When an insurer is faced with multiple claimants commencing multiple suits against its insureds, the insurer can use one of two methods in settling those claims: 1) the pro-rata approach; or 2) first-come, first-served approach.

In the pro-rata approach, each claimant usually receives a percentage of his proven damages, based on the total amount of damages of all claimants and the policy limits.  Conversely, in the first-come, first-served approach, the insurer has the discretion to settle multiple claims on a first-come, first-served basis as long as it acts in good faith.  Under this rule, it has been generally held that a liability insurer can settle with some claimants although to do so may exhaust the insurance funds.

It appears that New Jersey follows a version of the first-come, first-served approach.  In Doitch v. Narendrakumar, the Court held “absent bad faith, an insurer may settle with one or more claimants, notwithstanding that the settlement may exhaust the policy limits.”  Further, in its analysis the Court explained that when a presumptively valid and adequate award has been made to one of several claimants, the fact that the remaining claimants, or any of them, have not been taken into the confidence of settling parties falls short of establishing an equitable claim against the insurer.

Applying the above principles to the facts at issue, the Doitch Court noted that the insurer, had negotiated a very favorable settlement in respect of claims asserted against its insureds; and that it would be fatuous to require an insurer to proactively search for additional claims before entering into a global settlement.  Further, prior to entering into the settlement, the insureds were fully aware that the settlement would exhaust their policy limits but would not resolve all pending claims against them.  Thus, the Court concluded, under these circumstances, the insurer had not acted in bad faith when it settled some, but not all, of the claims against its insureds.

It is important to make sure you know your jurisdictions approach to settling multiple claims before proceeding with global settlement, to avoid any potential bad faith claims.

Thanks to Colleen Hayes for her contribution to this post.