Undue Delay In Pursuing Subrogation May Result In Missing The Recovery Boat
December, 2006
by Dean S. Rauchwerger and Michael S. Errera
In determining when to engage counsel on a potential recovery opportunity involving multiple claimants, it is important to recognize the harsh realities of moving too slowly. Where more than one party is seeking recovery against a target defendant, the target’s liability policy limits could easily be exhausted before your claim is presented for settlement or a judgment secured - leaving you without any recourse other than the extent of the target’s own collectible assets.
Hypothetical
Massive fire starts in a neighboring property, eventually engulfing and destroying not only Company A’s adjoining property, but that of Company B as well. Although a five year statute of limitation exists, Company A’s insurer retains subrogation counsel immediately and suit is filed long before the limitation period lapses. In contrast, Company B’s insurer continues to slowly adjust the claim and refers the matter to subrogation counsel shortly before the statute of limitations expires. Unfortunately, the target defendant possesses liability coverage that, at best, can only partially satisfy one of the claims. Company A, after filing suit, is successful in obtaining a policy limits payment. By the time Company B seeks recovery against the target defendant, there is no longer any liability coverage to cover any portion of Company B’s loss.
• Is payment of the target defendant’s policy limits by its insurer permissible when Company B is now left chasing the target’s corporate assets?
• Unless bad faith exists in reaching settlement with Company A, Company B’s recovery opportunities would be properly limited to the seizable assets from the target defendant itself.
Missing the Recovery Boat
The dire consequences of waiting too long to refer a matter to subrogation counsel for investigation and filing of suit is exemplified by State Farm Mutual Ins. Co. v. Murphy, 38 Ill. App. 3d 709, 348 N.E.2d 491 (2d Dist. 1976). This case involved a three car collision where four persons were injured 1. The at-fault driver, Timothy Murphy, was insured by State Farm and had an insurance policy with limits of $50,000 per person and $100,000 per occurrence. Following the accident, three claims were immediately filed against Murphy - one settled for $200, a second settled for $50,000 during the trial, and a third claim settled for $49,800 after the trial. Because of these three payments, Murphy’s $100,000 per occurrence policy limit was exhausted. Prior to the final two settlements being reached, a fourth injured party filed suit against Murphy. However, after Murphy’s policy limit was exhausted, State Farm reserved its right to deny liability, retained counsel to defend Murphy, and retained separate counsel to file a declaratory action seeking a ruling that as the policy limits were exhausted, State Farm no longer had a duty to defend Murphy in the pending or any future lawsuits arising from this accident. In affirming the trial court’s decision that State Farm acted appropriately, the appellate court observed:
The insurer is given the right both by policy and by statute to settle claims against its insured. And it is provided in the statute that as long as the settlement is made in good faith, the amount of the settlement is subtracted from the amount of the policy limits. This is true even though there are several claimants, as 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 exhausting an insured’s policy limits to settle a claim, the court noted the insurer’s duty to act in “good faith” in favor of its insured when settling claims:
The insurer is not exonerated if the prior settlements were not in good faith or if the insurer in some other way, such as a failure to inform the insured of the danger of excess liability, breached its duty of good faith towards its insured. Yet it is for the insured or the judgment creditor who is attempting to collect beyond the policy limits to prove that the insurer acted in bad faith. Where no bad faith is alleged or shown, it is presumed that an insurer acted in good faith and within its rights under its policy in settling with an injured party.
Conclusion
Appreciating the value in working closely with recovery counsel early on is critical to maximizing your subrogation opportunities. Although most jurisdictions provide generous statutes of limitation, the longer one delays in pursuing subrogation, the greater the risks that other parties who also suffered losses may exhaust the target defendant’s available liability policy limits. The prudent approach is to promptly involve subrogation counsel where viable recovery opportunities exist, especially when multiple claimants are in play. Once a target defendant’s insurance policy is exhausted, any judgment achieved would only be satisfied by the target defendant’s collectible assets, often resulting in reduced recoveries. Key point - to maximize your recovery opportunities where multiple claimants compete against a limited liability policy, pursue subrogation expeditiously so that your claims are in the “recovery boat!”
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1 The same principles have been upheld by courts in many states.
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