Recently, we have had a number of claims where the decision has been made to simply pay full policy limits, either due to a lack of defenses or as a business decision. Some of these claims involve multiple defendants and the plaintiff’s counsel refuses to accept the limits and dismiss your insured until the remaining defendants have also reached a settlement. Because this can take months and the insurance company remains obligated to defend the insured until a dismissal (or verdict) has been obtained, many insurers have been asking if there is anything that can be done to satisfy the insurer’s obligation towards the insured and close the file.
This question arises because the duty to defend is broader than the duty to indemnify. However, many carriers are asking, “If the limits of the policy are offered/tendered, does the duty to defend end?” Obviously, if the offer of policy limits is made in exchange for a full Release and Settlement Agreement, the duty to defend would also be released.
However, what if the insurance limits are not sufficient to satisfy the entire claim or there are multiple defendants? Can the insurance company simply interplead the limits into the Court and stop defending the insured, even before the litigation is concluded by settlement or judgment?
Most policies contain language similar to the following:
Subject to the limit of liability, if you pay the premium when due, we will pay compensatory damages for bodily injury or property damage for which any insured becomes legally responsible because of an auto accident. We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. We reserve the right to recover from any party to whom we have provided a defense any defense costs incurred by us should a court of competent jurisdiction conclude that we had no duty to provide a defense to that party. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted by payment of judgment or settlements. We have no duty to defend any suit or settle any claim for bodily injury or property damage not covered under this policy.
Liability Coverage, Insuring Agreement, (emphasis added). Insurance companies have used language similar to that highlighted above to assert that interpleading policy limits into the court ends the duty to defend. For example, in Mahan v. Am. Std. Ins. Co., the Court of Appeals held that, based on the policy language involved, the insurance company, American Standard, was entitled to interplead funds to address possible claims that could be filed against its insured and avoid any duty to defend. 862 N.E.2d 669 (Ind. Ct. App. 2007).
Because American Standard filed its Complaint for Interpleader based on its pre-suit investigation and before suit was actually filed against the insured, the 7th Circuit was asked to address a similar case just a few days later. In Abstract & Title Guar. Co. v. Chi. Ins. Co., the Court was asked to address whether the deposit of funds with the court constitutes a payment of claims such that the insurance company’s duty to defend is extinguished, even after the defense had been commenced. 489 F.3d 808 (7th Cir. 2007).
In Abstract & Title, Abstract & Title Guaranty (“ATG”) provided services in connection with real estate transactions. As part of its business, ATG obtained an errors and omissions policy from Chicago Insurance Company (“CIC”). During the applicable policy period, ATG became involved with Royal Haven Builders (“Royal Haven”), which involvement became extremely troubled. During the relationship, Royal Haven began a long decline into bankruptcy, fraud and check kiting, and an employee of ATG started slipping funds intended for third parties under the table directly to Royal Haven. The same ATG employee failed to look after the interests of other parties to whom ATG owed contractual and fiduciary duties in these complex real estate matters. Not surprisingly, some of those who had been defrauded by Royal Haven and the ATG employee took notice when deals worth millions went south.
In 2003, ATG started being served with legal complaints. CIC was notified of these claims and quickly realized that the value of these claims was going to considerably exceed CIC’s potential maximum liability limits. Accordingly, CIC filed an interpleader action in federal court and deposited the full amount of its insurance limits. CIC also advised ATG to obtain counsel of their choosing and seek payment of those legal fees out of the interplead limits. After adjudication of several claims, ATG realized that there would not be sufficient funds to pay for all of the claims and its attorney fees. ATG then filed suit against CIC for breach of contract and bad faith for failing to defend it in the underlying actions.
In ruling on the cross motions for summary judgment that were filed, the Court held that the decision of Mahan was equally applicable to the case against CIC. More specifically, the Court ruled that CIC’s duty to defend was extinguished when it unconditionally interplead its policy limits into the Court. Id. at 812. Specifically, the Court held:
…while this case was pending the Indiana Court of Appeals decided a similar question in Mahan v. Am. Standard Ins. Co. In Mahan, an automobile insurer faced a situation where the number and value of potential claims against the insured might have exceeded the insurer’s total liability. The policy included a clause that shifted the burden to defend or settle onto the insurer, but the contract also included a clause that disavowed any duty to defend after the limits of liability had been paid. As the claims started to loom, the insurer initiated an interpleader action and deposited with the court the total sum of its liability under the policy. The court eventually divided the funds amongst the injured parties. The insured counter-claimed against the insurer alleging breach of contractual duties to defend and bad faith.On nearly identical facts to this case, the Indiana Court of Appeals held in Mahan that there was no breach of contract for interpleading and failing to defend. This appears to resolve the question of whether Indiana law allows the use of interpleader as a method of paying the policy limits. But the court rested its “failure to defend” decision on additional grounds that are not present here: in Mahan, the insurer interpleaded before the first lawsuit was filed against the insured. In this case, ATG had already been served a complaint before CIC filed the interpleader. The question before us is whether this difference should lead us to a result that is contrary to Mahan. On the basis of the language of the contract, we conclude that it should not.In Indiana, when an insurance contact is clear and unambiguous, the language therein must be given its plan meaning. On the other hand, where there is ambiguity, insurance policies are to be construed strictly against the insurer and the policy language is viewed from the standpoint of the insured.This all comes down to the question of whether the deposit of the funds with the court constitutes payment of claim expenses. If it is, then CIC has exhausted its obligations under the contract. … The definition of a claim expense is expansive in this contract. We repeat the relevant part: “all other fees, costs, and expenses resulting from the investigation, adjustment, defense, and appeal of a Claim, suit or proceeding arising in connection therewith, if incurred by CIC.” CIC deposited the sum total of its financial obligations into the court’s coffers for the purpose of satisfying the claims that were piling up against ATG. There can be few actions that would fall more plainly within the meaning of “costs or expenses resulting from the . . . adjustment . . . of a claim . . . incurred by CIC.” We see nothing ambiguous about this language, despite the parties’ best efforts at obfuscation. Having paid its limit in claim expenses, the contract between the parties clearly instructs that CIC was under no obligation to defend or to continue to defend ATG. Indeed, the contract even goes so far as to allow CIC, if already actively defending ATG, to throw up their hands and not “continue” any longer. In light of such strong language, we would be hard pressed to read this contract to require CIC to both defend the suits and pay to its full limits.
