McReynolds v. American Commerce Insurance Company – 7/13/2010

August 2, 2010

Arizona Court of Appeals Division One Holds That An Insurer Satisfies Its Duty by Promptly, and in Good Faith, Interpleading Its Policy Limits Into Court, Naming All Known Claimants in the Action and Continuing to Provide a Defense To Its Insured.

McReynolds was treated at Flagstaff Medical Center (“FMC”) for injuries sustained in an automobile accident with another driver, Ranieri.  Ranieri was insured by American Commerce Insurance Company (“ACIC”) and had liability limits of $25,000.  McReynolds’ medical bills exceeded these policy limits, but McReynolds demanded payment of the policy limits from ACIC.  ACIC sent McReynolds a check for the policy limits but made it payable to McReynolds and FMC.  Plaintiff rejected the check and filed suit against Ranieri.  McReynolds then served an offer of judgment for the policy limits.  On advice of counsel, ACIC did not accept the offer of judgment, believing that if it accepted the offer without a release of claims from FMC, it could be left open to liability to FMC for the full amount of its lien up to the $25,000.  Instead, ACIC filed an interpleader action naming McReynolds, FMC, and AHCCCS.  FMC eventually released its liens, AHCCCS defaulted and the interpleader was dismissed.  The matter then went to trial and McReynolds secured a judgment against Ranieri for nearly $500,000.  Ranieri assigned all claims she might have against ACIC to McReynolds for a covenant not to execute and McReynolds filed suit against ACIC for bad faith, asserting that ACIC breached its duty of good faith and fair dealing by failing to give equal consideration to the insured’s interests when it did not accept the offer of judgment.  ACIC filed a motion for summary judgment, which the trial court granted, ruling that had ACIC accepted the offer of judgment, it and Ranieri could have still been liable for the medical lien by FMC.  McReynolds timely appealed. 

The Arizona Appeals Court affirmed the grant of summary judgment in favor of ACIC, explaining that the case is “about whether the insurer had a duty to properly manage the policy limits and, if so, whether the good faith filing of a prompt interpleader satisfies that duty.”  The Court held that an insurer satisfies its duty by promptly, and in good faith, interpleading its policy limits into court, naming all known claimants in the action, and continuing to provide a defense to its insured, as ACIC did here.  The Court agreed with the trial court that to accept the offer of judgment, ACIC would have left itself and its insured exposed to a claim by the lienholder after having already paid out all available funds under the policy pursuant to A.R.S. § 33-931(A).  The Court further reasoned that to the extent an insurer has a duty to manage its policy limits, this duty is considered part of the duty to fairly consider settlement offers, giving equal consideration to the insured’s interests.  By promptly filing an interpleader for the policy limits and continuing to provide a defense to its insured, the Court held that ACIC properly managed its policy limits and therefore was entitled to summary judgment.       

Judge Barker authored the opinion, Judges Johnsen and Portley concurre