Adjusters and attorneys alike often encounter cases where a claimant’s damages greatly exceed the policy limits for a given accident. In those cases (liability aside), the company will simply tender its policy limits, settle the case, and avoid trial and a potential excess verdict. What happens, however, when an accident yields two claimants, each of whose damages exceed the total policy limit for the accident? The answer is nuanced and requires a balancing of legal obligations and business interests.
Illinois courts employ a “first to settle rule.” In Illinois, as long as a settlement made by an insurer on behalf of its insured is made in good faith, that amount is subtracted from the amount of the policy limits. According to the Illinois Appellate Court, “the insurer has the right to settle claims in good faith even though such payments exhaust the policy limits of the insured’s policy so that a subsequent judgment creditor cannot collect on the policy.” In other words, it is legal for an insurance company to settle a claim with “Claimant 1” for the full policy limits, and then turn to “Claimant 2,” who has an equally viable claim, and deny liability because the policy limits have been exhausted. Additionally, once the policy limits have been exhausted, the insurer has no duty to defend its insured.
Though a company’s response to “Claimant 1” and “Claimant 2” above is legal, it might not be the most prudent course of action. This is because a plaintiff, if his recovery greatly exceeds the available policy limits, can attempt to recover from an insured’s personal assets. This rarely happens when the plaintiff has recovered something, but if he/she has been shut out completely, like “Claimant 2,” this avenue may be the only route to recovery. Having an insured pay a lawsuit out of his personal coffers on a claim that was supposed to be covered is not likely to sit well with the insured, and therefore does not lead to a happy customer.
What then is an adjuster or attorney to do when confronted with this situation? Practically speaking, the best course of action is to quickly discover potential claimants where this case might be an issue. The next step is to bring all plaintiffs/claimants to the negotiating table at one time, explain the applicable policy limits, and work out a resolution with all plaintiffs. This way, the appropriate releases can be signed and the insured can be absolved and have peace of mind.