SNR Denton on DeMarco v. Travelers Insurance Co.: Insurer Faced with Multiple Claims Exceeding Policy Limits Must Seek to Minimize Insured’s Financial Exposure

SNR Denton on DeMarco v. Travelers Insurance Co.: Insurer Faced with Multiple Claims Exceeding Policy Limits Must Seek to Minimize Insured’s Financial Exposure

William Barker   By William T. Barker, Partner, SNR Denton

DeMarco v. Travelers Insurance Co. applied Rhode Island's unique standard for an insurer's duty to settle to multiple claims exceeding limits.  In doing so, it adopted the minority rule that such an insurer must seek to minimize insured's financial exposure and can be liable for bad faith if its efforts are not found reasonable.  This commentary criticizes that result.

In September, 2003, DeMarco was seriously injured while a passenger in a vehicle driven by Doire.  Another passenger, Woscyna, was also seriously injured.  Doire was insured by Travelers, with a combined single policy limit of $1 million.  When DeMarco's case was tried, Travelers admitted Doire's liability for the single-car accident; while the opinion never says so, it appears to have assumed that liability all along.

Starting in February, 2004, DeMarco's lawyer repeatedly demanded the policy limit, filing suit in March, 2004.  (Woscyna did not file suit until August, 2006, when the statute of limitations was about to expire, but he had submitted a settlement demand of $829,747 by February, 2005.)  DeMarco's demands consistently asserted that failure to settle would subject Travelers to liability under Asermely v. Allstate Insurance Co.,[1] where the Rhode Island Supreme Court had held that an insurer which rejects an offer to settle and an excess judgment results and is not set aside, "the insurer is liable for the amount that exceeds the policy limits, unless it can show that the insured was unwilling to accept the offer of settlement."

Travelers consistently offered its policy limit to settle both claims, but refused to offer it all to Demarco. DeMarco went to trial and recovered an excess judgment.  On appeal, Travelers argued that Asermely applied only to single claimant cases.  It also argued that, even if Asermely did apply, whether it had acted reasonably was a factual question that could not properly be resolved on summary judgment. The supreme court rejected the first point, though "explicating" the applicability of Asermely in multiple claimant cases.  It agreed on the second point, remanding for findings of fact.

The court summarized its holding as follows:

We hold that, when an insurer is faced with multiple claimants with claims that in the aggregate exceed the policy limits, the insurer has a fiduciary duty to engage in timely and meaningful settlement negotiations in a purposeful attempt to bring about settlement of as many claims as is possible, such that the insurer will thereby relieve its insured of as much of the insured's potential liability as is reasonably possible given the policy limits and the surrounding circumstances. In meeting this duty, the insurer must negotiate as if there were no policy limits applicable to the claims and as if the insurer alone would be liable for the entire amount of any excess judgment. The insurer must exercise its best professional judgment throughout this process, always keeping in mind the best interests of its insured and the necessity of minimizing its insured's possible eventual direct liability. As with the Asermely rule when it is applied in the single claimant situation, in order to show that an insurer has violated its fiduciary duty in a multiple claimant case, the insured (or a party to whom the rights of the insured have been assigned) need not demonstrate that the insurer acted in bad faith but only that the insurer did not act reasonably and in its insured's best interests in light of the surrounding circumstances.

The commentary summarizes the law elsewhere:

The cases are essentially unanimous in holding that an insurer owes no duty to claimants to refrain from depleting the policy limits by disproportionate settlements with other claimants. Any such duty would be inconsistent with the insurer's duties to its insured. Nor can a claimant who has not obtained a judgment obtain an injunction against disproportionate settlements with other claimants.

Most courts hold that an insurer acts consistently with its duty to its insured by making reasonable settlements with some claimants, even if that depletes the limits available for other claims. In particular, insurers are generally permitted to make reasonable settlements on a "first come, first served" basis. This is especially true where claimants have deliberately chosen to pursue claims piecemeal. Courts are reluctant to delay settlement with some claimants based on the possibility that other claimants or potential claimants might be adversely affected by depletion of the policy limits. Nor are they prepared to require insurers to refuse reasonable demands, at the risk that refusal might later be found to be bad faith. Of course, an insurer cannot hastily make excessive settlements that deplete its limits in order to relieve itself of the responsibility of further protecting its insured.

The commentary criticizes the rule adopted by the Rhode Island court as both unfair to insurers and failing to properly reflect the interests of insureds, especially those who have no ability to contribute to payment of an excess judgment.

[1] Asermely v. Allstate Ins. Co., 728 A.2d 461 (R.I. 1999).

William T. Barker is a member of SNR Denton's Insurance Litigation & Coverage Practice Group and practices in the firm's Chicago office.  He has a nationwide practice in the area of complex commercial insurance litigation, including coverage, claim practices, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author, with Ronald D. Kent of THE NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION and with Charles Silver of the forthcoming PROFESSIONAL RESPONSIBILITIES OF INSURANCE DEFENSE COUNSEL; he has written over 100 published articles on insurance and litigation subjects.  He has been described as "[t]he leading lawyer commentator" on the relationships between insurance and civil procedure.  Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995).  He is an Adviser to the American Law Institute project on Principles of the Law of Liability Insurance.  He is a member of the EDITORIAL BOARD OF THE NEW APPLEMAN ON INSURANCE LAW LIBRARY EDITION and THE NEW APPLEMAN INSURANCE LAW PRACTICE GUIDE.  He is Editorial Board Director and Senior Contributing Editor of INSURANCE LITIGATION REPORTER and a member of the Board of Editors of DEFENSE COUNSEL JOURNAL.

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