Bad Faith Action To Go To Jury

A California federal court has denied cross-motions for summary judgment and held that issues of material fact remained as to whether an insurer should have settled a case for less than its policy limit and as to whether it filed an interpleader action in bad faith. Doublevision Entm’t, LLC v. Navigators Spec. Ins. Co., 2015 WL 3919587 (N.D. Cal. June 25, 2015).

An insured escrow agency was sued for breaching various duties to its client by allegedly mishandling escrow funds. The escrow agency tendered its defense to its E&O carrier, which accepted the defense. The claimant, a film producer, made an initial settlement offer of $245,000 pursuant to California Code of Civil Procedure Section 998, which imposes penalties on a party that refuses a written settlement offer and fails to ultimately achieve a better result than that offer. The insurer did not accept the offer.

Subsequently, the escrow agency went into receivership after it faced multiple other claims related to the mishandling of its escrow business. The insured’s defense counsel believed that the other claims put the insured at an increased risk of an adverse verdict. The insured’s defense counsel recommended that the insurer settle for $300,000, but there was no evidence that the insurer considered whether to make that settlement offer. Because the insurer faced multiple claims against the policy, the insurer then filed an interpleader action and deposited the balance of the policy limit, $466,358.48, with the court. The court overseeing the interpleader action reserved $49,000 for the film producer. The film producer then won a judgment against the escrow agency for $1.5 million. The escrow agency assigned its rights under the policy to the film producer, which brought an action for bad faith against the insurer.

In the ensuing bad faith action, the court denied in pertinent part cross-motions for summary judgment by the carrier and the film producer, holding that issues of material fact remained. The film producer argued that the filing of the interpleader action was in bad faith. The court held that “when an insurer institutes or prosecutes an interpleader in bad faith and as a way to relieve itself of the burden of conducting a defense, then the insurer may be liable for the tort of bad faith refusal to defend the insured.” However, the court found that the “the summary judgment record [was] too fact-bound to say conclusively whether” this was or was not the case.

The court also found that there were issues of material fact as to whether the insurer should have perceived a substantial likelihood of damages in excess of the policy limits at the time of the Section 998 offer. In addition, the court found that issues of material fact remained as to whether the insurer should have made an affirmative offer to settle at a later stage of the litigation. As such, the court declined to resolve the bad faith claim on summary judgment.

Wiley Executive Summary

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