A Recent California Decision Demonstrates That Insurers Must Eliminate All Possibility of Liability to Successfully Bring a Motion for Summary Judgment

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In a recent decision, on November 29, 2016, in Tidwell Enterprises v. Financial Pacific Ins. Co., the California Court of Appeal examined when duty to defend arises under a general liability policy.  In Tidwell, the damage the insured was sued over occurred after the policy had lapsed, but extrinsic evidence suggests continuous and progressive damage occurring during the policy period may have ultimately caused the loss. Tidwell is a good illustration of the difficulty insurers have obtaining summary judgment ending a bad faith lawsuit before trial in a duty to defend case.

In reversing the lower court’s decision to grant the insurer’s motion for summary judgment, the Court of Appeal relied on the general principle that “an insurer…bears a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy.” The Court held that summary judgment in the insurer’s favor was improper because extrinsic evidence suggested the possibility of coverage, and the insurer had failed to present undisputed facts eliminating that possibility.

In 2006 or 2007 Tidwell Enterprises (Tidwell) installed a fireplace in a newly constructed home. At the time of the installation, Tidwell was insured by Financial Pacific and remained insured under various but similar policies until March 2010. In November 2011, more than a year after the policy had lapsed, a fire allegedly originating in the fireplace, and damaged the home. The homeowner’s insurer, State Farm General Insurance Company (State Farm), sent Tidwell a letter notifying them of an impending subrogation action by State Farm. Tidwell immediately forwarded the correspondence to Financial Pacific. The insurance company denied Tidwell’s claim on the basis that its coverage had lapsed by the time the damage identified in State Farm’s complaint occurred.

Tidwell subsequently retained an expert who determined that the damage was caused by “repeated exposure of the combustible materials framing the chimney chase . . . from every fire burned in the fireplace since it was installed.” Based on the expert’s finding, Tidwell argued that repeated fires, some of which occurred when the policy was active, caused damage to the chimney, and lowered the point of the wood’s combustion, eventually resulting in the 2011 fire.

In granting Financial Pacific’s motion for summary judgment, the trial court found that the insurance policy had lapsed prior to the fire that damaged the Fox home, and held that plaintiffs may not assert alternative causes to create coverage issues that were not alleged in the third-party complaint.

The Court of Appeal interpreted the policy language as stating that Financial Pacific would be liable under the policies for physical injury to tangible property caused by Tidwell that (1) occurred during a policy period; and (2) was caused by continuous or repeated exposure to substantially the same general harmful conditions. The Court also relied on the following established principles: a third-party plaintiff cannot be the arbiter of coverage, and any doubts as to whether the facts establish a duty to defend must be resolved in the insured’s favor. More specifically, “facts known to the insurer and extrinsic evidence to the third-party complaint can generate a duty to defend, even though the face of the complaint does not reflect a potential for liability under the policy.”  In reversing the judgment in favor of Tidwell, the Court noted that Financial Pacific failed to eliminate all possibility that the repeated exposure of the wood to high temperatures altered the wood in such a way as to cause damage. More generally, “to prevail on a motion for summary judgment premised on a claim that the insurer had no duty to defend, the insurer must present undisputed facts that eliminate any possibility of coverage.” (American States Ins. Co. v. Progressive Casualty Ins. Co. (2009) 180 Cal.App.4th 18, 27.)

Tidwell illustrates that, in a duty to defend case under California law, insurers who deny a defense while ignoring extrinsic facts outside the complaint which support coverage, are subject to bad faith claims.

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.

California Law Imposes On Insurance Companies A Duty To Settle Anytime There Is A Risk Of A Verdict In Excess Of Policy Limits

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When a person is sued, they may have liability insurance that covers them by providing a defense and policy funds to settle the lawsuit. Often there may be an opportunity to settle the case but the insurance company unreasonably refuses to do so. This can lead to a verdict against the insured above the policy limits, or other damages from a delayed settlement.  An insurance company’s unreasonable refusal to settle, which damages the policyholder, can give rise to a bad faith case, including the amount of the judgment above policy limits.

