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EXCESSES OF LIABILITY

--Threading the Needle

Dealing with claims where the liability threatens to exceed the policy limits, either from multiple claimants or from horrendous damages, is much like threading a needle. This essay provides cautions in dealing with that situation and highlights some approaches not fully appreciated in common practice.


The Context

There are two growing problems in threading the needle when the liability can (but may not) exceed the policy limits. The first is the temptation to impose a solution on the insured. The second is the growing trend to impose duties directly from the insurer to the third party claimant. Both of these bear on the evolving duty of good faith.  There are ways to deal with both issues.

The Danger in Imposed Solutions

A good example of an imposed solution is shown in Nationwide Mut. Ins. Co. v. Holmes, 842 S.W.2d 335 (Tex.App.--San Antonio 1992, writ hist. pending). When faced with the possibility of excess liability, and an offer within the policy limits, the insurer stated that instead of promising to indemnify the insured, the insurer would, at its option, go forward to trial and pay bankruptcy costs. Even though the insured was found not liable, Id. at 388, the insurer was sanctioned for $7,500.00 in actual and $2,000.00 in punitive damages. The insurer also was found liable to pay attorneys fees Id. at 342-343.

While the solution that the insurer offered was acceptable under the current law, the Court found that the insurer was not within its rights to impose the solution. The Court's reason was that the law is that imposing a solution is no escape from Stowers and does not indicate good faith. (Also note that next in this article is a discussion of the possible direct duty to third parties that is evolving and that would have made the solution even more dangerous.) It is important to remember that imposing a solution over the expressed wishes of an insured may result in a claim of bad faith even when the imposed solution proves out a complete success.

Third Party Duties

There is a disturbing trend of imposing a duty to third parties in insurance cases. It is basically a matter of interpretation of the codes and common law. The issue resolves around the question of: Is a policy of insurance provided to the insured to protect the insured's interests or is a policy of insurance required (by statute or otherwise) to protect society from the insured? Under the developing Watson (Watson v. Allstate Ins. Co., 828 S.W.2d 423 (Tex.App. -- Fort Worth 1991, Writ Granted, Reversed on Appeal) line of cases, there may be a statutory or common law liability that runs directly to the third part claimants. Such a duty creates a vicious squeeze when considering the rights and duties of an insurer. This is especially true as in the Watson jurisdiction there was no common law duty to the third parties -- only a statutory one that is in conflict with the insured/insurer relationship. This is a disturbing and conflict ridden area that by its existence may be one of the best possible arguments for a uniform liability law.

A uniform law is even more important since the vast majority of the judges to view the Watson line of reasoning have disagreed with the decision of the activist Texas Supreme Court that reversed it.  

Good Faith Re: Both Insured and Claimants

There are issues under the patchwork of laws of good faith/bad faith with duties that may run to both the insured and to claimants.  The result is that caution indicates that a "good faith" approach be used.  Anderson states as follows:

"An 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 its insured as soon as possible." (Arnold P. Anderson, Establishing Good Faith Settlements in Multiple Claims Cases, FIC Insurance Quarterly Summer 1979, 381, 394-395.) With this statement as a foundation, the issue of good faith actually becomes important in an "excess liability" case.  It is important to take the steps necessary to establish good faith.

After all, when "[f]aced with the problem of inadequate coverage for claimed injuries, the plaintiffs' bar must hope to fashion an error or series of errors on the part of the carrier in order to create additional coverage outside the policy." Proper handling of these claims is "easier said than done." (David F. McGuire, For the Defense, Vol. 34, No. 6, page 31). Good faith is a developing and dangerous area of the law with multiple differences between jurisdictions and constant changes.

Commonwealth Lloyd's Ins. Co. v. Thomas, 825 S.W.2d 135, 144 (Tex.App.--Dallas 1992, Judgment Set Aside) is a comprehensive case that lays out the difference between Texas law and the laws of other jurisdictions as to bad faith. At 142, note 2, it also summarizes the other jurisdictions' seminal cases. It is a good point to begin review if your jurisdiction has not established a clear doctrine.

Note especially the Louisiana case, Liberty Mutual Insurance Co. v. Davis, 412 F.2d 275 (5th Cir. 1969) where at 483-484 evidence of bad faith by the insurance company was found in a failure to settle claims on a fair value/first come, first served basis -- diametrically opposed to the developing pro rata rule. It is troubling that what is required in one jurisdiction (e.g. Coe v. State Farm Mutual Automobile Insurance Co. 66 Cal.App.3d 981, 136 Cal.Rptr. 331 [1977] and pro rata) is defined as bad faith in another.

Methodology -- What to do

Introduction.  The best summary of methodology for establishing good faith that I have found is in Arnold P. Anderson's Establishing Good Faith Settlements in Multiple Claims Cases. (FIC Quarterly, Summer 1979, page 381-395.) Note that not all of his citations are as solid as they once were. E.g. Darrah v. Lion Bonding & Surety Co., 200 S.W. 1101 (Tex.Civ.App. -- Fort Worth 1918) is a surety case whose rational has been expressly rejected by the courts of Texas. See Rosell v. Farmers Texas Mutual Insurance Co., 642 S.W.2d 278, 279-280 (Tex.Civ.App. -- Texarakana 1982).

