Avoiding Bad Faith When There Are Multiple Competing Claims in Excess of the Liability Policy Limits
In 2010, the Arizona Court of Appeals addressed the legitimacy of bad faith claims asserted against an insurer who files an interpleader action after it is unable to resolve a dispute arising out of multiple claims in excess of the available policy limits. In McReynolds v. Am. Commerce Ins. Co., 225 Ariz. 125, 235 P.3d 278 (App. 2010), the defendant was insured under a policy with liability limits of $25,000. After a dispute arose between plaintiff’s counsel and the treating hospital over the satisfaction of a medical lien, plaintiff served an offer of judgement for the policy limits on the insurer. Instead of responding to the offer of judgment, however, the insurer promptly filed an interpleader action and paid the $25,000 policy limits into the court. The Court of Appeals found that had the insurer accepted the offer of judgment, it would have “left the insurer and the insured exposed to a claim by the lienholder after having already paid out the available monies under the policy.” Because acceptance of the offer of judgment “would not have extinguished the liability of the insured,” the Court found that the insurer did not act in bad faith when it filed the interpleader and continued to provide a defense for the insured.
Within its holding in McReynolds v. American Commerce Insurance Co., the Court determined that when handling multiple claims in excess of policy limits, the insurer can insulate itself from bad faith claims by the (1) prompt, good faith filing of an interpleader as to all known claimants; with (2) payment of the policy limits into the court; and (3) the continued provision of a defense for the insured as to each pending claim. According to the Court, this acts as a “safe harbor” against a subsequent bad faith claim for failing to properly manage the policy limits or to give equal consideration to multiple settlement offers in excess of the applicable policy limits. In sum, so long as the insurer promptly files the interpleader in good faith and continues to provide a defense for its insured, it cannot be subjected to bad faith claims arising out of its actions.
The McReynolds holding remains the law in Arizona. However, its limits have been subjected to multiple attacks by attorneys attempting to avoid interpleader or the safe harbor created by the filing of an interpleader by the insurance carrier. In one Pinal County case the trial court denied the insurer’s motion for summary judgment on the basis that a question of fact existed as to whether the insurer made a genuine good faith effort to settle all claims before interpleading the policy limits. In particular, the insurer never offered to coordinate or pay for a mediation before filing the interpleader. Since whether an insurer fails to properly investigate, evaluate, and/or settle claims is generally an issue of fact for the jury, the question of whether the insurer was protected by the McReynolds safe harbor could not be dispensed by a motion for summary judgment. It is important to note that this was merely a trial court holding and does not abrogate the holding of McReynolds in any way. However, it has become clear that some courts may take issue with the idea that insurers can protect themselves from bad faith claims by filing interpleaders as soon as they are faced with multiple competing claims in excess of the policy limits. The better course of action may be for insurers to first attempt a pro rata settlement of the available policy limits, or to facilitate settlement discussions by arranging for a private mediation.
Some attorneys have also argued that the McReynolds safe harbor does not apply if the insurer does not promptly pay the policy limits into the court with the filing of the interpleader. However, this argument may be avoided by affirmatively requesting an order from the trial court directing the insurer to deposit the policy limits with the clerk of court. The Arizona Court of Appeals has not yet weighed in on this issue, but it is something that should be considered when filing an interpleader action.
When dealing with multiple claims in excess of the policy limits, insurers must be diligent to ensure they are giving equal consideration to their insureds, while taking the steps necessary to ensure they will be protected by the safe harbor created in McReynolds. With proper strategy, insurers can protect themselves from liability for bad faith claims while hopefully protecting their insureds from excess exposure by facilitating the global settlement of all claims. The attorneys at Thomas, Rubin & Kelley have extensive experience with respect to handling matters that involve numerous claimants and interpleader actions. Please feel free to contact us if you need assistance with any of your Arizona claims.