Liability insurance usually “imposes two separate obligations on the insurer,” to defend the insured and indemnify the insured against covered claims.  (Howard v. American National Fire Ins. Co. (2010) 187 Cal.App.4th 498, 519.)  The duty to defend is well known to be broader than the duty to indemnify. It encompasses any claim which “potentially seeks damages within the coverage of the policy.”  (Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 275.)

The duty to defend provides context for the duty to settle. This is because an insurer’s duty to settle exists before judgment and factual findings on claims, which are necessary to ultimately determine insurance coverage. Thus, an insurer must discharge its duty to settle often without the benefit of facts necessary to know whether or not there is actual coverage.

Under California law, an insurance company has a duty “to make reasonable efforts” to settle lawsuits against its insured.  (PPG Industries, Inc. v. TransAmerica Ins. Co.(1999) 20 Cal.4th 310, 312.)  California law imposes a duty to settle “to protect the insured from exposure to liability in excess of coverage.”  (Murphy v. Allstate Ins. Co.(1976) 17 Cal.3d 937, 941.)  This is necessary so the insured does not suffer “as a result of the insurer’s gamble” not to  accept a reasonable settlement, a gamble “on which only the insured might lose.”  (Id.)  Thus, the insurance company’s duty to settle protects the insured by imposing on the insurance company the risk of a judgment above policy limits where a reasonable settlement offer is rejected.

The only permissible consideration” with respect to the duty to settle is “whether . . . the ultimate judgment is likely to exceed the amount of the settlement offer.”  (Johansen v. California State Auto Ass’n Inter-Insurance Bureau (1975) 15 Cal.3d 9, 16.)  An insurance company’s “belief that the policy does not provide coverage” is not a basis to refuse a reasonable settlement offer. (Howard, supra, 187 Cal.App.4th at 525.)

The duty to settle extends beyond the coverage terms of the policy.  The California Supreme Court has held that the insurance company has a duty “to settle in an appropriate case although the express terms of the policy do not impose such a duty.”  (Comunale v. Traders & General Insurance Co. (1958) 50 Cal.2d 645.)  It is not reasonable or good faith conduct for an insurance company to refuse to settle based on a “no coverage position.”  (Howard, supra, 187 Cal.App.4th at 531.)

Policyholders who have been sued and have an opportunity to settle the case within policy limits, but the insurance company refuses, should consider seeking independent legal advise. A settlement may be in the insured’s best interests, and an unreasonable refusal to settle by the insurance company may give rise to bad faith liability.

California Supreme Court Reaffirms Broad Scope Of Duty To Defend

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Under California law, the duty to defend is broader than the duty to indemnify, encompassing potentially covered claims.  This uniquely favorable law has wide implications, and efforts to chip away at or narrow this legal rule are continuous.  A recent California Supreme Court decisionreasserts the broad and favorable principles for insureds that govern the duty to defend.

In Hartford Casualty Insurance Company v. J.R. Marketing, L.L.C. (2015) 61 Cal.4th 988, the California Supreme Court addressed the insurer’s right to seek reimbursement from attorneys hired by the insured, where the insurer paid the bills pursuant to a court order and later claimed they were inflated.  Although the holding in the case was based on unique facts, in making its decision, the California Supreme Court issued some sweeping statements reinforcing the broad duty to defend under California law.

The first sentence of the opinion reasserts California’s fundamentally broad duty to defend:  “This court has long maintained that if any claims in a third party complaint . . . are even potentially covered by the [liability] policy, the insurer must provide its insured with a defense to all claims.”  (Id. at 991.)  This is an important principle in a couple of respects.  It means that the third party claims alleged against the insured don’t have to be actually covered, only potentially covered.  And it means if even one claim alleged against the insured is potentially covered, the insurer must pay to defend the insured against the entire lawsuit.

This latter point involves what California courts often referred to as a “mixed” action, because the third-party action mixes potentially covered and non-covered claims. (Id.at 998-999.) Hartford Casualty unequivocally states when a third-party lawsuit “includes some claims that are potentially covered, and some that are clearly outside the policy’s coverage”, the insurance company must nevertheless “defend the entire action.”  (Id. at 997-998.)

