Asserting Interpleader in Federal Court. Once counsel passes the initial jurisdictional hurdles, the procedure for asserting a federal interpleader action is very similar to Texas state court. First, a stakeholder must be the subject of more than one claim regarding a single and identifiable fund. Wausau Ins. Co.

6 v. Gifford, 954 F.2d 1098, (5 th Cir. 1992). The stakeholder must demonstrate in its petition that there are more than one claimant with adverse claims to the same fund, and that those claimants have been joined to the interpleader proceeding. FED. R. CIV. P. 22(1). In doing so, the stakeholder must then show that there is a real or reasonable fear of liability and that it filed its interpleader action timely after receiving notice of those multiple claims. See Mendez v. Teachers Ins. & Annuity Ass n., 982 F.2d 783, (2d Cir. 1992). After filing its petition in interpleader (and before the claimant files its response), the stakeholder is required to deposit the entire fund of the policy into the court s registry or make a bond payable to the clerk in such an amount as the court deems proper. 28 U.S.C. 1335(a)(2). Finally, the stakeholder is required to file and serve the action on all necessary parties, and the stakeholder is entitled to use nationwide service of process to affect that goal. See 28 U.S.C In response, the various claimants may file a motion to dismiss the interpleader action and attempt to negate one of the interpleader requirements under federal law. Those include a lack of independent federal jurisdiction, a lack of adverse interest between the claimants in the fund, a lack of multiple liability to the stakeholder, or the occasioning of unreasonable delay or prejudice by the stakeholder in filing the interpleader suit. FED. R. CIV. P. 22. Likewise, the claimants may file a normal answer and any applicable FED. R. CIV. P. 12(b) defenses seeking dismissal of the interpleader suit. After the claimants file a response, the court will conduct a hearing on the issues. Courts usually bifurcate the proceeding for interpleader, first determining that the matter is a proper interpleader and then conducting a trial on the merits. NYLife Distribs., Inc. v. Adherence Group, Inc., 72 F.3d 371, 375 (3 rd Cir. 1995) (in federal courts, actions for interpleader normally involve two steps: first, a determination that the interpleader suit is proper; and second, a trial on the merits between the various claimants). At the first hearing, the trial court determines whether the interpleader is proper. Id. This is solely a question of law for the trial judge. If the stakeholder prevails, the court should dismiss it and enter an injunction restraining the claimants from proceeding against the stakeholder in any other suit regarding the policy. New York Life Ins. Co. v. Connecticut Dev. Auth., 700 F.2d 91, 95 (2d Cir. 1983). Following the hearing on the propriety of the interpleader action, the suit proceeds on the merits as either a jury or a bench trial. That trial is meant to adjudicate all claimants claims and dispense the fund amounts. NYLife Distribs., 72 F.3d at 375. Indeed, at this point, most interpleader actions are resolved by cross motions for summary judgment. See Id. Unlike Texas state law, counsel in a federal interpleader action should note that only final orders denying interpleader are immediately appealable. FED. R. CIV. P. 54(b); Hoornstra v. U.S., 969 F.2d 530, 532 (7 th Cir. 1992). However, orders granting an interpleader action are interlocutory, even though the stakeholder is dismissed and cannot be appealed until all claims to the interpleaded funds have been adjudicated. Diamond Shamrock Oil & Gas v. Commissioner of Internal Revenue, 422 F.2d 532, 534 (8 th Cir. 1970). Thus, the stakeholder maintains a significant appellate advantage in federal court as it can immediately appeal the denial of an

