By Charles H. Mullin, Karl N. Snow, and Noah B. Wallace, Principals, Bates White, LLC
In their article appearing in the May/June 2010 issue of Coverage, “Proper Settlement Credits in All Sums Jurisdictions,” Charles H. Mullin, Karl N. Snow and Noah B. Wallace explore the question of whether a settlement credit in all sums jurisdictions should be equal to the policy limits of the settled policies (“policy limits”) or equal to the amount of the settlement (“pro tanto”). They extensively analyze three hypothetical cases where an environmental claim is allocated to differing insurance policies using both policy limits and pro tanto formulas for settlement credits.
The authors’ guideposts in their analyses are two well established public policy objectives: (1) the goal of encouraging settlement, thus avoiding litigation costs and the uncertainty of the outcomes for the settling parties and (2) the goal of leaving third parties to the settlement unaffected by the terms of the settlement. Their study finds that the acceptance of a given settlement credit approach in all cases would be inequitable. Instead, the proper choice depends on the facts underlying the settlement. More specifically, the proper choice is grounded on the reasons the settlement amount varies from the policy limits. When a contention specific to the policies in question is the prime reason for the settlement, such as a coverage defense applicable to those policies or the risk of insolvency, the pro tanto approach may be more equitable. The authors explain, “This approach leaves nonsettling insurers unaffected by the settlement and the policyholder whole.” In contrast, when a common coverage defense or the time value of money drives the settlement, “the policy limits approach is preferable as it removes the possibility of over collection [by the settling policyholder] and leaves each party, at a minimum, as well off as it was prior to the settlement.”
The authors acknowledge that their case studies do not take into account some complicating factors: litigation costs are not borne equally, risk aversion among parties may differ, and there is generally an asymmetry of information among the policyholder, the settling insurer and the nonsettling insurers. Nonetheless, the authors state that the basic patterns they have found will pertain to the vast majority of potential fact patterns.
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