It is the proverbial “damned if you do and damned if you don’t” situation for insurers. An insurer is presented with a limits demand to settle for one insured – and it should be accepted based on liability and damages considerations -- but the settlement offered will not secure a release for all insureds.

If the insurer accepts the settlement offer, and secures a release for one insured, then the insured(s) not released can be expected to argue that the insurer acted in bad faith, by exhausting the policy without consideration of their interests.

Of course, if the insurer does not accept the settlement offer, because what’s proposed does not secure a release for all insureds, the insured with the settlement opportunity will invariably say that the insurer is liable for any resulting excess verdict because the insurer’s rejection of the settlement offer was in bad faith.

Faced with this no-win situation, it is not unusual for insurers to consider the possible use of interpleader.  It is at least likely to come up in the insurer’s discussion of options.  In general, the insurer files a pleading that explains to the court its impossible predicament and deposits the limits of its policy with the court.  Insurer to the court: Here you go, we want to pay all we owe, not favor one insured over another, help us out.  The thinking is that, by divorcing itself from the decision making and putting it in the court’s hands, the insurer did not place one insured’s interest over another’s.  Therefore, it should be protected against being in a one-way-or-another bad faith situation.

This is what the insurer did in Baldwin v. Standard Fire Insurance Company, No. 23A-CT-2728 (Ind. Ct. App. June 24, 2024).  But it did not get the outcome sought.  Just the opposite.  The court concluded that it may have committed the bad faith that it specifically sought to avoid.

The case has a number of issues and a complex procedure and a dizzying array of suits going back and forth.  I’ll limit the discussion to the interpleader issue.

Bradley Baldwin and Tommi Hummel were involved in a motor vehicle collision.  Hummel was at fault.  Baldwin was seriously injured and John Hopkins, a back seat passenger in Hummel vehicle, was also injured.  Jill McCarty was another passenger in the Hummel vehicle.      

Baldwin filed suit against Hummel and her husband.  The Hummels had an auto policy with Standard Fire that provided liability coverage of $50,000 per person and $100,000 per accident.  Baldwin offered to settle with the Hummels for the $50,000 per person limit.  Counsel for Baldwin and the Hummels were in agreement that Baldwin’s claim would exceed $50,000. 

However, Standard Fire did not accept the offer and it expired.  The insurer had concluded that if Hopkins made a claim, which he had not yet done, it was “certain” to exceed $50,000.  And it was possible that Jill McCarty would make a claim. 

Faced with this situation, Standard Fire filed an interpleader action and deposited $100,000, the per accident limit, with the court.  The insurer asked the court to declare that it had performed all of its duties and obligations under the policy.  It did so, it stated, “in order to protect the [per collision] policy limit of $100,000].”   

The Hummels then entered into a $700,000 confidential settlement with Baldwin, that included a covenant not to execute against the Hummels personally and Baldwin was assigned the Hummels’ rights against Standard Fire.  The court reduced the agreement to a final agreement.

The court in the interpleader action held a hearing and ordered the release of $50,000 to Baldwin and later ordered the release of $50,000 to Hopkins.  The court rejected all kinds of bad faith allegations against Standard Fire and concluded that the insurer had not breach any duties.

The case went to the Indiana appeals court, which saw the situation much differently.  I’ll set out the court’s discussion verbatim.  Doing this provides a better appreciation of the court thinking on the use of interpleader than a summary from me:

“A genuine issue of material fact precludes the entry of summary judgment for Standard Fire on the question of whether it breached its duty to exercise good faith and fair dealing toward the Hummels when Standard Fire allowed the November 2018 settlement offer to lapse. As the designated evidence makes clear, in the November 2018 settlement offer Baldwin offered to settle with the Hummels for the per-person policy limit of $50,000 in exchange for various representations and waivers. At the time of that offer, both Standard Fire and Hummels’ counsel had already concluded that the Hummels’ personal liability to Baldwin would exceed $50,000. Thus, any reasonably prudent person facing the potential total exposure of Baldwin’s claim would have accepted the November 2018 settlement offer.

“Nonetheless, Standard Fire did not accept the offer and instead allowed the offer to expire. In doing so, Standard Fire appeared to give no consideration to the Hummels’ interests. Instead, Standard Fire emphasized its own concern to proceed by way of the interpleader action ‘in order to protect the [per-collision] policy limit of $100,000.’  And, as a result of Standard Fire’s decision, the Hummels eventually conceded to being personally liable to Baldwin for $700,000.

“Standard Fire’s argument on appeal in support of its decision to not accept the November 2018 settlement offer doubles down on its own interests without any consideration of its obligation to exercise good faith and fair dealing to its insureds. Standard Fire emphasizes how rational the interpleader action was from its point of view and how reasonable it is for the insurer to be concerned about per-collision policy limits. We have no qualms with Standard Fire’s assessment of its own interests. It was Standard Fire’s apparent disregard for the interests of its insureds that establishes a genuine issue of material fact on this issue and precludes the entry of summary judgment. Accordingly, we reverse the trial court’s entry of summary judgment for Standard Fire on the issue of whether it exercised good faith and fair dealing toward the Hummels.”

Putting aside the complexities of the specific situation here -- and the fact that the appeals court did conclude that there were some problems with the $700,000 settlement as it was reached without notice to the insurer -- the court’s opinion demonstrates how challenging this scenario can be for insurers.  The insurer was in a no-win-situation and asked the court for help.  The court did so.  But now that court will address whether the insurer acted in bad faith.   

When there are inadequate limits -- a situation not of the insurer’s making and the insurer turns to the court for help -- judicial alchemy is an inappropriate solution.