Insurance Law Update By: Katie E. Jacobi and Michael L. Young HeplerBroom LLC, St. Louis

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1 Illinois Association of Defense Trial Counsel Springfield, Illinois IDC Quarterly Volume 24, Number 1 ( ) Insurance Law Update By: Katie E. Jacobi and Michael L. Young HeplerBroom LLC, St. Louis Complex Claims, Complex Questions: Illinois s Approach to Liability Claims Involving Multiple Claimants and Multiple Insureds A standard commercial general liability policy states that an insurer may, at [its] discretion, investigate any occurrence and settle any claim or suit that may result. See, e.g., Insurance Services Office, Inc. (ISO) Form CG GA The amount the insurer will pay for damages typically is limited by the policy s limits of insurance. Id. Further, the insurer s right and duty to defend ends when [it has] used up the applicable limit of insurance in the payment of judgments or settlements.... Id. Courts, however, do not always enforce these provisions to the letter with claims involving multiple claimants or multiple insureds. In the multiple claimant or multiple insured context, a liability policy s limit of insurance very well might be insufficient to cover all claims brought by all claimants or brought against all insureds. In that situation, the insurer faces a difficult decision as to how to proceed. An insurer might want to settle claims as they are asserted against the insured, even if those settlements deplete the policy limits to the exclusion of other claimants. In contrast, an insurer might want to defer settling with individual claimants in an attempt to reach a global settlement with all claimants. Still others might want to file an interpleader action requesting a court to distribute the proceeds. Unfortunately, case law often does not provide definitive guidance for insurers in this situation, and states have adopted contradictory approaches for handling these claims. This column examines an insurer s obligations in handling complex claims involving either multiple claimants or multiple insureds under Illinois law. Claims Involving Multiple Claimants In the multiple-claimant context, some cases support the view that Illinois has adopted the majority approach, which is the first come, first served approach. Under this approach, the insurer may settle claims with individual claimants in exhaustion of the policy limits and to the exclusion of other claimants, so long as the insurer acts in good faith to reach a reasonable settlement agreement. Sampson v. Cape Indus. Ltd., 185 Ill. App. 3d 83, 86 (4th Dist. 1989); State Farm Mut. Auto. Ins. Co. v. Murphy, 38 Ill. App. 3d 709, 712 (2d Dist. 1976); Haas v. Mid Am. Fire & Marine Ins. Co., 35 Ill. App. 3d 993, (3d Dist. 1976). Only where the insurer breaches its duty of good faith may it be held liable for a judgment in excess of the policy limits. Murphy, 38 Ill. App. 3d at 712. Determining what this duty of good faith entails, however, is not an easy task. As with any claim, the insurer s primary duty of good faith is to its insured. To comply with this duty, the insurer should communicate with its insured regarding the policy limits and potential for excess liability. Id. Page 1 of 5

2 Many commentators suggest that the insurer is best served by advising the insured of the policy limits and the potential for excess liability, and even recommending that the insured seek personal counsel. See, e.g., Thomas R. Newman, Exhausting Policy Limits when Settling Less than All Lawsuits, For the Defense, March 2013, at 38; Rina Carmel and Barbara A. O Donnell, The Initial Stages of Handling Complex Claims Resolving Issues Involving Multiple Claimants/Multiple Insureds Seeking Coverage: The Practical Dos and Don ts, Insurance Coverage and Claims, April 2013, at 1. Although the insurer has a duty to protect the interests of the insured by settling within the policy limits when reasonable, an insurer is neither required to initiate settlement negotiations nor to make a settlement offer where the claimants make clear that they will not accept an offer. Haas, 35 Ill. App. 3d at Also, the insurer is not required to make a settlement offer when it reasonably believes it has a good defense to the claim. Id. at 997. The question remains: What constitutes good faith where claims have been brought by multiple claimants and the policy limits are insufficient to resolve all of those claims? Though the cases discussing this issue offer some insight, they also make clear that courts judge the propriety of the insurer s conduct by the particular facts of each claim. The insurer has no set rules to ensure it satisfies this duty. An insurer also might owe a duty of good faith to the claimants directly, but again, this duty depends on the circumstances of the particular claim. Id. at 996. In Haas v. Mid America Fire & Marine Insurance Co., 35 Ill. App. 3d at 994, the insurer reached settlements with three of four claimants, nearly exhausting the policy proceeds. The remaining, non-settling claimant sought to hold the insurer liable for an excess judgment against the insured, contending that the insurer had a duty to inform that claimant that it was engaged in settlement negotiations with the other claimants. Id. at 995. The appellate court disagreed. First, the claimant made no settlement demand. Second, the insured s liability to the claimant was questionable. Third, the other claimants claims against the insured appeared much stronger in terms of liability. Although the court concluded that the insurer had no duty to the non-settling claimant under these particular facts, it noted that an insurer might have a duty to notify claimants of settlement negotiations in certain circumstances. Id. at 996. The Illinois Appellate Court Fourth District indicated in Sampson v. Cape Industries, Ltd., 185 Ill. App. 3d 83 (4th Dist. 1989), that if a claimant obtains a judgment against an insured, that claimant s interest in the policy proceeds may take priority over other claims. An insurer that settles with other claimants for the full policy limits after receiving notice of a judgment against its insured and subsequent garnishment proceeding could be deemed to have acted in bad faith. Sampson, 185 Ill. App. 3d 83. Though the insurer has the power to settle with other claimants for the full policy limits before a claim is reduced to a judgment against the insured, the judgment against the insured might give that claimant priority over other claimants. Id. at 86. The insurer in Sampson raised a concern that it could be deemed to have been acting in bad faith by refusing to settle with the other claimants. Id. at 87. Yet, the appellate court essentially dismissed this concern, stating that a court undoubtedly would take into account the lack of available of funds in determining the propriety of the insurer s conduct. Id. Though this holding might encourage a race to the courthouse, which is generally disfavored, it also can be reconciled with the first-come, first-served rule. The claimant obtained a judgment against the insured before other claimants reached settlement with the insurer. Id. at 84. Awarding priority status to a judgment entered before subsequent settlements satisfies the rule that policy proceeds are payable on a first-come, first-served basis. Moreover, assigning priority to a judgment against the insured could be viewed as protecting the interests of the insured the insurer s primary duty. To protect the interests of its insured, the insurer must satisfy any judgments against the insured before paying the policy limits to other claimants, presumably with more tenuous claims. Page 2 of 5

