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An Insurer's Bad Faith Exposure May Not End Even If Policy Limits Are Tendered

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Insurance carriers adjusting California claims have long feared policy limits settlement demands in third-party liability cases and the prospect that their response to such demands could expose the carrier to a bad faith claim. Many carriers presume that they are insulated from bad faith liability if they ultimately agree to pay these policy limit demands, but a recent decision handed down by the California Court of Appeal holds that insurance companies can still be liable for bad faith despite promptly offering their policy limits to settle claims. In Barickman v. Mercury Casualty Company (2016) 2 Cal.App.5th 508, the Court held that an insurer's act of offering policy limits to an injured claimant in exchange for a general release of all claims did not, as a matter of law, indicate that the insurer acted in good faith. In fact, the Barickman Court found that, despite promptly offering policy limits to settle a claim, the carrier acted in bad faith and engaged in claims-handling conduct deemed unreasonable when the claims adjuster refused to accept settlement and release language proposed by the claimant.

In Barickman, Mercury Casualty Company's insured ran a red light while driving under the influence of alcohol striking two pedestrians who were in the crosswalk with the walk signal in their favor. The incident was witnessed by several individuals, statements were given to the policy and liability was not in question. Within two months after the accident, Mercury offered the policy limits of $15,000 per person to settle the claims of the injured pedestrians. After Mercury tendered the policy limits, the driver was sentenced to three years in state prison and ordered to pay approximately $165,000 in restitution. Nonetheless, claimants accepted Mercury's policy limits offer and returned signed releases on the form provided by Mercury, but added the following explanatory sentence to Mercury's recitation of a $15,000 payment: "This does not include court-ordered restitution." Claimants also demanded that payment be made within five days of delivery of the executed releases.

Rather than proceeding with the settlement, Mercury spent the next several months considering whether it would agree to the additional language inserted by claimants' counsel. Mercury requested and received several extension of time to respond and consulted with the insured's representative and criminal defense attorney. Apparently, Mercury's apprehension to move forward with the proposed settlement agreement stemmed from a concern that claimants were seeking to prevent Mercury's policy limits payment to resolve the tort claims from acting as a credit or offset for amounts the insured owed in restitution pursuant to the criminal conviction. Claimants' counsel clarified that the additional language requested only sought to confirm that the restitution order would not be nullified by the civil release and that any offset or credit available under the law would still apply. Despite these assurances, Mercury still refused to proceed with settlement and apparently failed to offer revised settlement language addressing its misplaced concerns.

Due to Mercury's delay and refusal to proceed with the settlement, the claimants filed a personal injury suit against the driver and ultimately settled with a stipulated judgment in favor of claimants and against the driver for $3 million (i.e. $2.2M in favor of claimant Mcinteer and $800,000 in favor of claimant Barickman) with an agreement not to collect the judgment against the driver. As part of the settlement, the insured driver assigned her bad faith rights against Mercury to the claimants.

Although Mercury ultimately paid each claimant the $15,000 per-person policy limits after the settlement and assignment of rights, claimants filed suit against Mercury for breach of contract and breach of the implied covenant of good faith and fair dealing. Claimants alleged that the driver's liability for the catastrophic injuries suffered by claimants was certain as was the likelihood that their damages would result in judgments against Mercury's insured well in excess of the $15,000/$30,000 policy limits. Claimants contended that Mercury acted in bad faith by failing to make an offer without unacceptable terms and conditions, by refusing to settle the case at policy limits when it had the opportunity to do so, and by Mercury's unwillingness to make efforts to reach a reasonable settlement.

Mercury relied primarily upon Graciano v. Mercury General Corp. (2014) 231 Cal.App.4th 414 and argued in its defense of the bad faith claims that it acted in good faith as a matter of law because it timely offered its insured's policy limits to claimants nine weeks after the accident. Mercury asserted that the only reason the case did not settle was due to claimants' insistence on the addition of unacceptable settlement terms and not Mercury's failure to offer its policy limits. However, the Barickman Court was not persuaded and noted that Mercury's argument ignores the fundamental principle, articulated in Graciano and other cases, that "when a claim is based on the insurer's bad faith, the ultimate test is whether the insurer's conduct was unreasonable under all of the circumstances." Importantly, the Court of Appeal found that while Mercury acted in good faith by initially offering claimants its policy limits in exchange for a general release of all claims, Mercury subsequently acted in bad faith by failing to do all within its power to effect a settlement and address the sole settlement term proposed by claimants. In addition to finding that Mercury was incorrect and acted unreasonably with respect to claimants' criminal restitution provisions added to the settlement agreement, the Court noted that the insurer's duty of good faith requires it to explore details of a settlement offer with a view toward resolving issues that arise, rather than simply rejecting a settlement offer or term it finds ambiguous or incomplete. Despite promptly tendering its policy limits following the accident, Mercury was found to have acted in bad faith by failing to properly and effectively close out the settlement and reach an agreement with claimants as to the terms of the settlement and release agreement.

Conclusion

In sum, the Barickman Court held that an insurer's obligation to act in good faith does not end once it tenders its policy limits and that the obligation of the insurance carrier to act reasonably and in good faith with respect to its claims-handling conduct continues and is not discharged until the claim has been fully resolved. Insurance carriers and claims adjusters should be forewarned that simply agreeing to tender policy limits is not enough to stave off bad faith claims. Carriers and adjusters must ensure that their actions do not otherwise frustrate or prevent a settlement from taking place after policy limits are tendered (either through unreasonable conduct or through ignorance of the law) or their actions may give rise to a viable bad faith claim.

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