7 interpleader action. The various claimants are at a corresponding disadvantage as they cannot immediately appeal an order granting the interpleader action. In other words, if the interpleader action is approved, the claimant is required to complete the entire interpleader proceeding including a complete trial on the merits to the interpled policy limits and a final judgment resolving the claims before appealing the trial court s decision. See Diamond Shamrock Oil & Gas, 422 F.2d at 534. This provides an obvious strategic consideration that should be taken into account when deciding whether to file an interpleader action in either state or federal court. C. Idiosyncrasies of Filing Interpleader Proceedings and Considerations for Practitioners. Perhaps the most important consideration for filing an interpleader suit is that the interpleader is absolutely affirming that the multiple claims will exceed the policy amount and that the insurer is relinquishing all claims to any amounts available under the policy coverages at issue. An insurer is therefore well advised to do a significant amount of investigation, consideration and communication before it decides to file an interpleader action. In sum, the decision must not be taken lightly or without sufficient information. As one practitioner put it, [a]n insurer should not simply pay out policy proceeds to any claimant who happens to be the first to press a claim. Rather, an insurer should first investigate fully and consult with insureds as soon as possible. See Arnold Anderson, ESTABLISHING GOOD FAITH SETTLEMENTS IN MULTIPLE CLAIMS CASES, FIC. INSURANCE QUARTERLY SUMMER 1979, 381, The same is true for interpleader actions. In making these decisions, there are a number of documents and investigation materials to compile, examine and analyze, including those reflecting: (1) the severity of the damages or injuries; (2) the strength of the claimants claims; (3) the adequacy of the insurance company s investigation to date; (4) the sufficiency of the insurance company s communications regarding settlement offers (otherwise known as the paper trail between the adjuster, the client, defense counsel, client s personal counsel [if any], and opposing counsel and/or the claimants); (5) the sufficiency of the insurance company s communications regarding offers to compromise potential judgments in excess of policy limits; (6) conflicts of interest and potential conflicts of interest between the insurer and the insured; (7) the ability of the insured to obtain its independent counsel to analyze the issues; and, (8) Stowers demands or other offers of settlement made in the suit. See id.; see also, EXCESS OF LIABILITY, THREADING THE NEEDLE WHEN THERE ISN T ENOUGH INSURANCE, at p. 2. In sum, an insurer should fully investigate a claim, consult with the insured promptly regarding the risks and benefits of an interpleader action, determine what settlements are reasonable from the standpoint of the insured and, potentially, obtain an advisory legal opinion analyzing the pros and cons of interpleader action both from the insured s and insurer s point of view.

8 III. CONSIDERATIONS FOR FILING INTERPLEADER UNDER SORIANO STOWERS AND TEX. INS. CODE CH. 541 The application of the Stowers Doctrine regarding multiple claimants presenting multiple claims in excess of policy limits was squarely presented in Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994). In Soriano, the issue was whether the insurer was negligent for failing to settle the claims arising out of its insured s car accident. Id. at 315. There, two sets of claimants (the Medinas and the Lopezes) sought recovery for serious injuries and deaths arising out of a car accident. Id. at 314. The insured maintained minimum insurance coverage of $20,000 per occurrence, and the insurer initially offered full policy limits to the Medinas at the onset of the suit. Id. The Medinas refused the offer and continued with the lawsuit. Id. On the eve of trial, the Lopezes settled their claim for $5,000. Id. at 315. Thereafter, the insurer offered the remaining $15,000 to the Medinas to settle all claims. In response, the Medinas made a demand for the original offer of $20,000. The insurer refused, and the case went to trial where the jury awarded the Medinas $172,187 in damages. Id. After judgment, the insured assigned his rights against the insurer to the Medinas, who promptly brought a cause of action for negligent handling. After a jury trial on the Stowers claim, the insurer was found negligent for failing to settle the Medinas claim and awarded $520, in actual damages. The insurer appealed. On appeal, the intermediate appellate court affirmed, finding that there was sufficient evidence that the initial $5,000 settlement with the Lopezes was unreasonable and negligent, thereby making failure to settle with the Medinas for $20,000 negligent. The Texas Supreme Court reversed, holding that an insurer may enter into a reasonable settlement with one of several claimants even though such settlements exhaust or diminish the proceeds available to satisfy the claims. Soriano, 881 S.W.2d at 315. In other words, when making its determination on accepting settlement demands in cases involving multiple claims, an insurer may consider the merits of each particular claim and the corresponding potential liability of its insured on individual bases. The insurer may then make the decision to accept or reject those offers based upon that individual claim even though that settlement may diminish or exhaust the coverage available to other claimants. The Texas Supreme Court explained that this standard is nothing more than what is required of an insured under Stowers and that an insurer may not be subject to liability for reasonably proceeding on behalf of its sued insured. Soriano, 881 S.W.2d at 316. This holding has since been expanded and affirmed in numerous fashions. See also Travelers Indem. Co. v. Citgo Petroleum Corp., 166 F.3d 761 (5 th Cir. 1999); Kings Park Apartments, Ltd. v. National Union Fire Ins. Co. of Pittsburgh, PA., 101 S.W.3d 525 (Tex. App. Houston [14 th Dist.] 2003, pet. denied); Carter v. State Farm Mut. Auto. Ins. Co., 33 S.W.3d 369, 371 (Tex. App. Fort Worth 2000, no pet.). For instance, in Travelers, the Fifth Circuit analyzed the dilemma faced when the settlement of one insured s claims left the