3 Claims Involving Multiple Insureds Claims against multiple insureds covered by the same policy raise additional concerns. The few Illinois courts to consider an insurer s obligations in this situation have reached contradictory results, creating even more uncertainty and confusion. The Illinois Appellate Court First District has held that the insurer may settle a claim against one insured for the full policy limits, leaving nothing for another insured. In Pekin Insurance Co. v. Home Insurance Co., 134 Ill. App. 3d 31, 32 (1st Dist. 1985), the named insured and his employer both qualified as insureds under the named insured s personal auto policy. Without notifying the employer, the insurer settled the claim against its named insured for the full $25,000 policy limit. Pekin Ins. Co., 134 Ill. App. 3d at 32. The insurer offered the employer a defense under a reservation of rights, informing it that the limits had been depleted in settling the claim against the insured. Id. at After the employer rejected the defense under the reservation of rights, the insurer sought a declaration that it had fulfilled its obligations to the employer under the terms of the insurance policy. Id. at 33. The employer contended that the insurer acted in bad faith by settling the claim against the named insured for the full policy limits without even notifying the employer. Stating that it was doubtful that the insurer s conduct amounted to bad faith, the court noted that the consequences of the settlement did not harm the employer. Id. Because the employer was offered a defense and was entitled to a setoff for the claimant s recovery against the named insured, the employer would be required to pay only that part of a judgment that exceeded the policy limits. Id. at 34. The employer was in no worse position than if the insurer had defended the employer and had paid the first $25,000 of a judgment. Id. Because the employer was not harmed by the settlement, the court found that the insurer had not acted in bad faith. Pekin Ins. Co., 134 Ill. App. 3d at 34. As for the duty to defend, the court found that the insurer had satisfied its obligations to the employer under the terms of the insurance policy by providing a defense under a reservation of rights, even though the employer rejected that defense. Id. Illinois law is clear that an insurer is not obligated to provide the insured with an unconditional defense where coverage is questionable. Id. at The insurer complied with its obligations and, therefore, did not act in bad faith. Id. The Illinois Appellate Court Fifth District, however, has reached the opposite conclusion, finding a question of fact as to whether an insurer acted in bad faith by settling on behalf of one insured in exhaustion of the policy limits without notifying another insured. In Kirk v. Allstate Insurance Co., 2012 IL App (5th) , 10, following a motor vehicle accident, the claimant asserted claims against both the owner of the vehicle and the driver of the vehicle. Both qualified as insureds under the policy. Kirk, 2012 IL App (5th) , 3, 5. Without notifying the driver, the insurer settled the claim against the owner. Id. 10. When the claimant brought a claim against the driver, the insurer provided a defense under a reservation of rights, but not until nearly a year after receiving notice. Id. 13. At trial, an excess judgment was entered against the driver. Id. In finding a question of fact as to whether the insurer acted in bad faith, the court focused on the insurer s conduct towards the driver from the time a claim was first asserted. Id The court emphasized that the insurer had virtually no communication with the driver. Kirk, 2012 IL App (5th) , The insurer failed to notify the driver of the policy limit demand, settlement negotiations, and that the driver was to be excluded from the release. Id. In fact, the insurer sent correspondence to the driver at the wrong address, even though the driver had provided the insurer with the correct address. Id. 27. The court found that the insurer s conduct could be deemed bad faith towards the driver, even though the driver was entitled to a setoff for the settlement with the named insured. Id. 13, 32. The court noted that allowing the insurer to settle a claim against one insured simply because the other received a setoff for the Page 3 of 5

