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By Patrick A. Calhoon

In Barickman v. Mercury Cas. Co. (2016) 2 Cal. App. 5th 508, the California Court of Appeal affirmed a $3 million judgment arising from Mercury’s failure to settle a case for the policy limits of $30,000. How did that happen you ask? Believe it or not, it seems it was just a case of good old-fashioned stubbornness by Mercury. Mercury offered to pay the $30,000 policy limits after its intoxicated insured ran over two pedestrians, causing serious injuries. But Mercury had a problem with certain language proposed by plaintiffs’ counsel. As it turned out, the proposed language had no negative legal effect on Mercury and was only intended to protect the injured pedestrians’ rights to collect court ordered restitution, a fact plaintiffs’ counsel made clear to Mercury. Nevertheless, Mercury dug in its heels, refused to include the language, blew up the settlement, and thereby exposed its own insured to judgment far in excess of the policy limits. Choose your battles wisely, right?

The Accident and Underlying Claims Handling  

Mercury’s insured, while driving intoxicated, ran a red light, struck and seriously injured two pedestrians who were in a crosswalk with the walk signal in their favor. The day after the accident, the insured informed Mercury of the accident, but, on advice of counsel, did not provide any details. A few weeks later, counsel for the injured pedestrians sent Mercury a letter describing their extensive injuries and enclosing a copy of the police report.

About a month later, Mercury offered the policy limits of $15,000 per person to the two pedestrians. Counsel for the pedestrians conducted his due diligence regarding the insured’s assets to determine whether to accept the policy limits in satisfaction of all civil claims. Over the course of the next few months, Mercury and the pedestrians’ counsel exchanged correspondence about the statement of assets provided by the insured.

A few weeks later, Mercury’s insured was sentenced to three years in state prison and ordered to pay approximately $165,000 in restitution to the injured pedestrians. Six weeks later, counsel for the pedestrians informed Mercury that the policy limits offer was accepted and returned signed releases on the form provided by Mercury, but added an explanatory sentence to Mercury’s recitation of a $15,000 payment: “This does not include court-ordered restitution.”

For the next several weeks Mercury considered whether it would agree to the additional language. Mercury spoke to the counsel for the pedestrians to determine whether the proposed language was intended only to ensure the release did not waive the pedestrians’ right to the restitution award or also to preclude offset against the restitution award by the amount of the insurance settlement. A note in the claims file revealed that Mercury was informed that the language was only intended to protect the pedestrians’ right to receive the restitution award.

On the day of the final deadline to respond to the pedestrians’ demand, Mercury requested an additional extension because it did not have an official response from its insured’s criminal attorney as to the effect of the additional language on Mercury’s right to a set-off. The pedestrians’ attorney rejected the request for an extension. A few days later Mercury told the pedestrians’ attorney that the insured’s criminal attorney advised Mercury not to accept the additional language and asked him to reconsider whether the matter could be settled without the added language. In response, the pedestrians’ attorney wrote, “Just to make my point clear Mercury has intentionally mischaracterized my added language. The added language simply eliminates any argument that the Court’s restitution order is wiped out by the release. Your characterization that Mercury’s payments would not … act as a credit on what your insured owes under the restitution order is not only false but, as you undoubtedly know, would violate Cal. Law under [People v. Bernal (2002) 101 Cal.App.4th 155.” Barickman at * 512-513.

The Personal Injury Action and Continued Dispute over the Additional Language

Shortly thereafter, the injured pedestrians sued the intoxicated driver for personal injuries. The pedestrians’ attorney and Mercury’s adjustor exchanged letters disputing the disagreement of the added language. For example, the attorney wrote, “To reiterate my past discussions with you, my clients never objected to a Mercury payment set off against the court ordered restitution and axiomatically, they never requested that your insured waive any set off. Indeed, I told you early on that case law specifically allowed your insured a set off, and I gave you the case citation. I again clarified this position to you in my letter of January 11, 2011. Also, the language my client[s] added to the release simply clarified their rights of restitution—that there could be no later dispute or subsequent contrary argument made by your insured.” Even the insured’s mother, acting as attorney-in-fact for the now incarcerated insured, notified Mercury that she had learned that the disputed language “would not and could not impact the insurance money offsetting the restitution. Therefore, with [the insured’s] agreement, and acting as her Attorney in Fact, I am instructing Mercury Insurance to pay the policy limits of $15,000.00 to each of the claimants at the earliest possible date, despite any pending civil action.” Despite all of this, Mercury stubbornly continued to try to persuade the injured pedestrians to sign the unedited releases. Barickman at * 514.

The personal injury action was settled with a stipulated judgment in favor of one of the pedestrians against the intoxicated insured for $2.2 million and in favor of other for $800,000. Mercury’s insured assigned her rights against Mercury to the injured pedestrians in exchange for their agreement not to attempt to collect the judgment against her. Mercury paid each of the pedestrians the $15,000–per–person policy limits. Id.

The Bad Faith Action

The pedestrians filed an action for breach of contract and breach of the implied covenant of good faith and fair dealing. The complaint alleged that liability for the catastrophic injuries caused to the pedestrians was virtually 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. As a result, Mercury’s failure to make an offer without unacceptable terms and conditions, its refusal to settle the case at policy limits when it had the opportunity to do so, and its unwillingness to make efforts to reach a reasonable settlement constituted a breach of its obligation of good faith and fair dealing, exposing Mercury’s own insured to excess damages.

The parties agreed to a trial by reference of all issues of fact and law pursuant to Code of Civil Procedure section 638. The parties stipulated that the referee’s (a retired judge) statement of decision would be entered as a judgment as though the case had been tried to the court pursuant to Code of Civil Procedure section 644, subdivision (a).

