Nevada Court Addresses Insurer’s Need for Interpleader

One of the more perplexing issues faced by insurers is how to handle multiple claims, or a claim involving multiple insureds, when there are insufficient policy limits available to pay all loss.  In states where insurers are not free to settle claims on a first-come, first-serve basis, interpleading the policy limits into court may be an option.  In its recent decision in Everest Indemnity Ins. Co. v. Aventine-Tramonti Homeowners Association, 2012 U.S. Dist. LEXIS 33860 (D.Nev. Mar. 13, 2012), the United States District Court for the District of Nevada, in a matter of first impression under Nevada law, addressed the protections afforded by interpleader.

The insurer, Everest, issued a primary owner-controlled insurance program (OCIP) in connection with the construction of a housing development.  The policy had a $1 million limit of liability that was eroded by defense costs or, as the court described it, a “burning limits” policy.  Two of Everest’s insured were sued in connection with a construction defects suit, and Everest undertook their defense.  Everest paid nearly $150,000 in defense costs before offering the remaining limit to the claimant.  This offer was rejected, and the claimant indicated that it would continue to pursue a multi-million dollar judgment and that the complaint would be amended to add several other defendants qualifying as insureds under the policy.  Recognizing that there would be numerous insureds competing for the same remaining $850,000 limit, Everest terminated its defense and filed an interpleader action, whereupon it sued approximately sixty (60) of the insureds under its policy for an interpleader and declaratory relief.  The underlying matter eventually settled and the court released the interpled funds to the underlying plaintiff and defendants. 

At issue in Everest was the breach of contract and bad faith claims raised by one of the insureds under the policy, Rising Sun, which while not a defendant at the time Everest terminated its defense of the underlying suit, was later added as a defendant.   At that time, Rising Sun tendered its defense to Everest.  Everest denied a defense to Rising Sun and instead directed it to request from the court periodic disbursements from the interpled funds to pay for its defense.  Rising Sun argued that Everest had a duty to defend each of its insureds until the policy limit was exhausted and that paying the funds into the court as part of an interpleader action did not constitute exhaustion. 

The court held that under the circumstances, Everest’s commencement of an interpleader was the appropriate mechanism for resolving the various parties’ claims to the limited fund and that by doing so, Everest properly discharged its duties under the policy.  Upon commencing the interpleader and paying the funds into the court, a party such as Rising Sun was required to seek reimbursement for defense and indemnity payments from the court rather than from Everest.  Depositing the funds in this manner, observed the court, is a “sure way for an insurer to extinguish its duties.”    While the court acknowledged a lack of Nevada law on the issue, the court reasoned that “interpleader would seem to extinguish the duty to defense, because the potential for indemnification ceases when the policy limits are interpled, after which the insured can no longer reach any assets of the insurer under the policy, but only the interpled funds.”