California Insurance Companies’ Duty Of Good Faith To Reasonably Effectuate Settlement Goes Beyond The Timely Tendering Of Policy Limits

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An insurer has a duty of good faith and fair dealing which “obligates the insurance company, among other things, to make reasonable efforts to settle a third party’s lawsuit against the insured.” (PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 312.) Indeed, “[t]he duty to settle is implied in law to protect the insured from exposure to liability in excess of coverage as a result of the insurer’s gamble—on which only the insured might lose.” (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 941.) Thus, “when a liability insurer tenders its ‘full policy limits’ in an attempt to effectuate a reasonable settlement of its insured’s liability, the insurer has acted in good faith as a matter of law. . .” (Graciano v. Mercury General Corp. (2014) 231 Cal.App.4th 414, 426.)

Yet, in Barickman v. Mercury Casualty Co., Los Angeles Superior Court No. BC504911, certified for publication in August of 2016, the Court of Appeal held that an insurer may breach its duty of good faith even if it timely tenders the full policy limits, if it fails to reasonably “explore the details of a settlement offer with a view toward resolving issues that may take the offer outside policy limits.” (Heredia v. Farmers Ins. Exchange (1991) 228 CalApp.3d 1345, 1360.)

In July of 2010, Laura Beth Barickman and Shannon Mcinteer were lawfully crossing a street in a crosswalk when Timory McDaniel, driving while intoxicated, struck and seriously injured them. Three weeks later, counsel for Barickman and Mcinteer sent

Mercury Casualty Co. a letter detailing their injuries and three weeks after that, Mercury offered each victim the policy limits of $15,000 under a minimum California liability “15/30” bodily injury liability covered required by California law (Veh. Code, §§ 16050, 16056(a)).

In December of 2010, Barickman and Mcinteer accepted the policy limits offer and returned signed releases, but added an explanatory sentence that the policy limits acceptance “does not include court-ordered restitution.”

Over the next month, Mercury’s claims adjuster, Oliver Chang, and Barickman and Mcinteer’s attorney, Mark Algorri, inquired into, explained, and debated the implications of the simple sentence inserted into Mercury’s standard release form. Algorri explained that the added language was intended only to ensure that the release did not waive his clients’ rights to the restitution award. Chang (who, presumably was not licensed to practice law), however, was unclear as to whether the added language affected McDaniel’s right to an offset against the restitution award by the amount of the insurance settlement. Algorri then explained again to Chang that the language was not intended to limit any of McDaniel’s offset rights and provided citation to California authority which provided that Mercury’s payment would act as a credit on what McDaniel’s owes under the restitution order.

In mid-January of 2011, Algorri filed suit against McDaniel after being unable to effectuate settlement with McDaniel’s insurer, Mercury, due to the added reservation of rights language. Apparently, Chang’s reticence in accepting the release with the added term was colored, at least in part, from an objection by McDaniel’s criminal defense attorney to any clause which waives his clients right to an offset, who was unaware that Algorri made clear that the language was solely intended to reserve the victims’ rights to full restitution. Chang was also told in mid-January by McDaniel’s mother (acting as her “Attorney in Fact” to accept the release, along with the added language, after she learned that the language “would not and could not impact the insurance money offsetting the restitution.”

The lawsuit proceeded through August 2012 when the action settled pursuant to a stipulated judgment for $3,000,000. McDaniel assigned her rights against Mercury to Barickman and Mcinteer, and they, in turn, filed a suit against Mercury for breach of contract and breach of the implied covenant of good faith and fair dealing.

In May of 2014, the parties agreed to a trial by reference with a retired judge appointed as referee. The referee held in favor of Barickman and Mcinteer, as “it was unnecessary for [Algorri] to put [the reservation of rights language] in the release, because the law was clear that a release in a civil case would not release a defendant in a criminal case from a restitution order made by a criminal court” and that “Mercury’s contention that the language added to the release ‘did not protect the insured against a waiver of her right to restitution offset’ has no merit.”

The Superior Court entered judgment in November 2014 and Mercury appealed. The Court of Appeal agreed with the referee, whereas Mercury’s “offering of the policy limits was not sufficient in and of itself to defeat a bad faith claim as a matter of law.” The Court explained that “when a claim is based on the insurer’s bad faith, . . . the ultimate test is whether the insurer’s conduct was reasonable under all of the circumstances,” citing Graciano, supra, 231 Cal.App.4th at 427. The Court further reasoned that the only obstacle to completion of the settlement was the added reservation of rights language that Mercury contended could have been interpreted as a waiver by McDaniel of her right to an offset. The Court of Appeal submitted that Mercury, in lieu of accepting the unnecessary caveat outright, should have simply proposed language clarifying that the victims would be entitled to the full restitution amount while at the same time McDaniel would be entitled to an offset.

The case is important in that it advises insurers that their duty of good faith to reasonably effectuate settlement goes beyond the timely tendering of policy limits. The case raises further implications regarding an adjuster’s unauthorized practice of law. A non-attorney should not be tasked with interpreting conclusions of law. If they do, and they are wrong, they expose the insurance company to all damages proximately caused by the insurer’s breach of the covenant of good faith and fair dealing which, in this case, was $2,000,000 instead of the $30,000 for which Mercury should have been on the proverbial hook.