McReynolds v. American Commerce Insurance Co. (CA1 7/13/10)

Insurance lawyers will be writing to their companies about this one. It concerns the handling of multiple claims in excess of the policy limits.

ACIC’s insured caused an accident that injured McReynolds. The policy limit was $25,000. His claim was big; even his hospital lien was over $40,000. ACIC tendered the limit but he rejected it because ACIC put the hospital’s name on the check.  He sued the insured and made an OJ for the policy limit; ACIC provided a defense and responded to the OJ with an interpleader naming McReynolds, the hospital, and AHCCCS. When the hospital released its lien and AHCCCS defaulted, the interpleader was dismissed. McReynolds obtained an excess verdict at trial (over $400,000), took an assignment of the insured’s rights, and sued ACIC for bad faith based on its failure to accept the OJ.

The trial court granted summary judgment for ACIC; the Court of Appeals affirms.

McReynolds argued that ACIC should have “managed” its policy limit by settling his claim, leaving its insured exposed only to the much-smaller hospital lien. The court disagrees, holding that when an insurer is faced with multiple claims in excess of the policy limit its obligation is satisfied by promptly and in good faith interpleading its limits, so long as it also provides its insured a defense. The court specifically recognizes the victim’s claim and the medical liens as separate claims.

The court rejects other theories for paying multiple claims. The “first-in-time” rule doesn’t apply here because McReynolds’ injury and medical bills were at the same time. Courts that had said its a jury question for a bad-faith action didn’t address the interpleader angle.

“Promptly” means, when there is an OJ,  within the time for responding to it. In so holding the court clarifies that Rules 6(a) (last day on a Sunday/holiday) and 6(e) (extra days for mail) apply to responses to OJs.

And “good faith?” What a bad-faith interpleader would be is not explained. The court proudly says that its holding creates a “safe harbor”; our courts have once again produced a “safe harbor” with uncharted rocks and shoals.

The opinion also requires that the carrier actually pay the money into court. Rule 22 doesn’t require doing so until the time of discharge (and it is easier for all concerned that money never actually pass through the court’s hands); why the rule is different for insurance carriers is also unexplained.

The court regards this as an issue of first impression but the impression for years has been that interpleader is the safe thing for a carrier to do in this situation. The case will in any event be cited for the interpleader as “safe harbor”idea and its rules for getting there.

That’s unfortunate because the court comments, albeit very much in passing, on the other side of the coin. It quotes and agrees with a Kansas case that interpleader is but one of at least three ways of dealing with the situation: alert all claimants and get mutual agreement; pay the claims as they come (though this opinion has already thrown doubt on that); or interplead the policy limit.

A climate in which carriers probably must file interpleaders and claimants must file lawsuits to trigger them – which this opinion could further – is not necessarily good for either. McReynolds’ argument was legally wrong but hardly unreasonable; ACIC would have greatly reduced its insured’s exposure by paying him. What if it had? How is it bad faith to settle a $400,000 claim and expose the insured to only $40,000? What if one claim were 20 or 30 or 50 times larger than the other rather than merely 10? Interpleader should be for the tough calls. Carriers are already afraid that if they can’t settle with everyone – including every passenger and passerby and person who hasn’t made a claim yet but might someday –  then they can’t settle with anyone. That causes delayed compensation and higher claims costs even when the company knows perfectly well that one claim is huge and the others are peanuts. The attitude that making no decision is safest hardly needs to be reinforced; instead, carriers should be assured that they may settle multiple claims in objectively reasonable ways even if that exhausts the policy. That not paying claims need be a safe-harbor is a sign that not all is well in bad-faith land.

(link to opinion)