Also known as: preferential settlement · preferences · preferential transfers
Written by attorneys · grounded in primary & secondary sources — see below
An insurer's practice of settling some claims under a liability policy while leaving others unsatisfied when multiple claims may exceed the available coverage limits.
A federal agency offered settlement payments only to contractors meeting a racial preference criterion in a contracting dispute. The agency justified the distinction as advancing a compelling interest in diversity. A disappointed contractor challenged the settlement structure as an impermissible racial classification. The court applied strict scrutiny to determine whether the preference was narrowly tailored.
A corporation proposed settling a shareholder dispute by issuing new shares with special preferences to one class. The articles of incorporation did not yet authorize the class or describe its terms. The board sought to finalize the settlement before amending the articles. Shareholders objected that the preferences could not be created without proper authorization.
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A will left ambiguous language about dividing assets among heirs. One group proposed settling the dispute by applying a constructional preference favoring the donor's general plan. Another group presented evidence of a different intention. The court resolved the ambiguity by weighing the most persuasive preference against the extrinsic evidence.
A state agency settled employment claims by granting hiring preferences to veterans. Female applicants argued the policy disproportionately harmed women. The agency showed the purpose was to benefit veterans rather than discriminate. The court held that disparate impact alone did not establish a violation without discriminatory intent.
An insurer faced multiple claims exceeding policy limits after an accident. It filed an interpleader action to allocate the fund among claimants. One claimant sought to enjoin other proceedings to protect its share. The court addressed whether the interpleader could prevent preferential settlements outside the proceeding.
An insurer's settlement becomes preferential when it pays some claimants while leaving others without recourse once policy limits are exhausted. The hornbook identifies this as a distinct problem under the insurer's duty to claimants in multiple-claim cases. Courts examine whether the insurer acted in good faith toward all claimants or favored some to the detriment of others.
Yes. The hornbook cites Robert E. Keeton's 1956 Harvard Law Review article as the foundational treatment of preferential settlement of liability-insurance claims. That article examines how insurers may favor certain claimants when coverage is limited. Later cases and commentary continue to reference it when addressing the insurer's duties in multi-claim scenarios.
…337 U. S. 55 (1949). [^maj-12]: See cases listed in n. 4. [^maj-13]: 3 Moore, Federal Practice ¶ 22.08, at 3024-3025; Keeton, Preferential Settlement of Liability-Insurance Claims, 70 Harv. L. Rev. 27 , 41-42 (1956). [^maj-14]: See Keeton, op. cit. supra , n. 13. [^maj-15]: The insurance problem envisioned at the time was that of an…