Baldwin v. Standard Fire Ins. Co
2024 WL 3093500 (Ind. 2024)
Insurers have long viewed interpleader as the go-to strategy and a safe harbor for avoiding accusations of bad faith when dealing with multiple liability claims exceeding policy limits. However, a recent decision from the Indiana Court of Appeals suggests that insurers may need to reconsider relying on interpleader as a shield against bad faith claims, especially when faced with time-limited settlement demands.
The decision involved three lawsuits stemming from a car accident in June 2018 between Bradley Baldwin and Tommi Hummel, who was driving with two passengers and failed to yield the right of way. Baldwin was taken by ambulance to a nearby hospital, while Hummel and one of her passengers, John Hopkins, were airlifted to another hospital. The other passenger, Jill McCarty, fled the scene before officers arrived and discovered drug paraphernalia and alcohol inside Hummel’s car.
Baldwin brought a personal injury lawsuit against Hummel and her husband, who had an auto insurance policy with Standard Fire that provided liability coverage with limits of $50,000 per person and $100,000 per accident. Standard Fire hired outside counsel to represent the Hummels.
In November 2018, Baldwin sent the Hummels a time-limited settlement demand (what the decision calls a “settlement offer”) for the $50,000 per-person policy limit. Standard Fire and outside counsel had concluded that Baldwin’s claim would likely exceed $50,000 and that if Hopkins made a claim, it would certainly exceed $50,000; thus, the two claims would exceed the $50,000 per-person and $100,000 per-accident policy limit. Instead of accepting Baldwin’s settlement demand, Standard Fire filed an interpleader action two months later, in January 2019, seeking to deposit the $100,000 per-accident policy limit with the clerk of court.
In December 2019, Standard Fire deposited the $100,000 per-accident policy limit with the clerk and sought a declaration that it had fulfilled all its duties under the policy. The trial court ordered the release of $50,000 to Baldwin but otherwise denied Standard Fire’s motion. The court later ordered the release of the remaining $50,000 to Hopkins, who was then dismissed from the case.
The Hummels later entered into a confidential settlement with Baldwin for $700,000 and assigned to Baldwin their claims against Standard Fire. As assignee, Baldwin sued Standard Fire for breach of the duty to defend and breach of the implied duty of good faith and fair dealing. After the parties cross-moved for summary judgment, the trial court entered a consolidated order entering summary judgment for Standard Fire on Baldwin’s claims.
On appeal, the trial court’s order was affirmed in part and reversed in part. The Indiana Court of Appeals affirmed the entry of summary judgment for Standard Fire on Baldwin’s claim that Standard Fire breached its duty to defend Hummel, but found there were genuine issues of material fact whether Standard Fire breached its duty of good faith and acted in bad faith by not accepting Baldwin’s time-limited settlement demand. This article addresses only the latter two issues.
On the first issue, the Court of Appeals held that the implied duty of good faith and fair dealing requires an insurer to “consider the insureds’ interests in settlement decisions.” Id. at *6. Because auto policies almost invariably give the insurer the right to decide whether to settle, the Court of Appeals found that an inherent tension existed between an insurer’s right to control settlements and an insured’s financial interests. The Court of Appeals quoted an insurance treatise that described how the interests of the insurer and the insured often diverge, particularly when a claim could be settled for the policy limit:
It is generally in the insured’s interest to settle for the policy limit, since doing so protects the insured from any potential personal liability. However, it is generally not in the insurance company’s interest to settle for the policy limit. Apart from considerations of defense costs, the insurance company cannot do any worse than paying its policy limit…Moreover, liability insurance policies, by their terms, give insurers complete discretion in deciding whether to settle or litigate. In light of that fact, and the conflict of interest that can arise between the insurer and the insured in connection with whether a claim against an insured should be settled, the law has imposed on insurance companies an implied contractual obligation to settle under certain circumstances.