4 prior settlement completely ignored the insurer s conduct towards that insured. Id. 23. Interestingly, the court distinguished Pekin Insurance Co. because that case involved an agency issue and no excess judgment was involved. Id. 30. The court also noted that Pekin Insurance Co. was decided before a subsequent case discussing an insurer s duties to its insured. Kirk, 2012 IL App (5th) , 30 (citing Douglas v. Allied Am. Ins., 312 Ill. App. 3d 535 (2000) (discussing strong public policy reasons for prohibiting an insurer from discharging a duty to defend by paying policy proceeds)). As for the duty to defend, the court stated that an insurer cannot discharge its duty to defend simply by paying policy limits. Id. 24 (quoting Douglas, 312 Ill. App. 3d at 543). Public policy prohibits an insurer from simply paying its proceeds and walking away because the defense protection is one of the most significant protections a policy affords. Id. 25. Kirk demonstrates that an insurer is best served by communicating with all insureds. Not only did the insurer in that case fail to notify the driver of the settlement negotiations, but also it failed to notify him initially that the damages exceeded the policy limits and that the plaintiff had made a policy limit demand. This complete lack of communication factored greatly into the court s decision. It remains unclear whether an insurer would be considered as having acted in bad faith by settling on behalf of one insured but not others if the insurer had communicated openly with all insureds. Other questions remain unanswered, as well. Neither insurer mentioned in Pekin Insurance Co. or Kirk seems to have questioned its duty to defend the non-settling insured even though the policy limits had been exhausted. The Kirk court suggested that an insurer always will have a duty to defend the insured, even after the policy limits have been paid. Kirk, 2012 IL App , 25. Yet, this suggestion contradicts the language of a standard liability policy. Additionally, the insurer in both Pekin Insurance Co. and Kirk settled on behalf of the named insured. Though neither case addresses the insured s status as a named insured, other states have suggested that the insurer might have a stronger obligation to settle on behalf of the named insured as the insured that purchased the policy. See, e.g., Underwriters Guarantee Ins. Co. v. Nationwide Mut. Fire Ins. Co., 578 So. 2d 34, 35 (Fla. Dist. Ct. App. 1991) (liability insurer s settlement on behalf of named insured in exhaustion of policy limits relieved insurer of duty to defend additional insured); Am. States Ins. Co. of Tex. v. Arnold, 930 S.W.2d 196, 202 (Tex. Ct. App. 1996) (finding that settlement and release on behalf of named insured in exhaustion of policy limits relieved insurer of any duty to defend additional insured). Conclusion Although clarity about an insurer s obligations in responding to complex liability claims is lacking under the existing case law, the case law does demonstrate that communication between the insurer and insured is the best practice. The insurer should inform the insured at the outset that the claim might exceed policy limits and keep the insured apprised of all settlement negotiations. The insurer also should make efforts to settle claims when reasonable, especially claims where little doubt exists as to coverage and liability. In fact, the insurer should make these efforts even if other claimants might be excluded from recovery. But, the insurer must carefully investigate and evaluate each claim and exercise good judgment in protecting the interests of its insured. About the Authors Katie E. Jacobi is an associate at the St. Louis office of HeplerBroom LLC, with an emphasis in the practice of insurance law. Ms. Jacobi received her J.D. from St. Louis University School of Law, cum laude, where she was inducted into the Order of the Coif, and her undergraduate degree from Truman State University, cum laude. She is licensed in Illinois and Missouri and is a member of the IDC, serving its Insurance Law Committee. Page 4 of 5

5 Michael L. Young is a partner with the St. Louis office of HeplerBroom LLC, with a primary emphasis in the practice of insurance law. He represents both insureds and insurers in complex insurance coverage matters at all stages of the claims process. Mr. Young s litigation practice also includes the defense of personal injury, products liability, and white collar criminal defense matters. Mr. Young obtained his law degree from Saint Louis University, summa cum laude, in 2002, where he was the Valedictorian of his class. While in law school, Mr. Young served as a Staff Member for the Saint Louis University Law Journal in He received his Bachelor of Arts degree in 1999 from Washington University in St. Louis, Missouri, summa cum laude, majoring in History. About the IDC The Illinois Association Defense Trial Counsel (IDC) is the premier association of attorneys in Illinois who devote a substantial portion their practice to the representation of business, corporate, insurance, professional and other individual defendants in civil litigation. For more information on the IDC, visit us on the web at Statements or expression of opinions in this publication are those of the authors and not necessarily those of the association. IDC Quarterly, Volume 24, Number Illinois Association of Defense Trial Counsel. All Rights Reserved. Reproduction in whole or in part without permission is prohibited. Illinois Association of Defense Trial Counsel, PO Box 588, Rochester, IL , , , idc@iadtc.org Page 5 of 5