Insurer that Rejected Exception from Release Language Liable for Bad Faith Failure to Settle Despite Offering Policy Limits
A California intermediate appellate court has held that an insurer is liable for bad faith failure to settle, even though it had made a timely offer to settle for its full policy limits, where the insurer declined to agree to release terms proposed by the claimants to which the insured refused to agree. Barickman v. Mercury Cas. Co., 2016 WL 4274674 (Cal. Ct. App. July 25, 2016).
An insured, driving while intoxicated, struck and seriously injured two pedestrians in a crosswalk. The driver’s insurer offered to settle with the pedestrians for the available coverage limits of $15,000 each. Before the pedestrians accepted that offer, the insured was sentenced to three years in state prison and ordered to pay approximately $165,000 in restitution. The pedestrians later informed the insurer that they would accept its policy limits offer, but they insisted on the following language in a release agreement: “This does not include court-ordered restitution.” A representative of the insurer allegedly spoke with the pedestrians’ attorney, who explained that the purpose of the language was to ensure that the settlement would not affect the pedestrians’ right to the $165,000 restitution award. The insurer sought the consent of the insured driver’s criminal defense attorney to add the requested language to the release, but the attorney refused to provide its consent. When the settlement was not completed, the pedestrians brought suit against the driver. They later obtained a stipulated judgment of $3 million, coupled with an agreement not to execute on the driver’s personal assets, and they sued the insurer for bad faith failure to settle. The trial court ruled in favor of the pedestrians.
The appellate court affirmed, agreeing with the trial court’s decision that the insurer’s refusal to agree to the added release language or to propose additional language to clarify the scope of the requested additional language was unreasonable under the circumstances. The court also rejected the insurer’s argument that its early tender of its policy limits precluded a finding of bad faith, stating that that position, if accepted, “would mean an insurer that at one point acted in good faith during settlement negotiations has fully discharged its obligations under the implied covenant and has no further responsibility to make reasonable efforts to settle a third party’s lawsuit against its insured.” The court also rejected the insurer’s argument that it relied upon the withheld consent of the insured driver’s criminal defense attorney, finding that the insurer had failed to communicate all relevant facts to the criminal defense attorney, including the substance of the insurer’s communications with the pedestrians’ attorney about the intent of the added release language. As a result, the court affirmed the judgment of $3 million plus interest against the insurer.