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September 29, 2016

Insurer Held Liable For Excess Of Limits Judgment Despite The Insurer’s Policy Limits Settlement Offer

In Barickman v. Mercury Casualty Company (July 25, 2016) 2 Cal.App.5th 508, an auto insurer which offered its full policy limits of $15,000 per person/$30,000 per accident to the two pedestrians injured when the intoxicated insured ran a red light and struck the claimants in a cross-walk was nonetheless held liable for a $3 million stipulated judgment against the insured. The issue in the case was whether the insurer’s rejection of a modification to the settlement agreement requested by the claimants’ counsel was reasonable.

It has long been the law in California that, where there is a substantial likelihood of liability in excess of policy limits, the covenant of good faith and fair dealing requires that the insurer accept a reasonable settlement demand within policy limits. In general, there are two fact patterns where these cases arise: when the insurer has wrongfully denied coverage and when the insurer has made an erroneous determination of the value of the claim. (See, e.g., Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 661 [“an insurer, who wrongfully declines to defend and refuses to accept a reasonable settlement within policy limits in violation of its duty to consider in good faith the interest of the insured in the settlement, is liable for the entire judgment against the insured even if it exceeds the policy limits”]; Johansen v. Calif. State Auto. Assn. Inter-Insurance Bureau (1975) 15 Cal.3d 9, 12 [“… an insurer who fails to accept a reasonable settlement offer within policy limits because it believes the policy does not provide coverage assumes the risk that it will be held liable for all damages resulting from such refusal, including damages in excess of applicable policy limits.”].)

The Barickman case does not fall neatly into either category. The insurer did not dispute coverage nor was it disputed that, in light of the clear liability of the insured and the claimants’ injuries, a policy limits settlement for $15,000 per claimant was reasonable. The issue in the case was the reasonableness of insurer’s conduct after the claimants accepted the insurer’s offer of policy limits.

As noted, the insured was intoxicated at the time of the accident. Following the July 11, 2010 accident, the insured was arrested and criminally charged. The insurer made a policy limits offer to the two claimants on September 1, 2010. In late October 2010, the insured was criminally convicted and, in addition to a three year prison sentence, she was ordered to pay $165,000 in restitution. In December 2010, after review of the insured’s assets and financial condition, the claimants’ counsel advised the insurer that his clients accepted the $15,000 per claimant policy limits offer.The insurer prepared a release agreement, which the claimants modified to add: “This does not include court-ordered restitution.” The claimants then signed the modified release and returned it to the insurer. Rather than accepting the modified release, the insurer then spent several weeks considering whether it would agree to the modification. During that time, the claimants’ counsel confirmed to the insurer that the added language was simply to assure that the court-ordered restitution was not part of the release, and the release was not intended to defeat the offset against the restitution order to which the insured would be entitled by reason of the insurer’s payments. Nevertheless, the insurer did not agree to the modification.

On January 13, 2011, the claimants filed a personal injury action against the insured. After the insurer appointed defense counsel for the insured, on February 4, 2011, the insurer agreed to the modified language in the settlement agreement, but the claimants elected to proceed with their lawsuit. In August 2012, the personal injury action was settled with stipulated judgments for the claimants totaling $3 million, and with the insured assigning her rights against the insurer to the claimants. The claimants’ lawsuit against the insurer for breach of contract and breach of the covenant of good faith and fair dealing followed. The parties agreed to a trial by reference.

The Referee held that the insurer breached the covenant of good faith and fair dealing by its initial rejection and delayed acceptance of the claimants’ counsel’s requested modification to the settlement agreement. That finding was predicated on the fact that the requested language was essentially superfluous, as the law is clear that the settlement of a civil action does not release a defendant from a restitution order made by a criminal court, although the defendant is entitled to an offset for payments made to the crime victim by the defendant’s insurer. Thus, the Referee held that the insurer’s refusal to accept the release as modified by the claimants’ counsel was “unreasonable” and, as a result, the policy limits were opened and the insurer was liable for the $3 million stipulated judgment.

The obvious “take away” from the Barickman decision is that an insurer cannot delay or act unreasonably before securing an enforceable settlement or it risks bad faith liability if the settlement falls apart. Thus, even if you think you have a done deal, such as an agreement in principle at the conclusion of a mediation or settlement conference, if the settlement has not been reduced to an enforceable agreement, the insurer must continue to act decisively and reasonably until the settlement is effectuated to avoid possible bad faith exposure.

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