Indiana Supreme Court Recognizes Safe Harbor for Insurance Companies to Avoid Bad Faith Claims

by Charles Maiers, Esq.

In a split decision, the Indiana Supreme Court recently held that an insurance company can avoid a bad faith claim arising from a loss with multiple claimants by filing an interpleader action, naming all possible claimants, and defending its insured. In so doing, the Court recognized a safe harbor for insurance companies to avoid potential bad faith claims for failing to promptly settle. Bradley Baldwin, Individually and as Assignee of Tommi C. Hummel and Travor Hummel, Appellant-Defendant and Counter-Claimant, and Bradley Baldwin, Individually and as Assignee of Jess M. Smith, III, of Tom Scott & Associates, P.C., as Special Personal Representative of the Estate of Jill L. McCarty, Deceased, v. The Standard Fire Insurance Company, Appellee-Plaintiff and Counter-Defendant, and Tommi C. Hummel, Travor Hummel, Jill L. McCarty, John M. Hopkins, State Farm Mutual Insurance Company, and Department of Child Services Indiana Child Support Bureau, Other Defendants Below, Ind. Supreme Court Case No. 25S-CT-33; 2025 LX 420199, 2025 WL 2962254.

In June 2018, Tommie Hummel and Bradley Baldwin were in an accident, injuring both drivers and one of Hummel’s passengers. Hummel’s other passenger fled the scene. Hummel had a policy of insurance with Standard Fire Insurance Company with liability limits of $50,000.00/person and $100,000.00/accident. Standard Fire determined that there were three potential claimants: Hummel’s two passengers and Baldwin.

Several months later, Baldwin sued Hummel for personal injury. Thereafter Baldwin’s counsel demanded the full $50,000.00 per-person policy limits and indicated that the demand would only be held open for twenty (20) days. Standard Fire, on Hummel’s behalf, rejected this demand on the grounds that it was premature considering the other two potential claimants.

One month after rejecting Baldwin’s settlement demand, Standard Fire filed an interpleader action naming Baldwin and Hummel’s two passengers as interested parties. Standard Fire admitted that the $100,000.00 per-accident policy limits were due under the policy but contended that it was unable to determine who was entitled to what.

As trial in the Baldwin case approached, Baldwin’s counsel demanded $700,000.00 to settle. Standard Fire rejected the demand. Hummel, however, accepted the $700,000.00 demand and assigned to Baldwin his bad faith claim against Standard Fire exchange for Baldwin’s agreement not to enforce the settlement against him.

Baldwin, as assignee, then sued Standard Fire for bad faith. Baldwin’s bad faith claim was predicated on Standard Fire’s previous refusal to settle for the $50,000.00 demand.

The trial court granted Standard Fire partial summary judgment finding that Standard Fire had not breached any duty to its insured by refusing the time-limited demand and filing the interpleader. After the Indiana Court of Appeals affirmed in part and reversed in part, the Indiana Supreme Court accepted the appeal.

The Indiana Supreme Court concluded that Standard Fire was not liable for bad faith. In so doing, the Court adopted the Restatement of Liability Insurance §26 which provides a mechanism by which insurers can avoid liability when refusing time-limited, policy limit demands in claims involving multiple claimants and insufficient coverage.

The Restatement recognizes that, where there are multiple legal actions that would count toward a single policy limit, the insurer has a duty to the insured to make a good-faith effort to settle the actions in a manner that minimizes the insured’s overall exposure. It may satisfy this duty by interpleading the policy limits to the court, naming all known claimants, and, if the insurer has a duty to defend or a duty to pay defense costs on an ongoing basis, continuing the defend or pay its insured’s defense costs.

Notably, the safe harbor provided by an interpleader action is not time limited so long as the interpleader action fully complies with all applicable deadlines under the trial rules. Stated another way, an insurer does not “lose” the opportunity to avail itself of the interpleader’s safe harbor, so long as it otherwise complies with deadlines. “Once an insurer properly invokes interpleader’s safe harbor – by depositing policy limits, naming all claimants, and providing a defense – it has fulfilled its duties to its insured as a matter of law.” Id at 14.  As such, an insurer satisfies its duty of good faith in circumstances where multiple claimants may exhaust policy limits by (1) filing an interpleader action, (2) naming all possible claimants, and (3) continuing to defend as required by the policy until a Court declares that the insurer has satisfied its obligations under the policy.

The dissent in this case argued that the third claimant was not reasonably likely to make a claim and, as such, the Standard Fire should have disregarded the possibility of a third claim because the third possible claimant fled the scene. Nonetheless, the majority concluded that Standard Fire need not evaluate the likelihood or merit of the claims but rather the possibility of multiple claims exceeding policy limits was sufficient for it to seek the safe harbor via interpleader.

If you have any questions regarding this decision or have any questions concerning insurance coverage matters or settlement practices, please contact a member of our Insurance Coverage Practice Group.