Court Upholds Texas’ “First Come, First Served” Approach When Claimant Demands Exceed Policy Limits
In a recent opinion, the Fifth Circuit reaffirmed and applied its holding from OGA Charters. In doing so, it blocked (via a bankruptcy adversary proceeding) one set of plaintiffs from keeping an insured’s entire policy limit, which the insurer paid as per Texas’ “first come first served” approach to time-limited policy limits demands.
When Can Liability Policy Proceeds Become Property of a Bankruptcy Estate?
In its prior ruling in OGA Charters, the Fifth Circuit addressed how bankruptcy and insurance law intersect in a multiple-claimant, insufficient liability limits situation.
In that case, an insured bus charter company with a $5 million liability policy faced multiple claims after one of its buses crashed, killing nine people and injuring 40 others. In response to demands, the insurer quickly entered into settlements with a small subset of the claimants which would have exhausted the entire $5 million limit, to the detriment of the other claimants. The claimants who were left out of the settlements then filed an involuntary bankruptcy petition against the insured, followed by an adversary proceeding against the insured and its insurer, seeking to block the insurer from paying the settlements.
The bankruptcy court preliminarily enjoined the insurer from paying the $5 million, and the parties subsequently filed cross motions for summary judgment on whether the liability policy proceeds (which are not normally property of a bankruptcy estate because third parties, not the insured debtor, have the right to the proceeds) were property of the estate.
On appeal, the Fifth Circuit concluded that a liability policy’s proceeds can become property of the estate in the “limited circumstance” in which there are multiple claimants and insufficient limits for all the claims (as was the case based on the facts before it). It did so, in part, to ensure that the claimants would be entitled to an “equitable division” of the policy proceeds in an estate that otherwise might not have many other assets. The Fifth Circuit was careful to point out, however, that its ruling did not upset Texas’ long-standing Soriano rule that an insurer will not be liable if it exhausts its entire limit settling less than all claimants’ claims if it was reasonable to do so. Thus, the OGA Charters opinion merely provided guidance on the instances in which liability policy proceeds will become property of the estate.
Solis Applies OGA Charters to its Facts
Turning to the recent Solis case, in that case, an insured faced two competing wrongful death claims from a tractor-trailer accident. The first decedent’s family filed suit. The second decedent’s family jumped straight to making a “Stowers” time-limited policy limits demand. As noted above, under Texas’ Soriano rule, Texas takes a “first come first served approach” to such demands. Since the insurer determined it was reasonable to settle the second decedent’s claim for the full $1 million policy limit, the insurer transferred the entire $1 million to the second decedent’s law firm.
Upon learning of the settlement, the first decedent’s family filed an involuntary bankruptcy proceeding against the insured. The trustee then brought an adversary proceeding against the second decedent’s family and its law firm, seeking to avoid and recover the transfer of policy proceeds under the bankruptcy code (the insurer was presumably not included because it had already paid its policy limit). The second decedent’s family and their law firm moved to dismiss on the grounds that the trustee failed to allege a transfer of the insured’s property because the insured did not have legal title or a contractual right to receive the liability policy proceeds. The Fifth Circuit disagreed. It held that while the case before it presented a less “extreme” case of multiple claimants and insufficient limits than in OGA Charters, the OGA Charters rule still applied, meaning the policy proceeds were property of the estate. In a footnote, the Fifth Circuit reaffirmed its statement from OGA Charters that its ruling did not impact whether an insurer was entitled to settle some claims to the detriment of others in a multiple-claimant, insufficient limits situation.
What Does This Mean for Texas Insurers and Third-Party Claimants?
From an insurance perspective, the crystal-clear message from Solis is that the Fifth Circuit remains uninterested in disturbing Texas’ “fist come first served” approach to a multiple-claimant, insufficient limits scenario. This case does indicate, however, that unless the insurer quickly settles and pays its limit toward settlement (as it did in Solis), an insurer can become ensnared in an ancillary bankruptcy proceeding that seeks to enjoin payment of the limit and unwind the settlement (as was the case in OGA Charters).
In light of this, there are benefits to the insurer attempting to wrap all claimants into a global settlement if possible. If an insurer is unable to do so because of in-fighting amongst the claimants, this case confirms that an insurer is free to pay its entire limit to settle with less than all claimants if it is reasonable to do so, with bankruptcy court then becoming the “left out” claimants’ remaining option to ensure that they receive a percentage of the limits.
From the plaintiffs bar’s perspective, the practical implication for this case, and OGA Charters before it, is that it may reduce the number of “races to the finish line” to see who can send out a Stowers demand the fastest, since even if the insurer pays the demand, there is still risk the settlement will be unwound in bankruptcy court so that other claimants can benefit.
Please contact Sara Nau or any member of Phelps’ Insurance team if you have questions or need advice and guidance.