9 remaining insureds without protection under the policy. Id. at 764. There, the insurer issued three policies to its insured, Wright Petroleum, a wholesaler of petroleum products: a business auto policy, a catastrophe umbrella policy, and a comprehensive general liability policy. Id. Later, Wright and Citgo entered into a franchise agreement making Citgo an additional insured by endorsement to those policies. Id. One of Wright s fuel trucks crashed, killing both its employee and the driver of the other vehicle. Even though the truck was carrying Citgo s petroleum products at the time of the accident, the survivors initially sued only Wright. Travelers responded and provided a defense for Wright under the policies. Before trial, plaintiffs presented a settlement demand, and eventually settled and released Wright in exchange for Travelers tendering the full policy limits of $1.5 million for both the auto and umbrella policies. Citgo was not yet a defendant in the lawsuit and was therefore not included in any settlement talks or demands. Thus, when the parties finally executed the settlement, Citgo was not included in the release. Thereafter, plaintiffs amended their complaint, added Citgo and asserted that the company had been negligent in its continued dealings with Wright. Citgo demanded a defense and indemnity from Travelers who refused, citing in part the exhaustion of policy limits. Travelers then brought a declaratory judgment action, and Citgo counterclaimed. The court acknowledged that Stowers requires an insurer to accept an offer on behalf of its insured when an ordinarily prudent insurer would do so... The court, however, noted that this situation was different because the insurer did settle in a reasonably prudent manner. The only claim was that by doing so it potentially exposed itself to claims by additional insureds excluded from that settlement. The court noted that this dilemma was resolved by Soriano. There, evidence that a larger claimant was willing to settle within policy limits (but had not then made an offer) was deemed irrelevant in the absence of evidence that the settlement reached with the other claimant, considered alone, was unreasonable. Id. at 765. Thus, in situations involving multiple insureds, the duties to additional insureds terminate when a reasonable settlement exhausts the policy limits. Id. Citgo argued that when multiple insured parties, rather than multiple claimants, are involved, the Soriano approach discourages settlement. In other words, a partial settlement obtained on behalf of the one insured did not prevent continued litigation against the other exposed co-insured. The court rejected Citgo s position, noting that under such a rule the only rational course for insurers would be to formally or informally make all their insureds parties to any settlement negotiations. Travelers Indem. Co., 166 F.3d at 766. In such a situation [n]o insurer would settle at its policy limits with potential excess liability to a disgruntled co-insured lurking in the background. Id. The court noted that the mandatory interjection of new parties and new issues (particularly unforeseen ones) into ongoing settlement talks would likely increase the cost of negotiations and decrease the likelihood of their ultimate success. Thus, Citgo s argument effectively destroyed any chances of settlement, and at the same time provided little to no guidance on exactly when an ordinarily prudent insurer should settle. That

10 was unreasonable and beyond the scope of Soriano and Stowers. Thus, the Travelers decision followed those jurisdictions holding that a carrier need only act in good faith in securing the settlement on behalf of its insureds, and in doing so may settle on behalf of less than all of them if it is reasonably prudent based upon current information. The advent of Soriano, Travelers and other cases has placed Texas squarely within the majority rule of the first to settlement doctrine. This doctrine states that an insurer may settle some of the multiple claims even if that settlement significantly lowers or depletes policy limits available for the remaining claims. The comparative severity of the injuries or damages is not always the deciding factor. Instead, under the first to settlement doctrine, it comes down to what a reasonable insurer would do when confronted with the opportunity to settle some but not all claims. The use of the first to settlement doctrine under Soriano and Stowers presents interesting issues for filing an interpleader in instances of potential excess liability. Further, with the advent of cases such as Travelers, Texas courts appear to consider the insurer s knowledge and the relevant facts at the time of the settlement; as opposed to the insurer s knowledge and the relevant facts at some time in the future when an additional claimant or additional insured appears with a claim. Thus, the insurer must act in a reasonably prudent manner in dealing with the individual settlement offers as they appear. It cannot be liable for claimants with serious damages, or additional insureds with serious claims, that were neither present nor reasonably foreseeable when the settlement offer was tendered. To do so would increase the cost of negotiations and decrease the likelihood of their ultimate success as the insurer could never effectively buy peace. Travelers Indem. Co., 166 F.3d at 766. Those considerations will be analyzed in two categories: first where multiple claimants make multiple demands in excess of the policy limits; and two, where multiple additional insureds make multiple first party claims or conflicting beneficiaries make claims for the proceeds of a single life insurance policy. A. The Soriano Situation: Multiple Third Party Claimants with Insufficient Policy Limits and a Judgment Proof Insured. The most common example of insufficient insurance coverage and potential excess liability involves a judgment proof individual, insured by a minimum limits automobile liability policy, that is involved in a serious accident with numerous gravely injured claimants. This has come to be known as the Soriano situation after the Soriano case. Under Texas law, the claimants are not required to join forces and package their settlement offers, conditioning the settlement of one claim on the settlement of all claims. See Rosell v. Farmers Texas County Mut. Ins. Co., 642 S.W.2d 278, (Tex. App. Texarkana 1982, no writ). The general rule is that settlements need not be packaged, nor must they dispose of all claimants at one time. Id. Instead, the insurer must only reasonably attempt to settle the claims as they are presented and it must only make reasonable efforts to protect its insured by minimizing the total liability at issue. This sets up the

