One of the questions we are asked most frequently is whether a policy’s coverage limit can be exhausted in settlement of claims against one insured where doing so would leave another insured in the same claim without any additional coverage. The key Missouri case suggests an insurer can—and possibly should—accept a demand in that situation assuming (i) paying the limit would be reasonable in light of liability and damages and (ii) the insurer has at least tried to secure a release of all insureds before exhausting on behalf of just one.
In Millers Mut. Ins. Ass’n of Ill. v. Shell Oil Co., 959 S.W.2d 864 (Mo.App.1997), the named insured was Dunn. Dunn leased land from Shell and agreed to obtain liability insurance to protect both it and Shell. Shell was named as an additional insured on Dunn’s policy with Millers Mutual and was provided the same coverages afforded to Dunn. The plaintiffs, and injured wife and her husband on a loss of consortium claim, sued Dunn and Shell, both of which tendered to Millers Mutual. The company agreed to defend both. The plaintiffs demanded the coverage limit in settlement of their claims against Dunn, only, and they refused to consider any negotiations involving Shell. Furthermore, the plaintiffs and Dunn threatened a bad faith claim if Millers Mutual refused the plaintiffs’ demand. Millers Mutual notified Shell of the situation, and Shell objected to any cessation of Millers Mutual’s duty to defend should the coverage be exhausted in settlement in favor of only Dunn. Rather than accepting the plaintiffs’ demand, Millers Mutual offered its coverage limit in settlement of the claims against both Dunn and Shell. The plaintiffs refused. Shortly after that, Millers Mutual offered its limit on behalf of Dunn, only. The plaintiffs accepted, Dunn was released, and the limit was exhausted. Millers Mutual terminated its defense of Shell and filed a declaratory judgment action. Arguing it owed no further duty to defend, Millers Mutual relied on a clause in the policy stating, “Our duty to defend or settle ends when the applicable [coverage limit] has been exhausted by payment of judgments or settlements.”
The court found the exhaustion clause clear and unambiguous and determined Millers Mutual owed no duty to defend Shell after it exhausted in settlement of the claims against Dunn. The court distinguished several cases cited by Shell on the basis that “[e]ach involves a situation where an insurance company attempted to pay its policy limits into court to avoid defense costs or to a claimant without settlement on behalf of any insured or a release of any insured.” The court also disagreed with Shell that the policy’s severability clause (or “separation of insureds” provision) created an ambiguity when read in conjunction with the exhaustion clause.
Shell also contended Millers Mutual did not satisfy its duty to defend Shell when it paid its policy limit on behalf of Dunn. Rejecting this argument, the court considered several factors weighing against Shell: (i) there was a complete settlement on behalf of Dunn; (ii) the settlement for Dunn would allow Shell a setoff against the plaintiffs’ damages; and (iii) Millers Mutual acted fairly in attempting to defend and indemnify both Dunn and Shell. The court concluded, “Millers, faced with a difficult choice, should not be obligated to defend an additional insured after paying its limits in a reasonable settlement for the named insured. […] A settlement offer given to only one insured that would exhaust coverage under the liability limit of the policy creates a dilemma for the insurer. An insurer should not be precluded from accepting a reasonable settlement offer for fewer than all insureds. By accepting the offer the insurer would avoid being subjected to liability exceeding the policy limits due to its rejection of the settlement offer.”
Of note, there was no dispute in the case that paying the policy limit to settle was reasonable in terms of Dunn’s liability and the plaintiffs’ damages.