Abstract & Title, 489 F.3d at 811-12 (internal citations omitted; emphasis supplied).
Unlike most ISO form policies that form the basis for our practice, the policies at issue in Mahan and Abstract & Title, included language that discontinued the duty to defend after applicable limits had been exhausted by the “payments of judgments, settlements, Damages or Claim Expenses.” The majority of Indiana ISO Commercial, Auto and Homeowner policies merely include language that concludes the duty to defend upon the exhaustion of policy limits by “payment of judgment or settlement.” Thus, because the decisions in the matters outlined above were based heavily, if not exclusively, on the language of the policy itself, the question of whether an insurer utilizing the ISO policy can discharge its duty to defend by interpleading its policy limits remains.
To date, no Indiana state court has addressed this specific question. However, decisions from the United States District Court for the Northern and Southern District of Indiana do provide some insight. In Carolina Cas. Ins. Co. v. Estate of Ronald J. Studer, 555 F.Supp.2d 972 (S.D. Ind. 2008), a trucking company employee was involved in an accident in Indiana which resulted in the death of one and the injury of several other motorists. At the time of the accident, the trucking company was insured by Carolina Casualty Insurance (“Carolina Casualty”) who maintained the MCS-90 endorsement for $1 million. After suit was filed, Carolina Casualty conceded that its exposure exceeded its policy limits and proceeded to file an action for interpleader and declaratory judgment. Carolina Casualty claimed that it should be discharged from any further obligations under the policy, including the duty to defend, once it was allowed to interplead its policy limits into the court.
In determining that the unconditional interpleading of insurance limits did discharge the insurer’s duty to defend, the court found:
In support of its contention that its duty to defend is discharged, Carolina Casualty relies heavily upon the Northern District of Indiana’s recent ruling in Carolina Casualty Insurance Company v. Estate of Zinmaster, 2007 U.S. Dist. LEXIS 81291, 2007 WL 3232461 (N.D. Ind. 2007), in which the court addressed the identical issue presented in the case as bar, to wit, whether depositing the policy limits into the registry of a court through an interpleader action terminates the contractual duty to defend. In Zinmaster, as in our case, the insurance policy at issue provided that the contractual duty to defend ended when the policy limit had been “exhausted by payment of judgments or settlements.” At the time the plaintiff filed its motion for summary judgment in Zinmaster, no settlement agreement had been reached, nor had the policy limit been distributed. However, after the summary judgment motion was filed, but before the court ruled on the motion, the parties reached a mediation agreement, and the court had ordered distribution of the deposited funds in accordance with that agreement.
After collecting and analyzing the applicable cases, the Court in Zinmaster, concluded that,… where the insurance company has exhausted the policy limits with no hope of retrieving the funds, . . . under such circumstances . . . the insurer’s duty to defend is discharged.
. . .As discussed below, because we find that Carolina Casualty’s deposit of the $1 million to the registry of the court was a full surrender of the policy limit, rather than a conditional tender, even though the funds have not yet been distributed. …
As noted, Carolina Casualty has made a full surrender of its policy limits and does not dispute that the total value of all the claims it is obligated to pay exceeds the $1 million amount. Further, it has deposited the $1 million in the registry of the court with no expectation that it might later recoup any of that money. Thus, Carolina Casualty has made an unconditional tender of the policy limits and relinquished any clam to those funds. As such, … Carolina Casualty is entitled to summary judgment on its interpleader complaint.
Id. (internal citations omitted; emphasis added).
Clearly, the holding in Estate of Studer stands as highly persuasive authority regarding how this issue would be determined by the Indiana Supreme Court. If the insurance company unconditionally interpleads the entire policy limits and has no expectation that any of those funds will be returned, then it can be relieved of its duty to defend or to continue defending the insured.
Addressing and deciding such coverage issues can be a very involved process with significant potential for cost-savings if properly applied, and significant risks for allegations of breach of contract and bad faith if improperly handled. We at Garan Lucow Miller, P.C. routinely address such issues for our clients, and would be happy to assist if you have a claim that involves issues of coverage. If you have any questions about such matters, please contact the author of this article to discuss your rights as the insurer and your obligations to your insureds, as well as the best approach when issues such as these arise.
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Jennifer Davis, Editor of The Garan Report – Hoosier Edition, is a Shareholder in our Merrillville, Indiana Office. Jennifer can be reached at (219) 756-7901 or jdavis@garanlucow.com