An excess exposure case involving multiple claimants is a classic fact pattern for a potential bad faith claim.  One such scenario was discussed in the August 2018 Washington Court of Appeals’ decision in Singh v. Zurich Am. Ins. Co., 428 P.3d 1237 (Wash. Ct. App. 2018).

In Singh, the Court found that an insurer’s settling a large claim for policy limits, thereby leaving the insured undefended from a smaller claim, breached the insurance contract, as well as violating the Insurance Fair Conduct Act (IFCA) and the common-law duty of good faith.  Fortunately, the appellate court gave unusually clear instructions in its opinion so that other insurers might avoid Zurich’s half-million-dollar mistake.

The underlying fact scenario was a multi-vehicle freeway accident.  Zurich’s insured was at-fault truck driver JS.  The estate of nine-year-old NB, who died at the scene, demanded the $1M limits on JS’s Zurich policy, which Zurich planned to tender.  However, JS asked Zurich if JS could personally contribute $1,000 toward policy limits.  By contributing toward the policy limit, thereby leaving a small amount of indemnity money available from the policy, JS would be able to preserve his entitlement to a legal defense–maximizing his chances of negotiating a settlement with any other claimants who might appear in the future.  But Zurich declined JS’s proposal and settled the estate’s claim for policy limits.  Then, when another accident claimant, BS, sued JS, Zurich did not defend JS, who had to hire private counsel.  BS and JS later settled for $250,000.

Subsequently, JS sued Zurich for breach of the insurance contract, as well as under bad faith theories (negligence and violations of IFCA, the Consumer Protection Act and the common-law duty of good faith).  The jury awarded JS damages comprising the $250,000 he paid to settle with BS, plus his $36,000 attorney fees for the suit with BS, plus $5,000 in emotional distress damages.  JS was also awarded $293,710.23 as attorney fees for his suit against Zurich.  Zurich appealed.

The appellate court held that, contrary to popular belief, “there is no bright-line rule absolutely excusing an insurer from its duty to defend once coverage is exhausted in an excess exposure case involving multiple claimants.”  428 P.3d at 1244.  Zurich had alternatives to tendering its full limits; it could have negotiated a settlement that would not leave the insured undefended if other claimants came forward later.  428 P.3d at 1245.  For instance, Zurich could have accepted its insured’s proposal to contribute to the policy limits. 

The Singh court also evidently approved of the alternative strategy used by another insurer involved in the same claim.  Alaska National had accepted the NB estate’s policy-limits demand, but under the terms of the settlement it held back $100,000 until the expiration of the statute of limitations.  This arrangement allowed Alaska National’s insured to maintain some degree of coverage and to have a defense in the event another claimant came forward.  Given that the estate had accepted Alaska National’s settlement structure, it likely would have accepted Zurich’s proposal of a similar structure.  Zurich’s failure to attempt such a settlement was bad faith.

The rationale of Singh also applies in the context of a per-occurrence policy, such as when there are four or more claimants to a $100,000/$300,000 policy.  The insurer will likely want to settle some claims (to reduce the number of lawsuits to which the insured will be personally exposed).  The insured might request that the most severely injured claimant be offered the per-occurrence limit, specifically acknowledging that there will not be sufficient coverage for the remaining three claimants.  But, similar to how the Alaska National adjuster structured her settlement in Singh, the adjuster may want to hold back a nominal amount of policy money –perhaps enough to possibly settle the smallest claim – to keep in place the duty to defend while the insured negotiates the remaining claims.

Best practices for the claims adjuster in an excess exposure case involving multiple claimants is, first and foremost, to document your efforts to (1) reasonably and promptly settle claims against the insured, (2) while maintaining the insured’s defense until expiration of all claims that can be made from the accident.  When in doubt, document how you inquired into and considered your insured’s preferences regarding settlement (including whether to delay settling certain claims, whether to prioritize settling certain claims before others, and how much policy money to reserve for later).  Explicitly placing your insured’s interests (e.g., insurer-funded defense counsel throughout the life of the claims) above those of your company’s (e.g., early escape from litigation costs) is a strong defense to a later bad faith claim.  Good communication with your insured and defense counsel during the settlement process may avoid a bad faith claim altogether.