Insurer’s Reasonable Handling of Competing Claims on Policy Limits Sinks Bad Faith Claim

By Timothy Kevane, Sedgwick New York

In Purscell v. TICO Insurance Co., the U.S. Court of Appeals for the Eighth Circuit held that an insurer’s unsuccessful attempt to resolve multiple personal injury claims exceeding the policy limits did not constitute bad faith. 2015 WL 3855253 (8th Cir. June 22, 2015).

The case arises out of an automobile collision. The insured’s passenger – distraught, inebriated and suicidal due to a recent drunk driving incident that killed a friend of hers – commandeered the insured’s vehicle by slamming her foot on the accelerator. The car entered an intersection at 75 m.p.h when it collided into another vehicle, injuring its two occupants. The insured’s passenger died as a result of the crash. The insured’s liability policy afforded limits of $25,000 per person and $50,000 per accident for bodily injury. The insurer, Infinity, immediately put the full $50,000 per accident policy limits on reserve, designating $25,000 for the fatality and $25,000 for the other vehicle’s occupants (the Carrs).

Shortly after the accident, Infinity received a policy limits demand from the Carrs. Although aware that Mr. Carr’s medical expenses were substantial, Infinity advised it needed to complete its investigation of the claim, including with respect to coverage issues, and kept its insured apprised of the investigation. In response, the Carrs withdrew their offer. Infinity responded by assuring that liability was not being denied, but in view of the potential fatality claim, the policy limits would have to be allocated. After the fatality claim became certain, the Carrs filed their own lawsuit.

Infinity requested updates from the attorneys for the Carrs and the fatality claimants about how to split the policy proceeds. The insured demanded that Infinity settle the Carrs’ claim within limits, but made no mention of the fatality claimants, who later made their own policy-limits settlement demand. Infinity later clarified to the insured that the parents of the deceased passenger were also making a claim, and that all claimants were negotiating how to divide the policy limits. The insured did not respond. Infinity eventually filed an interpleader action, after having tried unsuccessfully to obtain input from the insured as to a viable settlement approach. A jury subsequently awarded Mr. Carr $830,000 and Mrs. Carr $75,000 in damages. The fatality claim was settled for about $7,000.

The insured sued Infinity for bad faith, claiming that it failed to focus on the one claim (by one of the Carrs) with the highest exposure. To prove that claim, he had to show that Infinity: (1) reserved the exclusive right to contest or settle any claims; (2) prohibited him from settling claims without its consent; and (3) refused in bad faith to settle a claim within policy limits. The evidence had to show the insurer intentionally disregarded the insured’s best interests when it had a reasonable opportunity to settle within policy limits.

The Court found no bad faith by Infinity in trying to settle all three claims globally, given that it never denied responsibility to pay the full limits. When a global settlement became unattainable, the insurer appropriately filed the interpleader action. Furthermore, the insurer never had a reasonable opportunity to settle the Carrs’ claim because it was unexpectedly withdrawn shortly after being made. The Court also took note of the insured’s disregard of the insurer’s inquiry about the fatality claim, when he asked it to settle the Carrs’ claim only. The Court concluded that “no reasonable jury” could find that Infinity acted in bad faith in seeking a global settlement of all three claims.