Indiana Adopts Restatement § 26 Safe Harbor: Interpleader of Policy Limits and Continued Defense Satisfies Insurer’s Good-Faith Duty in Multi-Claimant Cases
Introduction
In Baldwin v. The Standard Fire Insurance Co., the Indiana Supreme Court resolved a recurring and vexing problem in third-party liability insurance: what an insurer must do when multiple claimants with potentially serious injuries threaten to exhaust limited policy proceeds. The Court both articulates a governing duty and provides a “safe harbor” that, if satisfied, forecloses later claims that the insurer breached its implied duty of good faith and fair dealing or acted in bad faith toward the insured.
The case arises from a 2018 automobile collision involving the Hummels (insureds) and Bradley Baldwin (a third-party claimant). With a $50,000 per-person/$100,000 per-accident limit, Standard Fire faced at least two serious claims (Baldwin and passenger John Hopkins) and a potential third (passenger Jill McCarty). When Baldwin made a time-limited policy-limits demand for $50,000, Standard Fire declined and instead filed an interpleader, deposited the $100,000 aggregate limit with the trial court, named all known claimants, and continued defending the Hummels. After subsequent proceedings and an assignment/covenant not to execute between the Hummels and Baldwin, Baldwin (as assignee) sued Standard Fire for breach of the duty of good faith and bad faith. The trial court granted summary judgment to Standard Fire; the Court of Appeals partially reversed. On transfer, the Supreme Court adopts Restatement (Second) of the Law of Liability Insurance § 26 and affirms summary judgment for Standard Fire on the good-faith and bad-faith claims.
Justice Slaughter authored the majority opinion, joined by Chief Justice Rush and Justices Massa and Molter. Justice Goff concurred in part and dissented in part, agreeing with the adoption of § 26’s safe harbor but concluding that factual disputes should preclude summary judgment on both good-faith and bad-faith claims.
Summary of the Opinion
The Court establishes a two-part rule governing insurers facing multiple claimants against a single, insufficient policy limit:
- Duty: When multiple legal actions that count toward a single limit are brought against the insured, the insurer owes a duty to make a good-faith effort to settle in a manner that minimizes the insured’s overall exposure.
- Safe harbor: An insurer may satisfy this duty—as a matter of law—by interpleading the policy limits, naming all known claimants, depositing the limits with the court, and continuing to provide a defense or defense costs until settlement, final adjudication, or adjudication of no duty to defend.
Applying the new standard, the Court holds Standard Fire’s path—declining Baldwin’s per-person, time-limited demand; promptly interpleading the full $100,000 limit; naming Baldwin, Hopkins, and McCarty; depositing the funds; and continuing the defense—fell within the safe harbor. Consequently, Standard Fire did not breach its implied duty of good faith and fair dealing and did not act in bad faith. The Court rejects arguments that the interpleader was untimely, noting neither § 26 nor Indiana Trial Rule 22 imposes a special “timeliness” requirement beyond the rules.
On issues not addressed in Standard Fire’s petition, the Court summarily affirms the Court of Appeals. Justice Goff would have allowed a jury to decide whether Standard Fire reasonably feared a third claim from McCarty and whether Standard Fire acted in bad faith.
Analysis
Precedents and Authorities Cited
The opinion sits at the intersection of Indiana’s long-standing recognition of the insurer–insured “special relationship” and national approaches to multiple-claimant, insufficient-limit scenarios.
- Erie Insurance Co. v. Hickman (Ind. 1993): Established the implied duty of good faith and fair dealing in all insurance contracts, recognized compensatory damages for breach, and punitive damages for the independent tort of bad faith in appropriate cases.
- Vernon Fire & Casualty Ins. Co. v. Sharp (Ind. 1976): Cautioned against imposing onerous duties that would destabilize insurance markets—an economic balance that animates the Court’s adoption of a predictable safe harbor.
- Menefee v. Schurr (Ind. Ct. App. 2001) and Allen v. Great American Reserve Ins. Co. (Ind. 2002): Framed “reasonableness” in settlement efforts as typically a fact question, but the Court here explains that the recurrence and ubiquity of multi-claimant-limit problems warrant a standard that supports resolution at summary judgment when the safe harbor is satisfied.
- First Chicago Insurance Co. v. Collins (Ind. Ct. App. 2020): Recognized interpleader as a remedial device to join competing claimants to a common fund; a foundation for employing Trial Rule 22(A), (C), and (D).
- Mahan v. American Standard Ins. Co. (Ind. Ct. App. 2007): Held that using interpleader when multiple claims threatened to meet or exceed policy limits did not, in itself, breach the duty of good faith—an important Indiana predicate to the safe harbor approach.
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Comparative authorities:
- Texas Farmers Ins. Co. v. Soriano (Tex. 1994) and Voccio v. Reliance Ins. Cos. (1st Cir. 1983) (applying R.I. law): Illustrate a “wide discretion” or “first come, first served” settlement regime that risks depleting funds for later claimants.
- Peckham v. Continental Casualty Co. (1st Cir. 1990) (applying Mass. law) and Liberty Mutual v. Davis (5th Cir. 1969) (applying Fla. law): Exemplify the contrary approach requiring settlement strategy aimed at minimizing the insured’s overall exposure.
