Insurer Faced with Multiple Claims Against Limited Proceeds May Avoid Bad Faith by Interpleading Proceeds

Insurance/Torts - INTERPLEADING FUNDS AS DEFENSE TO BAD FAITH ACTION

McReynolds v. American Commerce Ins. Co., __Az. Adv. Rep. __ 1 CA-CV 09-0017 (App., Div. I, July 14, 2010) (J. Barker)

INSURER NOT IN BAD FAITH FOR FAILING TO ACCEPT OFFER OF JUDGMENT WITHIN POLICY LIMITS WHEN IT INTERPLEAD FUNDS IN LIGHT OF MULTIPLE CLAIMS AGAINST POLICY LIMITS

Plaintiff was severely injured in auto accident where adverse driver had only $25,000 in auto liability limits with American Commerce Insurance [ACI]. Recognizing that plaintiff's medical expenses alone exceeded these limits ACI promptly sent a check for $25,000 to the plaintiff made payable to plaintiff and Flagstaff Medical Center [FMC] where he was treated. Plaintiff rejected the check because FMC was also a payee and sued ACI's insured driver.

Plaintiff then served a $25,000 offer of judgment on the ACI insured driver which was not accepted. ACI was advised by legal counsel that ARS sec. 33-934 potentially rendered the insured and ACI liable to the health care provider up to the $25,000 limits if its insured were to accept the offer of judgment without taking care of the lien. Counsel recommended ACI interplead the funds alleging plaintiff, Arizona Health Care Cost Containment System [AHCCCS] and FMC both had potential claims against the money and asking the court to decide their relative rights. FMC then released its liens and AHCCCS defaulted. The interpleader was then dismissed.

Plaintiff won a $469,110.17 verdict against the ACI insured. The insured then assigned rights against ACI to the plaintiff and the plaintiff sued ACI for bad faith failure to accept the offer of judgment or otherwise settle within the policy limits. ACI was granted summary judgment and attorneys' fees against plaintiff. Plaintiff appealed. The Court of Appeals affirmed.

The Court of Appeals found that where the insurer is potentially faced with multiple claims that exceed the policy limits it fulfills its good faith obligations to its insured by promptly interpleading the funds and bringing all the potential claimants before the court for allocation of limited proceeds among the potential claimants while continuing to provide its insured a defense.

Finally the court found that Arizona Rules of Civil Procedure 68, 5 and 6 read together mandate that if the deadline to respond to an offer of judgment falls on a Saturday, Sunday or legal holiday the deadline is extended to the next day not a Saturday, Sunday or legal holiday. Hence here the interpleader was filed before the running of the deadline on the offer of judgment and therefore was timely.

It is noteworthy that the court totally ignored the fact that interpleading funds does nothing to protect the insured. You cannot compel any claimant in an interpleader to release the insured. To the contrary, if the insurer interpleads the funds, claimants may accept whatever the court decides is their fair share then go forward with a lawsuit to recover the difference against the insured.