Hartford Casualty also states emphatically and clearly that an insurance company owes “an immediate, complete defense in such a ‘mixed’ action. . .”  (Id. at 991.)  This confirms that a delayed defense breaches the insurer’s duty to defend.  This is important because insurer’s often belatedly pick up a defense or offer to pay some or all defense costs, and argue that extricates them from liability for harm caused by the delay.

The Supreme Court in Hartford Casualty also confirms that when an insurance company defends a third-party lawsuit, but reserves its right to deny coverage, there is a conflict of interest between the insurance company and insured.  (Id. at 998.)Hartford Casualty emphasizes that, under such circumstances, “the insurer must pay reasonable costs for retaining independent counsel by the insured.”  (Id.)    The Court added that the burden to prove defense costs were “unreasonable and unnecessary falls entirely on the insurer.”  (Id. at 1007.)

Hartford Casualty is a helpful decision to insureds, in reaffirming California’s strong laws in favor of a broad duty to defend against third party claims.

When You Are Sued And Your Insurance Company Defends But Won’t Settle

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If a person is sued and has liability coverage, his or her insurance company has a duty to defend and indemnify against the claim, if it is covered. The duty to defend isbroader than the duty to indemnify, requiring the insurance company to defend where the claim “potentially seeks damages within the coverage of the policy.” (Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 275.) In contrast, there is only a duty to indemnify (i.e., pay to settle) if there is actual coverage.

The distinction between a duty to defend (potential coverage) and a duty to indemnify (actual coverage) means that an insured will often be defended against a third party lawsuit, but the insurance company will resist settling the lawsuit because it disputes the existence of actual coverage.

A recent decision by the California Court of Appeal illustrates the dilemma this can create for an insured. On September 10, 2015, in 21st Century Insurance Company v. Superior Court, — Cal.Rptr.3d —, 2015 WL 5285822, the California Court of Appeal addressed a case where an insured was sued for negligence in connection with a car accident that resulted in a death. The insurance company defended the insured, but allegedly did not accept an offer to settle within policy limits because it disputed actual coverage.  In response, the insured agreed to a stipulated judgment above policy limits, assigned his rights against the insurance company to the claimant, and the claimant promised not to execute the judgment against the insured.

Settling a claim and assigning the insured’s rights to the claimant is a relatively common occurrencewhere an insurance company denies coverage. The idea is that the claimant can then pursue and litigate the coverage issue directly with the insurance company, and the insured is protected from having the judgment executed against him or her.

In 21st Century, however, the Court of Appeal drew a distinction where the insurer is defending the insured, but refuses to settle within policy limits, and the insured nevertheless settles the case for an amount above policy limits, with an agreement not execute it against the insured.  The problem with this, according to an earlier case, is that it attempts to bind an insurance company to a settlement it did not consent to, “without any actual commitment on its insured’s part to pay the judgment.” (Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 730.)  21st Centurydisapproved of this maneuver because the agreed upon judgment is “relied upon to prove damages.” (21st Century Insurance Company, supra, at *3.)  Thus, 21st Centuryheld the insurance company was not liable for damages above the policy limits.  In doing so, however, 21st Century emphasized that the insurance company was actually defending the claim, and the outcome would have been different had the insurer breached its duty to defend. (Id.)

As 21st Century acknowledged, this ruling places the insured “in an awkward situation.” (Id.)  If the lawsuit goes to judgment, and the insurance company is correct that there was only a potential for coverage (duty to defend) but not actual coverage (duty to indemnify), the insured will be responsible for the entire judgment. On the other hand, the case cannot be settled unless the insured pays the money, which he or she may not have, because the insurance company is disputing actual coverage.

The result is that many cases where an insurance company is defending its insured, but will not settle within policy limits, cases may be forced to verdict, with a substantial risk to the insured.  Under such circumstances, the insured should make every effort to convince the insurance company of its duty to indemnify, and the potential liability the insurance company faces if it is incorrect in its coverage assessment.