- McReynolds v. American Commerce Ins. Co. (Ariz. Ct. App. 2010): Endorses an interpleader “safe harbor” and treats compliance with procedural rules as adequate timeliness—supporting Indiana’s refusal to graft extra-timeliness requirements onto Trial Rule 22.
- Restatement (Second) of the Law of Liability Insurance §§ 24, 26: § 24(1) confirms the duty to make reasonable settlement decisions. § 26, adopted here in full, provides (1) the duty to minimize the insured’s overall exposure in multi-claimant, single-limit scenarios, and (2) the interpleader-based safe harbor.
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Treatises:
- New Appleman on Insurance: Describes the “special problems” of multiple claimants with serious injuries and canvasses the competing settlement approaches and pitfalls that make insurers vulnerable to later bad-faith suits no matter what they choose.
- Allan D. Windt, Insurance Claims & Disputes § 5:1: Emphasizes equal consideration of the insured’s interests and the professional judgment required in settlement decisions.
Legal Reasoning
The Court’s reasoning proceeds in two deliberate steps.
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Identify and adopt a principled standard. Acknowledging sparse Indiana precedent on the specific problem of multiple claimants and insufficient limits, the Court surveys jurisdictions and adopts Restatement § 26. This approach accomplishes two things at once:
- It codifies a duty aligned with Peckham’s “minimize the insured’s overall exposure,” ensuring that insurers look across all claims rather than capitulating to “first come, first served” pressures.
- It provides a predictable safe harbor: if the insurer interpleads the policy limits, names all known claimants, deposits the funds, and continues the defense, the insurer satisfies its good-faith duty as a matter of law. This certainty reduces ex post second-guessing—“you could have eliminated more liability with a different strategy”—that otherwise invites jury hindsight.
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Apply the new standard to undisputed facts. Standard Fire:
- Identified multiple claimants (Baldwin and Hopkins) with injuries likely exceeding the per-person limit and a third potential claimant (McCarty) within the claim period;
- Filed an interpleader under Trial Rule 22, naming all known claimants;
- Deposited the full $100,000 per-accident limit with the court;
- Continued to defend the Hummels in the underlying litigation.
The Court also underscores an important limitation from § 26’s commentary: the safe harbor is “principally directed at simple liability-insurance-coverage situations.” As complexity increases (e.g., layered programs, multiple insurers, self-insured retentions, overlapping policy years), the safe harbor “may not be practicable.”
The Partial Concurrence and Dissent (Goff, J.)
Justice Goff agrees that Indiana should adopt § 26’s safe harbor but concludes Standard Fire was not entitled to summary judgment on this record. He would submit to a jury two questions:
- Good faith: Did Standard Fire have a “real and reasonable” fear that McCarty would actually assert a claim, such that interpleader was necessary and reasonable? He stresses that interpleader cannot enjoin pursuit of the insured personally and often benefits the insurer more than the insured, so resort to interpleader should require a grounded, reasonable basis.
- Bad faith: Is there clear and convincing evidence of conscious wrongdoing? He points to evidence that Standard Fire valued Baldwin’s damages up to $100,000, declined Baldwin’s $50,000 per-person demand (thus exposing the Hummels to an excess judgment), and deposited the policy limits in a way that allegedly reduced its own litigation costs without meaningful protection to the Hummels, and he credits the plaintiff’s expert’s view of insurer self-interest in choosing interpleader.
In short, the dissent would condition the safe harbor’s dispositive effect on the insurer’s reasonable, non-speculative basis for fearing competing claims and would allow a fact finder to evaluate whether Standard Fire’s interpleader choice privileged its own interests over the insureds’.
Impact and Implications
The decision establishes a clear, administrable rule in Indiana—and a meaningful shift in settlement dynamics when policy limits are obviously inadequate.
For insurers
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A workable roadmap: When multiple claims against a single limit are present or foreseeable, an insurer can avoid later good-faith and bad-faith exposure by promptly:
- Filing interpleader under Trial Rule 22;
- Naming all known claimants;
- Depositing the full applicable policy limits with the court; and
- Continuing the defense (or defense costs) until resolution or adjudication of no duty to defend.
- Reduced hindsight risk: Compliance creates a dispositive safe harbor. Plaintiffs cannot defeat summary judgment simply by arguing that a different settlement allocation might have minimized the insured’s exposure more effectively.
- Documentation matters: Record investigation into potential claimants and the basis for concluding injuries may exceed limits. While the majority imposes no independent timeliness requirement beyond procedural rules, undue delay that prejudices parties could still invite litigation over whether all “known” claimants were properly included or whether defense obligations were maintained.
- Guardrails: The safe harbor is most secure in “simple” liability settings. Complex towers, multiple policies, shared limits across claims or insureds, or claims-made triggers may complicate application and weaken safe-harbor protection.
For insureds
- Protection by process, not by outcome: Interpleader does not bar plaintiffs from pursuing you personally for excess judgments. Its principal inures to equitable distribution of the limited fund and to shielding the insurer from later bad-faith attack—paired with the insurer’s duty to continue your defense.
