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August 2010

McReynolds v. American Commerce Insurance Co. ? An Arizona Insurer Faced With Multiple Claims in Excess of Policy Limits, May Properly Interplead its Limits

An Arizona Insurer Faced With Multiple Claims In Excess Of Its Policy Limits Satisfies Its Duty To Settle When It Promptly Interpleads Its Policy Limits Into Court, Naming All Known Claimants, And Continues To Provide A Defense To Its Insured.

2010 Ariz. App. LEXIS 115

The Court of Appeals of Arizona, Division One, in a matter of first impression, affirmed summary judgment for an insurer holding the insurer had met its duty to equally consider settlement offers, when presented with multiple claims in excess of policy limits, by promptly and in good faith interpleading its policy limits and continuing to defend the insured.
Michael McReynolds ("McReynolds") was injured in an automobile accident with Tanya Raineri ("Raineri").  McReynolds was treated at Flagstaff Medical Center ("FMC") where his medical bills were substantial.  FMC filed a lien for $43,603.85. 

Raineri was insured by American Commerce Insurance Co. ("ACIC") under a policy with liability limits of $25,000 per person.  McReynolds demanded the policy limit.  Aware that McReynolds' medical bills exceeded the policy limits, ACIC responded by sending a check for $25,000 payable to McReynolds and FMC along with a release of all claims.  McReynolds rejected the check and filed suit against Raineri.

Shortly after commencing litigation, McReynolds served ACIC with an offer of judgment in the amount of the policy limits.  Pursuant to Arizona Revised Statutes ("A.R.S.") section 33-394(a), if ACIC paid the policy limit to McReynolds without obtaining a release from FMC, ACIC and Rainieri, would still be open to liability.

ACIC filed an interpleader action and paid the policy limits into the court.  Eventually, FMC released its liens and the interpleader was dismissed.  Meanwhile, the underlying litigation went to trial, where McReynolds secured a judgment of $469,110.17 against Raineri.  Raineri subsequently assigned McReynolds any claims she might have had against ACIC in return for a covenant not to execute.

McReynolds then filed a complaint against ACIC alleging ACIC acted in bad faith and violated its duty of good faith and fair dealing by failing to provide equal consideration to its insured's interests when it filed the interpleader rather than accept McReynolds' offer for judgment.  The trial court granted ACIC's motion for summary judgment noting that McReynolds' theory would have presented ACIC with a "Hobson's choice." McReynolds appealed.

The Court of Appeals affirmed.  In a matter of first impression in Arizona, the Court of Appeals held that an insurer faced with multiple claims in excess of its policy limits satisfies its duties when it promptly interpleads its policy limits into court, naming all known claimants, and continues to provide a defense to its insured.

The Court observed that Arizona law has not expressly recognized a duty on the part of an insurer to manage policy limits, and to the extent such a duty exists, it should be considered a part of the duty to fairly consider settlement offers giving equal consideration to the insured's interest.

The Court of Appeals noted that while no Arizona authorities had addressed the relationship between an insurer's filing of an interpleader and its duty to equally consider settlement offers, courts in other jurisdictions had considered the matter.  Specifically, the Court discussed two out-of-state decisions which highlighted the connection between an insurer's duty and this course of action under similar circumstances. The cases held that an insurer, when faced with multiple claims in excess of its policy limits, may appropriately file an interpleader or otherwise provide for the equitable distribution among all claimants. 

The Court of Appeals expressly declined to apply the "first in time, first in right" rule.  Under the "first in time, first in right" rule, the first party to bring a claim is entitled to a full settlement, even if the settlement would exhaust the policy limits and leave subsequent claimants without remedy.  The Court of Appeals noted that there was no factual basis upon which a meaningful temporal priority could be established under the circumstances presented.

The Court of Appeals emphasized the uncertainty faced by an insurer attempting to manage competing claims regardless of the course of action the insurer pursues.  The Court stated that the favored approach to managing multiple claims in excess of the policy limits must provide for certainty to insureds, insurers, and litigants and not depend on submitting each case to a jury for an after-the-fact determination. 

With that goal in mind, the Court held that when an insurer is faced with multiple claimants and with claims in excess of policy limits, it can enter a safe harbor that will protect it from liability for bad faith failure to properly manage its policy limits.  To do so, the insurer should promptly, and in good faith, file an interpleader action and join all known claimants, pay its policy limits into court, and continue to defend its insured as to all pending claims until they are resolved.  Because ACIC did just that, the Court affirmed summary judgment in its favor.

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This opinion is not final.  Though it has been certified for publication, it may be modified by reconsideration, or granted review by the Arizona Supreme Court.  Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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Matthew G. Kleiner