Id. at *7 (quoting 1 Allan D. Windt, Ins. Claims & Disputes § 5:1 (Mar. 2024) (emphasis added by court)).
The Court of Appeals held that whether the duty of good faith requires an insurer to accept a policy-limit demand turns on whether a “reasonably prudent person would, in light of the person’s potential exposure to a judgment in excess of the settlement amount, have settled.” Id. Applying its adopted standard, the Court of Appeals found an issue of fact whether Standard Fire breached its duty of good faith because “any reasonably prudent person facing the potential total exposure of Baldwin’s claim would have accepted the November 2018 settlement offer.” Id. at *7. Although Standard Fire interpleaded its policy limit within two months after the time-limited demand expired, the Court of Appeals did not see that as a sign of Standard Fire’s good faith but self-interest:
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.
Second, the Court of Appeals addressed what it saw as a separate issue—whether Standard Fire “affirmatively acted in bad faith.” Id. at *8. In an earlier footnote, the Court of Appeals stated that although it has “occasionally conflated the distinct ideas of a breach of the duty to exercise good faith and fair dealing with bad faith,” the Indiana Supreme Court has “made clear that they are distinct legal issues.” Id. Bad faith is not merely bad judgment or negligence but conscious wrongdoing, the Court of Appeals explained. “Thus,” the Court of Appeals stated, “whether an insurer breached its obligation to exercise good faith and fair dealing toward its insured is one legal question; whether any such breach involved conscious wrong-doing to establish an award of punitive damages is a separate question.” Id. (footnote removed).
The Court of Appeals found that the affidavit of Baldwin’s expert “readily demonstrate[d] a genuine issue of material fact” on whether Standard Fire acted in bad faith, including Baldwin’s expert’s assertion that Standard Fire’s actions were “solely intended to benefit the insurance carrier and did not, or even properly consider the adverse effects which such a chosen path would impose upon [the Hummels] as the insureds.” Id. at *8-9. Thus, the Court of Appeals remanded the case for further proceedings on whether Standard Fire acted with “conscious wrongdoing.”
While this decision aims to protect insureds, these authors believe it will cause confusion and have broader unintended consequences. The decision seems to create an artificial distinction between concepts traditionally accepted as two sides of the same coin—breaching the implied duty of good faith and acting in bad faith. Treating the two as distinct concepts requires establishing a middle ground, which would have to be occupied by mere errors in judgment and simple acts of negligence, neither of which requires “conscious wrongdoing” which the Court acknowledges is a requirement to demonstrate bad faith. Thus, the decision might lead a trial court to the incorrect conclusion that an insurer can negligently breach the implied duty of good faith.
This decision also expands the duty of good faith beyond its traditional boundaries in Erie Ins. Co. v. Hickman, 622 N.E.2d 515 (Ind. 1993). It suggests that even objectively rational decisions made within an insurer’s contractual rights could breach the implied duty of good faith if they do not adequately consider the insured’s interests. This expansion could create a new standard that will be difficult to navigate, particularly for insurers faced with the dilemma of multiple potential claimants and insufficient policy limits. Interpleader has long been accepted as a prudent and fair approach for handling the dilemma, as it allows the court to oversee the equitable distribution of the policy limit. This decision, however, seems to put insurers into a catch-22. If an insurer interpleads the policy limit, the insurer risks being accused of bad faith for not settling with the first claimant who makes a demand. But if the insurer settles with the first claimant for the policy limit, the insurer risks leaving its insured exposed to other potential claims from later claimants with no remaining coverage. Thus, this decision might have the unintended effect of discouraging insurers from using interpleader and instead causing them to rush into settlements without the benefit of full information about all potential claimants. This could ultimately harm the financial interests of the insured, which is the consequence the decision aims to prevent.
These authors expect for insurers to face a rush by claimants to capitalize on the leverage created by this decision by submitting time-limited demands in situations involving multiple claimants.