- Settlement autonomy is constrained: Policies typically grant the insurer settlement authority. Assignments and covenants not to execute (as the Hummels attempted) cannot bind the insurer absent consent; the Court of Appeals’ conclusions to that effect were summarily affirmed.
- Practical takeaway: When limits are obviously inadequate for multiple serious claims, expect interpleader. Coordinate with defense counsel about personal exposure, potential contribution from other sources, and the strategy for defending residual claims.
For claimants and their counsel
- Time-limited policy-limits demands lose leverage in multi-claimant cases. An insurer can choose interpleader and continued defense without exposing itself to bad-faith liability for not accepting an individual policy-limits demand.
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Challenging the safe harbor: Potential attack vectors include failure to:
- Name all known claimants;
- Deposit the correct applicable limit;
- Continue the defense as required; or
- Apply the safe harbor properly in a complex coverage arrangement where the Restatement’s commentary suggests it may not fit.
For trial courts
- Early case management: Interpleader proceedings should be structured to allocate limited funds equitably and to ensure the insurer’s defense obligation continues until resolution.
- Summary judgment suitability: When § 26(2) is satisfied, breach-of-duty and bad-faith claims by insureds can be resolved at summary judgment.
Open questions after Baldwin
- “Known claimants”: How concrete must the insurer’s knowledge be? The dissent’s “real and reasonable fear” test would elevate this inquiry; the majority’s safe harbor is more categorical when the rule’s formal steps are met.
- Scope of “simple” coverage: Future cases will delineate when layered/complex programs fall outside the safe harbor’s practical reach.
- Timing and prejudice: Although the Court rejects an extra-textual timeliness requirement, extreme delay coupled with prejudice may raise separate issues, particularly if defense obligations lapsed or not all known claimants were included.
Complex Concepts Simplified
- Interpleader: A procedural device allowing a stakeholder (here, the insurer) facing competing claims to a common fund (policy limits) to deposit the fund with the court, join all claimants in one action, and have the court equitably apportion the money.
- Safe harbor (in this context): If an insurer (a) interpleads and deposits the policy limits, (b) names all known claimants, and (c) continues to defend the insured, it satisfies its good-faith duty as a matter of law and cannot be held liable for refusing an individual policy-limits demand.
- Duty of good faith and fair dealing: An implied contractual duty requiring insurers to refrain from unfounded refusals or delays in payment, deception, or unfair pressure, and to give equal consideration to the insured’s interests in settlement decisions.
- Bad faith: An independent tort requiring clear and convincing proof of malice, fraud, gross negligence, oppression, or conscious wrongdoing. It allows punitive damages, unlike a mere breach of contract.
- Per-person vs. per-accident limits: Liability policies often cap recovery twice—once per injured person (e.g., $50,000) and again in the aggregate per accident (e.g., $100,000).
- Time-limited policy-limits demand: A settlement demand that requires the insurer to tender the policy limits within a short window, commonly used by claimants to create bad-faith leverage if refused in single-claimant scenarios. Its force is now reduced where multiple claimants compete for insufficient limits and the insurer uses the safe harbor.
- Assignment and covenant not to execute: An insured facing excess exposure may assign claims against its insurer to the claimant in exchange for the claimant’s agreement not to pursue the insured’s personal assets. Such arrangements cannot bind the insurer to liability absent contractual or legal basis.
- Trial Rule 22 (Interpleader): Indiana’s procedural rule governing interpleader, including the ability to deposit funds and seek discharge as to claims on the fund. It does not enjoin claims against other sources, such as the insured personally.
Conclusion
Baldwin v. The Standard Fire Insurance Co. is a landmark for Indiana insurance law. By adopting Restatement § 26, the Supreme Court both clarifies the insurer’s duty in multiple-claimant, single-limit situations—minimize the insured’s overall exposure—and creates a predictable safe harbor: interpleader of the full policy limits, inclusion of all known claimants, and the continuation of the defense. This framework promotes fairness among claimants, protects insureds through sustained defense, and gives insurers a clear pathway to avoid later second-guessing and punitive exposure when limits are plainly inadequate.
The partial dissent underscores a cautionary counterpoint: interpleader should not become a reflexive, insurer-centric response untethered from a reasonable fear of competing claims. Future litigation will likely refine “known claimants,” the contours of “simple” coverage for safe-harbor purposes, and the role of timing and prejudice. For now, the Court’s decision supplies a bright-line rule that will reshape settlement dynamics in Indiana whenever multiple serious injuries outstrip limited policy proceeds.
Appendix: Procedural Footnotes
- The Court summarily affirmed the Court of Appeals on issues not raised in Standard Fire’s petition, including that: (a) the Hummels could not assign a malpractice claim against the counsel appointed by Standard Fire; (b) Standard Fire was not bound to the Hummels’ $700,000 settlement with Baldwin; and (c) McCarty was not an insured under the policy.
- Distribution of the interpleaded fund: The trial court directed $50,000 to Baldwin and $50,000 to Hopkins and the Indiana Department of Child Services (for child-support arrearage).
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