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Insurable Interests - Insights on Insurance Law

Wisconsin Court of Appeals grapples with the problem posed by multiple claimants and inadequate limits

Car accidentIn Lovelien v. Austin Mut. Ins. Co., No. 2016AP1679 (Wis. Ct. App. Dec. 27, 2017), two disappointed plaintiffs attempted to use Wisconsin’s direct action statute to require a liability carrier to distribute settlement proceeds in a pro rata fashion, prior to trial.

This case arises out of a tragic accident where the driver and two passengers of a van died when the van collided with another car. All the injured parties sued Austin Mutual, the van driver’s liability insurance carrier.

Austin Mutual attempted to negotiate a global settlement, informing the court that it was prepared to pay its full $500,000 policy limits. When its efforts failed, it settled separately with two of the four claimants. The two remaining plaintiffs objected, arguing that they were entitled to a pro rata share of the policy limits and that Austin Mutual’s settlement prevented them from receiving their shares.

For support, the non-settling plaintiffs pointed to Wisconsin’s direct action statute, arguing that it requires insurers with inadequate limits and multiple claimants to pay each claimant a pro rata share of the limits “based on the amount of damages each person sustained.”

Thankfully, the court rejected this argument. That statue, Wis. Stat. § 632.24, states:

Any bond or policy of insurance covering liability to others for negligence makes the insurer liable, up to the amounts stated in the bond or policy, to the persons entitled to recover against the insured for the death of any person or for injury to persons or property, irrespective of whether the liability is presently established or is contingent and to become fixed or certain by final judgment against the insured.

As the court noted, this statute simply makes a liability insurance carrier directly liable to the plaintiff, under certain circumstances. It does not discuss, or even implicate, how insurance proceeds are to be paid, except to say that a carrier’s liability extends only to the limits of its policy.

The court also appropriately recognized that the plaintiff’s arguments would establish bad law, curtailing the ability of insurers to settle with injured parties and forcing them to proceed to trial in every case to determine the appropriate shares. The court suggested that the Wisconsin Legislature address this topic through legislation.

There are no appellate cases in Wisconsin clearly describing an insurer’s duties when multiple claimants assert claims for inadequate policy limits prior to a jury’s determination of liability and damages. Contrary to some recent commentators’ conclusions, however, this does not mean that insurers are free to resolve those cases however they choose.

To the contrary, a carrier’s duty of good faith to its insured is squarely implicated by its conduct in settling claims in this factual context. Accordingly, when faced with multiple claimants and inadequate limits, carriers should fully investigate all claims completely, recognizing that claimants may (and often do) take positions adverse to one another.

Carriers should, at all times, keep their policyholders informed of the status of the investigation and settlement discussions, and should avoid jeopardizing settlement discussions that are advantageous to their insureds. Most importantly, if the claims potentially exceed policy limits, the carrier should attempt to negotiate a global settlement that eliminates the potential for an excess verdict. In these situations, carriers should proceed cautiously, keeping the insured in the loop and abiding by their instructions when appropriate.

Liability insurers that follow these guidelines face the best chance of avoiding extracontractual liability in these tricky cases.

January 17, 2018

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