After a bench trial, which included testimony from Mercury’s adjustor, the pedestrians’ attorney, and claims-handling experts for both sides, the referee found Mercury had breached the covenant of good faith and fair dealing by refusing to accept the releases with the language. The referee found that the language was only meant to preserve the injured pedestrians’ restitution rights and was not seeking to affect an offset for the amounts paid by Mercury against the restitution ordered by the criminal court. That position was reconfirmed in letters sent to Mercury. Despite these assurances, Mercury refused to go forward with the settlements without an unedited release. The referee further explained, based upon the totality of the evidence, the language did not constitute a nonacceptance of the policy limits and was essentially superfluous. This is 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. The language added was not vague or ambiguous. It only dealt with the Plaintiffs’ legal right to receive restitution. It did not refer to the insured’s right to offset the money paid by the insurer against the restitution ordered by the criminal court. 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 referee then awarded damages in the amounts of the judgment in the underlying case ($3 million) plus 10 percent interest from the date of the judgment and costs of suit. The superior court entered judgment based on the statement of decision. Barickman at * 515-516.

The Court of Appeal Affirmed the Trial Court

Mercury appealed the judgment. The Court found that Mercury engaged in bad faith by refusing to accept the modified release. On appeal, Mercury relied heavily on language from Graciano v. Mercury General Corp. (2014) 231 Cal.App.4th 414 (Graciano). According to Mercury, it did what it was supposed to by offering the policy limits and the only reason the case did not settle was based on plaintiffs’ insistence on the inclusion of the unacceptable additional language, not the failure to offer the policy limits.

The Court disagreed with Mercury and with its reliance on Graciano. In that case Sonia Graciano had been injured after she was struck by a car driven by the defendant’s insured. Less than three weeks after Graciano’s attorney contacted the insurance company, misidentifying the driver, the applicable policy number and the date of the accident, the insurance company completed its investigation, identified the correct insured and policy number and offered the full policy limits to Graciano. That offer was made within the 10–day time limit specified in a policy limits demand letter sent by Graciano’s attorney that continued to misidentify the driver and referred to an expired insurance policy. Graciano did not accept the offer and instead pursued her previously filed action against the driver. Graciano obtained a judgment in excess of $2 million and received an assignment of the driver’s rights against his insurer. Graciano then sued the insurance company for wrongful failure to settle. The complaint in Graciano alleged the insurance company “could have and should have earlier discovered the facts, and should have made the full policy limits offer more quickly.” Graciano was successful in her subsequent bad faith case. Barickman at * 519.

The Court of Appeal reversed in Graciano, holding there was no substantial evidence the insurance company had unreasonably rejected an offer to settle the driver’s liability because the only demand letter from Graciano’s attorney identified a different driver and a different, expired insurance policy. Graciano, 231 Cal.App.4th at *427–428. The Graciano court also held there was no substantial evidence the insurance company had unreasonably failed to accept an otherwise reasonable offer within the time specified for acceptance. The court explained, “a claim for bad faith based on an alleged wrongful refusal to settle also requires proof the insurer unreasonably failed to accept an otherwise reasonable offer within the time specified by the third party for acceptance. However, when a liability insurer timely 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 [citations] because ‘by offering the policy limits in exchange for a release, the insurer has done all within its power to effect a settlement.’ ” Graciano. at *426.

In explaining the holding of Graciano, the court in Barickman pointed out that the fundamental principle, articulated in Graciano and other cases, that, “[w]hen 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.” Graciano, at *427; accord, Bosetti v. United States Life Ins. Co. in City of New York (2009) 175 Cal.App.4th 1208, *1237 [“[i]f an insurer is to avoid liability for bad faith, its actions and positions with respect to the claim of an insured, and the delay or denial of policy benefits, must be ‘founded on a basis that is reasonable under all the circumstances’ ”]; see Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, *888, [“[o]rdinarily, the question whether the insurer has acted unreasonably in responding to a settlement offer is a question of fact to be determined by the jury”]; see also Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 724, fn. 7. In Graciano there were no other circumstances that raised a question of the insurer’s good faith either before or after it tendered the full policy limits. As the appellate court held, the evidence was undisputed that the insurer did “all within its power to effect a settlement.” Barickman at * 520.

The Court stated that although Mercury did initially act in good faith by offering the policy limits—the minimum $15,000/ $30,000 bodily injury liability coverage required by California law (Veh. Code, §§ 16050, 16056, subd. (a)), in exchange for a general release of all claims, there were disputed facts, including significant issues of credibility, as to whether Mercury did all within its power to effect a settlement once the injured pedestrians accepted that offer but proposed a slightly modified version of the accompanying release. Mercury’s contrary 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. Of course there is no authority for that proposition. Barickman at * 521.

Lessons To Be Learned

The most important takeaway from Barickman is that even a timely policy limits offer may not prevent a bad faith claim based on the insurer’s breach of the duty to settle. Here, while Mercury could have easily avoided this result, it instead chose to play hard ball, bicker, delay, and attempt to force a settlement which did not include the additional language even though it was clear that language did not affect Mercury in any negative way. An insurer has a duty to make all reasonable efforts to settle third party lawsuits to protect its own insured. According to Barickman, that duty includes making good faith efforts to clarify settlement language, to conduct legal research to understand the import of settlement language, and perhaps even to take opposing counsel at his or her word (confirmed in writing) as to the significance or insignificance of settlement language. Secondly, the duty to settle under the implied covenant of good faith and fair dealing does not end just because an offer of policy limits is made. There is a continuing duty to make reasonable efforts to effect the settlement even after such an offer. In a broader sense, Barickman further supports the proposition that any unreasonable conduct by the insurer which prevents a settlement within policy limits of a third party lawsuit against its own insured may result in a finding of bad faith.