Even if no one is hurt in all the chaos, the aggregate damage to the three damaged vehicles may well exceed the available property damage coverage of the at-fault driver.
The owners of the three damaged vehicles have three different insurers. Each will eventually pay their insured’s claim and then want to subrogate against the at-fault driver.
But Company A settles with its insured far faster than Companies B or C settle with theirs. And Company A’s claim alone is for more than the at-fault driver’s PD limit. Company A makes a limits demand and it wants a check yesterday. Can the at-fault driver’s carrier settle with Company A?
Yes, it can.
Under Illinois law, an insurer is entitled to make payments under its policy on a first-come, first-serve basis as long as the settlements are made in good faith. The relevant section of the Illinois Vehicle Code is 625 ILCS 5/7-317(f)(3):
(f) Provisions Incorporated in Policy. -- Every motor vehicle liability policy is subject to the following provisions which need not be contained therein:See also, State Farm v. Murphy, 38 Ill.App.3d 709, 348 N.E.2d 491 (2nd Dist. 1976). The Murphy court explained, 38 Ill.App.3d at 712, “The insurer is given the right both by policy and by statute to settle claims against its insured. [Citing, inter alia, to the Vehicle Code provision now codified at 625 ILCS 5/7-317(f)(3).] And it is provided in the statute that as long as the settlement is made in good faith the amount of the settlement is subtracted from the amount of the policy limits. This is true even though there are several claimants, as the insurer has the right to settle claims in good faith even though such payments exhaust the policy limits of the insured’s policy so that a subsequent judgment creditor cannot collect on the policy.”
* * *
3. The insurance carrier shall, however, have the right to settle any claim covered by the policy, and if such settlement is made in good faith, the amount thereof shall be deductible from the limits of liability specified in the policy.
* * *
As with every legal rule ever devised, there are exceptions. The Murphy court came up with two (Id.): “The insurer is not exonerated if the prior settlements were not in good faith (Obad v. Allstate Insurance Co. (1967), 27 App.Div.2d 795, 279 N.Y.S.2d 128), or if the insurer in some other way, such as a failure to inform the insured of the danger of excess liability, breached its duty of good faith towards its insured (Fireman’s Fund Insurance Co. v. Santoro (1st Cir. 1967), 376 F.2d 157).”
A prudent insurer will always keep its insured apprised of possible excess exposure. The question of what constitutes ‘good faith’ in this context is trickier; it does not appear to have been extensively litigated in Illinois. However, Sampson v. Cape Industries, Ltd., 185 Ill.App.3d 83, 540 N.E.2d 1143 (4th Dist. 1989), suggests that an insurer has broad discretion to settle claims in virtually any manner it wants: After being served with a garnishment summons, advising of a judgment against its insured and demanding payment under its two applicable liability policies, Zurich, the insurance carrier in the Sampson case, exhausted those policy limits by paying other claims. The Appellate Court reversed the summary judgment awarded Zurich on the garnishment claim, remanding the case for further proceedings – but did not find that Zurich had acted in bad faith.
The better practice for an insurer facing multiple claims which, in the aggregate, exceed its policy limit, may be to try and negotiate a pro rata settlement with all the pending claimants. But Illinois law does not require this. And stalling one claimant because another claimant (or two) might come forward may constitute a bad faith claims practice. See, §154.6(d) of the Illinois Insurance Code, 215 ILCS 5/154.6(d) (the failure to “effectuate prompt, fair and equitable settlement of claims... in which liability has become reasonably clear” may be a bad faith claims practice).
This principle hurts carriers hoping to pursue subrogation claims: By the time a carrier settles up with its own insured, the liability insurance available to the tortfeasor may have been completely paid out to other claimants. But the tortfeasor’s carrier can not be penalized in these circumstances.
Now let’s change the facts. Instead of presenting an excess claim, Company A presents a claim for, say, 75% of the at-fault driver’s PD coverage. The at-fault driver’s carrier settles with Company A for the amount claimed and obtains an appropriate release.
Now Company B comes straggling along. It, too, has a claim for 75% of the at-fault driver’s PD coverage and it is not at all pleased to find that all but 25% of the available policy limit has been paid out to Company A. Company B wants payment of its entire claim. It sues the at-fault driver. Must the at-fault driver’s carrier defend its insured?
Yes, it must.
And, no, the at-fault driver’s carrier cannot just shove its remaining policy limit at Company B and abandon its insured. See, Conway v. Country Casualty Ins. Co., 92 Ill.2d 388, 442 N.E.2d 245 (1982). From Conway on there are any number of Illinois cases which duly note that the duty to defend is broader than the duty to indemnify. Of course, in the example here, there is at least a question of whether the insured’s excess exposure is sufficient to trigger a conflict of interest. We will defer that question to another day.
Now, one more change of facts. Company B is eventually persuaded to accept the remaining policy limit. Its suit is dismissed; appropriate settlement documents are exchanged.
Now—finally—Company C shows up, arm extended, palm upright. It wants 50% of the at-fault driver’s PD limit – but that limit has been exhausted by the prior settlements. Company C is really unhappy when it gets this news. It sues the at-fault driver.
Does the at-fault driver’s carrier have an obligation to defend this suit?
Here, the rule of Zurich Ins. Co. v. Raymark Industries, Inc., 118 Ill.2d 23, 52, 514 N.E.2d 150 (1987), presumably applies (emphasis in original): “Where the insurer has exhausted its indemnity limits, however, the insurer cannot ultimately be obligated to indemnify the insured. Thus, the duty to defend is broader than the duty to indemnify only when the insurer has the potential obligation to indemnify. But when, as here, the insurer has no potential obligation to indemnify it has no duty to defend.”
In an ideal world, Companies B and C would get their respective acts together sooner. Company A would be willing to wait for the other carriers to come to the trough. With all claims presented (which, conveniently, for purposes of our example, add up to 200% of the available PD limit), the at-fault driver’s carrier can hopefully persuade Company’s A, B and C to accept 50¢ on the dollar and all go away at once. If not, there is always the remedy of interpleader, which in Illinois is provided for by §2-409 of our Code of Civil Procedure.