It is unfair to hold Arnold to cases decided well after his article was published, but it is important to be aware that several cites in support of the position taken in this article are no longer as strong as they were. However, Arnold P. Anderson's basic methodology holds up to review under modern surveys of bad faith such as Identifying and Litigating Breaches of the Duty of Good Faith and Fair Dealing, Trial Lawyers Forum (1991), Vol. 25, No. 1, pages 5-10.

First, document that you have considered the elements to evaluate: (taken from Arnold, Id. at 389 to 390) 1. the severity of the injury(ies); 2. the strength of the claimant(s)'s case; 3. the adequacy of the insurance company's investigation; 4. the sufficiency of the insurance company's communications regarding offers to settle (The creation of this type of paper trail is within the adjuster's complete control); 5. the sufficiency of the insurance company's communications regarding offers to compromise or potential judgments in excess of policy limits; 6. conflicts of interest between insurer and insured (or the absence of any conflict); 7. the ability of the insured to obtain separate counsel; and, 8. Stowers or other demands that the claims be settled. 2.

Second, all of these elements can be addressed by the steps that Arnold proposes be taken in any claim of this type: (cf Arnold, Id. at 395) 1. investigate fully; 2. consult with the insured as soon as possible; 3. determine what settlements are valid and reasonable from the standpoint of the insured; 4. completely investigate all claims and correspond (... creating the important paper trail ...) closely with the insured (Including covering the degree of liability of the insured and the available options. Id. at 390); 5. avoid jeopardizing settlement negotiations and consider initiating such negotiations (see Id at 390 to 393); 6. obtain an advisory legal opinion; 7. consider interpleader. (E.g. Id. at 385) See below.

Practice -- Threading that Needle

In a simple claim one may tender the policy limits in an effort to settle and then defend the claim if the offer is not accepted. The procedures are fairly well established in each jurisdiction, with wrinkles and differences, while common and dangerous, also well known. Unfortunately, these procedures no longer always apply to cases where there is an excess of liability.

In the more difficult "shallow pockets" cases (Cf Shallow Pockets, For the Defense Vol. 34, No. 3, page 27) there are variety of alternatives available. Of these, and considering the developments in the law, interpleader has grown in usefulness. In addition, a formal procedures outline incorporating the first six above points should be created and checklisted.

Using a formal procedures list will make it more likely that a defensive paper trail will be created and less likely that a point will be overlooked. The content and form of such a list is a proper function of industry wide advisory boards. In addition to the first six points, the seventh point, "consider interpleader," deserves some attention.

In 1967 interpleader was a novelty.  But then the United States Supreme Court stepped in.

In 1967 the United States Supreme Court reversed the Ninth Circuit and created substantial precedent supporting the use of interpleader as a method for settling multiple liability insurance claims. (See State Farm Fire & Casualty Co. v. Tashire, 386 U.S. 523 (1967).) That seminal case had severe limits, [E.g. it stated that "the mere existence of a fund cannot ..." be used to restrain claimants from prosecuting any claim against the insured. Id. at 533-534.), (See also Termination of the Insurer's Duty to Defend by Exhaustion of Policy Limits, 44 Ins. Coun. J. 254 (1977). The law in many jurisdictions has not improved for insurers since that date.]  Since that time the process has become so common that pleas in interpleader often go unremarked -- just business as usual.

For an example of Wests no longer key noting interpleader pleas see Jones v. Standard Fire Ins. Co., 825 S.W.2d 242 (Tex.App. -- Fort Worth 1992, writ denied).  The Interpleader in the case was so accepted it no longer drew a note or comment by Wests. Interpleader in insurance cases comprises the largest section of Research Guide Annotations under 28 U.S.C.S. 2361 and has specific ALR notes. (E.g. 19 ALR Fed. 166; 13 ALR Fed. 398; 8 ALR Fed. 738. However, note the cross-over involving life insurance cases.)

Interestingly enough, interpleader may not available to the insured even when it is available to the insurer. E.g. Farmers Irrigating Ditch & Reservoir Co. v. Kane, 845 F.2d 229 (10th Cir. 1988). An insurer should check the developing laws of its jurisdiction and determine a regular procedure that includes, rules out, or allows for interpleader depending on those laws. Often interpleader should be an option explained to the insured, not a procedure followed as a matter of course.

Also, in some cases interpleader is a disaster waiting to happen and should be avoided at all costs. The variance between jurisdictions is extreme. See above. In addition, insurers should seriously consider lobbying for a uniform good faith standard that establishes either "first come/first served" or interpleader as the appropriate behavior. A uniform statute or a federal guideline would benefit the bar and the industry by establishing certainty. Given the dissonance in the current development of the law, a uniform statute seems to be desperately needed and directly called for. Until then, a united industry front might provide some benefit.

Finally, there are a number of Shallow Pockets procedures.  See http://adrr.com/law1/shallow.htm.  

Bottom Line

All that can reasonably be expected when there is more liability than insurance is for the insurer to act in good faith and to make a reasonable attempt to protect the insured from liability. Following rational established guidelines, in consultation with the insured, and making good use of the various settlement tools available seems to be one way to fairly deal in good faith with the problem of more liability than insurance coverage. While "good faith" is "easier said than done," it is my hope that the above suggestions will provide some additional guidelines and considerations to aid those who are faced with the sort of excess of liability that results in the most difficult of cases.


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Copyright 1998 Stephen R. Marsh

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