11 Soriano situation and with a judgment proof insured, permits the use of interpleader. Basically, the insurer should discuss filing an interpleader with its insured, pointing out that the procedure effectively admits liability and tenders the entire policy limit. If possible, the insurer should gain approval for the course of action, and then the counsel should contact the claimants or their counsel as the case may be. In that communication, the insured and insurer can point out that the insured is judgment proof, and that they only tangible asset at issue is the policy limits. Thereafter, if the claimants agree to release the insured for liability in excess of the policy limits, the insurer can interplead the policy limits into the court, gain approval for the action, and have the Court dismiss both the insured (as a settled and released party) and the insurer (as the dismissed interpleader). The only remaining issue is how those funds will be distributed to the multiple claimants, and that issue is determined either by the court, or by agreement of the claimants. Thus, both the insured and the insurer have washed their hands of the claims and the interpleader action, and the claimants are presenting their claims to the policy proceeds in one forum. Finally, by filing an interpleader, the insurer, insured and claimants are effectively reducing legal expenses and putting all claimants on notice that their efforts in litigating the matter further are only bound to result on a reduced recovery (and increased legal fees) for all. In other words, all the possible money is already on the table and the claimants do not have to hassle with a bankrupt insured. This sort of interpleader is generally a viable option in the third party context only when the insured is judgment proof, and the claimants are willing to release that insured from further liability. If the insured is not judgment proof, it is unlikely that the claimants would be willing to release him for liability in excess of the policy limits. Thus, even if the insured interpled the policy proceeds, it would generally not be absolving its duty to defend its insured. Thus, agreement and negotiation is recommended to bring all the parties together, obtain a release on behalf of the insured and interplead the policy limits. B. Multiple Additional Insureds Claiming First Party Coverage Under an Insurance Policy. Another potential excess liability situation is multiple or conflicting insureds each making separate claims under a policy with insufficient limits to cover all of the claims. This situation could also arise when multiple named beneficiaries make a claim for policy proceeds under a life insurance policy. In such a situation, the insureds each have a potentially legitimate claim under a policy, but given the fact that each additional insured is subject to the same total policy limit, there is the potential that those numerous claims could exceed the amount of coverage and cause conflicts of interest. If there are multiple insureds, an insurer must be cautious. The insurer cannot unjustifiably favor one insured s interests over another or it might be accused of bad faith. Thus, the insurer should attempt to treat all insureds with equal fairness. Interpleader is an excellent option to resolve such a dispute and allow each insured the same opportunity to either litigate or settle their claims to the policy proceeds in one forum.

12 There are several considerations in this regard, including the insurer s obligations to timely file an interpleader action against the multiple first party claimants, and its duty to avoid currying any favor to any of the insureds by filing the action. For instance, in State Farm Life Ins. Co. v. Martinez, 216 S.W.3d 799 (Tex. 2007), the Texas Supreme Court held that failing to file an interpleader within the statutorily imposed 60-day time period to either pay or settle first party claims was an unreasonable delay, allowing bad faith penalties to attach. The Texas Supreme Court also held that the interest penalty would not continue to accrue after the interpleader was filed. Assuming the insurance company was faced with truly rival claimants, the Court determined that the filing of an interpleader should be treated as payment for purposes of stopping the accrual of penalties. Thus, Once [the insurer] interpleaded the entire policy proceeds, it owed nothing more on the policy. Thus, the courts below erred in awarding penalty interest and attorney s fees for more than [the time between the end of the prompt pay period and the time of the interpleader]. Id. at 807. This provides the insurer a considerable benefit and incentive to interplead the policy limits when it is faced with truly rival claims, and it has the opportunity to do so. Finally, and particularly in the first party context, interpleader poses certain risks because, by its very nature, it mandates that each of the additional insureds are not receiving full value for their alleged damage. That being said, a proper interpleader could potentially lend judicial approval to the final payment structure. In other words, the interpleader action may add a certain amount of insulation and credibility to the payments; each insured had a chance to litigate its claim to the policy proceeds, as opposed to just making a claim to the insurer. That in itself could discourage further claims by the insureds against the insurer. In the end, while this procedure may be a lawful and effective means of dealing with competing contractual claims, it may not bar or prevent the insureds from asserting extracontractual claims. The sheer complexity of the issues and law on the topic never seems to foreclose the possibility of an insured making a claim against its insurer for some sort of mishandling. Copyright 2008 Beirne, Maynard & Parsons, L.L.P. All rights reserved.