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INSURANCE NOTES

Full Performance Of Defense And Indemnity Obligations In The Insurance Contract Does Not Preclude Bad Faith Liability For Failure To Settle

08.16.2007
Can a liability insurer that has defended its insured fully, without a reservation of rights, and has paid its entire policy limits still be liable for bad faith? In Archdale v. American International Specialty Lines Ins. Co., __ Cal.Rptr.3d __, 2007 WL 2109276 (July 24, 2007), the Court of Appeal answered in the affirmative. An insurer that literally complies with the express policy provisions on defense and indemnity may still be liable for breach of the implied covenant of good faith and fair dealing. The case also illustrates the difference between contract and tort claims in bad faith cases.

George Godinez and his employer were sued when an 18-wheeler driven by Godinez collided with two other vehicles. Cheryl Archdale, the driver of one of the vehicles, and her husband sued Godinez and his employer.

AIG provided $500,000 in automobile liability coverage to Godinez and his employer and agreed to defend the Archdale lawsuit. While the suit was pending, the Archdales made settlement demands within the $500,000 policy limit. AIG refused to settle before trial. A judgment in excess of $1.2 million for the Archdales was entered against Godinez and his employer.

Then, AIG paid $142,500 to settle with the driver of the second vehicle hit by Godinez. Shortly thereafter, AIG paid the remaining limits, $357,500, to the Archdales, leaving an excess judgment of over $800,000 unpaid.

The Archdales, Godinez and his employer sued AIG for breach of contract and breach of the implied covenant of good faith and fair dealing, alleging that AIG had wrongfully failed to accept multiple reasonable settlement offers within policy limits to settle the Archdales' claim in the underlying action, resulting in an excess judgment against Godinez and his employer.

On a motion for summary judgment, AIG argued that all the causes of action were barred by the statute of limitations and that no breach of contract claim could be asserted because AIG provided a complete defense and had paid out its full limits. While the motion was pending, AIG took the deposition of Godinez. He admitted that he first spoke to his insurance attorney one year after the underlying lawsuit was filed. Godinez later tried to change his deposition testimony to "clear up confusion." The trial court denied Godinez' request to change his testimony and granted summary judgment to AIG on both grounds.

On appeal, the court observed that AIG complied with its express contractual obligations by providing a defense, without reservation, and paying all damages up to its policy limit. Thus, the court concluded, the breach of contract claim failed.

However, the court went on to state that a claim could still be made for breach of the implied covenant for AIG's failure to accept reasonable settlement offers within its policy limits and failure to do so before the limits were reduced by the settlement of the other claim. The court held that the amount of a judgment in excess of policy limits was a consequential damage of the breach of the implied covenant and may be recovered as a matter of contract damages.

The question of whether the excess judgment was a matter of contract or tort damages arose because the Archdales sought recovery in contract only, not in tort, and a longer limitation period applied to the contract claim. The Archdales had been assigned Godinez' assignable claims, leaving Godinez with his "purely personal" claims. Had the Archdales elected to proceed in tort as well as contract, they could have sought "Brandt fees," their attorneys' fees incurred in pursuing policy benefits from AIG under Brandt v. Superior Court, 37 Cal.3d 813, 817 (1985). As such, they could recover the amount of the excess judgment, but not their Brandt fees.

The court held that the statute of limitations did not bar the Archdales' contract claim, as it was tolled during the time the judgment in the underlying action was on appeal. Although a liability insurer's duty to accept a reasonable settlement offer causes damage upon entry of an excess judgment, the court reasoned the resulting damages are not known until the judgment becomes final. As the Archdales filed suit before the expiration of the four-year period following the conclusion of the appeal, the contract claim was timely.

As to Godinez' tort claim for emotional distress damages and punitive damages, the court held the claim was barred by the two-year tort statute of limitations based on his admission in deposition that the bad faith suit could have been filed before the limitations period had expired. The court stated the trial court properly refused to consider Godinez' "revised" testimony.

Therefore, the case was remanded to the trial court only as to the Archdales' contract claim.

The Archdale case re-emphasizes that an insurer's obligations to defend and indemnify sound both in contract and tort, with different available remedies and applicable statutes. An insurer that complies with the letter of the insurance contract can still be liable for contract and tort damages. Policyholder counsel are advised to ensure that all avenues of recovery are preserved. Here, the Archdales' counsel's failure to preserve tort claims prevented recovery of Brandt fees, which in many cases are substantial.

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