Policy Limits and Pro Rata Share Acceptance

While most cases flow easily through the arbitration process, claims involving multiple parties and policy limits offer unique challenges of which our members need to be aware. In a typical two-party scenario, the Applicant indicates it will accept the Respondent's policy limits as final settlement of the claim. In response, the Respondent properly asserts and supports the affirmative defense of policy limits. In these cases, the arbitrator will award damages up to the policy limit, based on the percentage of liability proven. By agreeing to accept the policy limits and keeping the dispute within arbitration's jurisdiction, the Applicant waives its right to pursue the balance of its claim afterwards (Article Second (d) of the Agreement). Simple!

Image of a gavel on top of moneyComplications arise, however, when the Respondent also argues that another party(ies) (i.e., Applicant's insured or another involved party) is also claiming damages against the policy limits. Due to the existence of the other claims, the arbitrator cannot award the policy limits, even if the Applicant indicates it would accept it.

Arbitration can still be helpful in resolving these matters. Here's how.

If the Applicant's insured is the only other party with a claim against the Respondent, the Applicant can indicate in the Affirmative Pleading Description field that it will accept the policy limits and reimburse its insured's out-of-pocket expenses from the award proceeds. By protecting the Respondent against the insured's claim, arbitration is allowed to retain jurisdiction over the dispute for quick resolution.

If there are multiple parties seeking recovery from the Respondent with policy limits (i.e., a multiple vehicle accident), arbitration will only retain jurisdiction if all parties are signatory and each filing company specifically asserts the affirmative pleading of "Pro-rata Share Acceptance." Simply agreeing to accept policy limits is not sufficient. Unless all parties have agreed, an arbitrator cannot enter a pro rata award, since it may adversely impact the Respondent's handling of all the claims.

For example, suppose there is a $10,000 PD policy limit with two parties with claims against it. If the parties assert the affirmative pleading that they will accept policy limits, each would expect an award, based on liability proven, of up to $10,000. However, if they have similar company claim amounts and liability is proven 100% on the part of the Respondent holding the $10,000 policy, each would actually only have access to up to $5,000, not the full limit. This is not what they indicated they would accept when they entered the "Policy Limit Acceptance" affirmative pleading. Therefore, the "Pro-rata Share Acceptance" affirmative pleading is necessary.

Article published in: November 2015 E-Bulletin