Duty To Defend And Exhaustion Of Policy Limits
Generally, an insurer does not have a continued duty to defend its insured after the insurer has exhausted policy limits by settling multiple claims with the insured’s consent, even though there might be additional claims arising from the same accident. In Liberty Mutual Ins. Co. v. Mead Corp., the Supreme Court of Georgia held that the insurer had no further duty to defend remaining claims after settling other claims and exhausting policy limits. The insurer had the insured’s consent to settle the claims, and the applicable insurance policy was construed to mean that “the duty to defend is limited by the amount of liability coverage afforded by the policy.”Similarly, if the insurer exhausts policy limits in good faith settlements of several claims, the insurer need not defend its insured on later-filed claims arising from the same accident. The rule is true even if the insurer mistakenly enters a defense on the later-filed claim, so long as the insurer did not prejudice the insured.
Based on a recent ruling by the Georgia Supreme Court, it remains to be seen whether this rule will hold true if the insurer commences to defend several claims arising out of a single accident without clearly reserving its rights to withdraw its defense at such time as policy limits are exhausted by payment to one or more of the claimants. “An insurer’s duty to defend its insured is not satisfied when the insurer settles by paying its policy limits to the wrong party.” The insurance policy in Atkinson v. Atkinson (like the one in Liberty Mutual Ins. Co. v. Mead), provided that the duty to defend would end upon payment of policy limits. The insurer entered a defense and paid policy limits, but to the wrong party. Because the payment did not resolve the case against the insured, the insurer could not withdraw.
These cases do not mean, however, that if an insured faces many lawsuits arising from a single accident, and it is clear that the liability will exceed policy limits, the insurer may tender the policy limits into court and withdraw from the defense of the lawsuits. The insurance policy at issue in Anderson v. U.S. Fid. & Guar. Co. (like most liability policies) provided that the insurer must defend as well as indemnify. The court ruled that allowing the insurer to tender policy limits into court addresses only the duty to indemnify and constituted a breach of the duty to defend while actions were pending. When an insurer is faced with a matter involving multiple claimants where the damages may exceed the policy limits, the insurer might take the following steps to reduce its potential bad faith exposure:
Steps To Reduce Its Potential Bad Faith Exposure When There Are Multiple Claimants
(1) reasonably and expediently investigate the matter and “attempt to ascertain the insured’s potential liability, identify the claimants, and assess the nature and extent of the claimants’ injuries or damages”
(2) “communicate with the insured concerning her potential liability as soon as possible” – inform the insured that the insurer will retain defense counsel and that the insured has the right to retain her own counsel and “diligently attempt to document all communications with its insured”
(3) “communicate with all claimants to inform them of [the insurer’s] policy limits – both per person and per occurrence – and its willingness to exhaust its limits to achieve a global resolution.” This may include convening a mediation or settlement conference. “The insurer should set a reasonable time limit for the claimants to accomplish their voluntary allocation. The insurer should also explain that if the claimants cannot reach agreement on the allocation of policy proceeds by the deadline, [the insurer] will either
(1) file an interpleader action
(2) begin settling individual claims as it deems reasonable.”
An insurer “should carefully document all communications with the various claimants and their counsel. If claimants or their lawyers misstate facts in communications, the insurer should attempt to correct their misimpressions.”
(4) “keep the insured apprised of the settlement process and its strategy.”
(5) if the claimants cannot reach a resolution amongst themselves, “the insurer should settle with individual claimants in a reasonable manner,” attempting to “prioritize the claims that pose the greatest threat of personal liability to the insured.”