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Insurance Law News - August 2016

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Insurer's Failure to Accept Policy Limit Demand That Preserved Claimants' Right to Recover Criminal Restitution Against Insured Renders Insurer Liable for Subsequent "Excess Judgment"

A liability insurer's failure to accept a policy limit demand that preserved the claimants' right to recover court-ordered criminal restitution against the insured rendered the insurer liable for the full amount of a subsequent "excess judgment" entered against the insured. (Barickman v. Mercury Cas. Co. (2016) --- Cal.App.4th ----, 2016 WL 4274674)

Facts

Timory McDaniel, driving while intoxicated, ran a red light and struck Shannon Mcinteer and Laura Beth Barickman, both of whom were pedestrians in a crosswalk. As a result, Mcinteer and Barickman suffered serious injuries.

The District Attorney's office filed criminal charges against McDaniel. The court in the criminal case later sentenced McDaniel to a prison term and ordered her to pay $165,000 in restitution to Mcinteer and Barickman.

At the time of the accident, McDaniel was insured on a Mercury Casualty Company auto policy with bodily injury liability limits of $15,000 each person / $30,000 each accident. A few weeks after the accident, Mercury offered to pay its policy limits in settlement of any liability McDaniel had to Mcinteer and Barickman. In connection with Mercury's settlement offer, Mercury sent standard "general releases" to the attorney who was jointly representing Mcinteer and Barickman.

Mcinteer and Barickman, through their attorney, eventually informed Mercury that they would accept Mercury's policy limits in settlement. Mcinteer's and Barickman's attorney returned the signed general releases to Mercury, but on each release added a sentence stating "This does not include court-ordered restitution," and also set a deadline by which Mercury had to fund the settlements.

Mercury sought clarification from Mcinteer's and Barickman's attorney as to the effect of the additional language in the releases. The attorney responded that the additional language in the releases was only intended to ensure that the releases did not "wipe out" Mcinteer's and Barickman's basic right to court-ordered restitution, and was not intended to preclude McDaniel from using Mercury's insurance payments as an "offset" against the amounts McDaniel owed as restitution. Mercury apparently did not communicate this explanation to McDaniel, and as result McDaniel initially was opposed to the additional language in the releases. Ultimately, Mercury did not agree to the modified releases or fund the settlements within the time limit set by Mcinteer and Barickman, and Mcinteer's and Barickman's settlement demands against McDaniel expired without being accepted.

Mcinteer and Barickman then filed a personal injury lawsuit against McDaniel. That lawsuit ended with Mcinteer obtaining a judgment against McDaniel for $2,200,000 and Barickman obtaining a judgment against McDaniel for $800,000, for a total of $3,000,000. Mcinteer and Barickman agreed not to execute on the judgments against McDaniel in exchange for an assignment of any rights McDaniel might have against Mercury.

Mcinteer and Barickman, as assignees of McDaniel, then filed a bad faith action against Mercury. Mcinteer and Barickman essentially alleged that Mercury had an opportunity to settle Mcinteer's and Barickman's claims against McDaniel for the policy limits, but failed to do so, thus resulting in the excess judgment against McDaniel.

Mcinteer, Barickman and Mercury stipulated to have the bad faith case decided by a referee. After trial, the referee found that Mercury had breached the implied covenant by refusing to accept the form releases with the additional "restitution" language inserted by the attorney for Mcinteer and Barickman. The referee thus awarded Mcinteer and Barickman damages in the amounts of the judgment in the underlying case (i.e., $2,200,000 for Mcinteer and $800,000 for Barickman), plus interest. Mercury appealed.

Holding

The Court of Appeal affirmed.

The appellate court agreed that Mercury had initially acted in good faith by offering its policy limits on behalf of McDaniel in exchange for a general release of all claims by Mcinteer and Barickman. However, that by itself did not relieve Mercury of further obligations to McDaniel.

The court observed that when Mcinteer's and Barickman's attorney eventually sent Mercury the signed form releases with the added language (i.e., "this does not include court-ordered restitution"), Mercury's adjuster sought clarification from the attorney regarding the effect of the additional language. In response, Mcinteer's and Barickman's attorney told Mercury's adjuster that Mcinteer and Barickman were only trying to preserve their "basic restitution rights" and were not seeking to eliminate McDaniel's right to use Mercury's insurance payment as an "offset" against the amount McDaniel owed as restitution. However, Mercury's adjuster failed to communicate that explanation to McDaniel.

The appellate court rejected Mercury's contention that it was only trying to protect McDaniel's right to use any insurance payment as an offset against the amount McDaniel owed as restitution. According to the court, under established case law, the right to an offset already existed. Further, if Mercury was concerned about expressly preserving McDaniel's right to an offset , Mercury could have simply suggested a further revision to the release (e.g., "and does not affect the insured's right to offset"), but Mercury did not do so.

The appellate court observed that the reasonableness of the insurer's claims-handling conduct was a question of fact to be resolved following a trial. While there was conflicting evidence on many issues, there was evidence supporting the referee's finding that Mercury had breached the implied covenant of good faith and fair dealing by failing to agree to a release with the additional language and/or failing to modify it to clarify the parties' mutual intent. Because Mercury's conduct caused the insured, McDaniel, to suffer a judgment in excess of the policy limits in the underlying action, Mercury was liable for the full amount of that judgment (i.e., $3,000,000 plus interest)

Comment

According to the appellate court, the modified release language that the plaintiffs' counsel wanted (i.e., "this does not include court-ordered restitution") was simply an expression of existing law (i.e., a civil settlement does not eliminate a victim's right to restitution ordered by the criminal court, but the defendant is entitled to an offset for any payments to the victim by the defendant's insurance carrier for items included within the restitution order). (See, e.g., People v. Bernal (2002) 101Cal.App.4th 155, 167-168; People v. Vasquez (2010) 190Cal.App.4th 1126, 1133.) Thus, Mercury should either have simply agreed to the additional language or sought to modify it so that the parties' intent was clear. Mercury's failure to do so was deemed to be a proximate cause of the excess judgment that was entered against the insured, McDaniel, in the underlying action.

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Where Primary Insurer Fails to Settle Within Primary Policy Limits, Forcing Excess Insurer to Contribute to Eventual Settlement, Lack of "Excess Judgment" Does Not Bar Excess Insurer's Suit Against Primary Insurer

Where a primary insurer failed to accept a reasonable settlement demand within the primary insurer's policy limits, and as a result an excess insurer was required to contribute to an eventual settlement, the lack of an "excess judgment" against the insured did not prevent the excess insurer from pursuing an equitable subrogation action against the primary insurer for failure to settle. (Ace American Ins. Co. v. Fireman's Fund Ins. Co. (2016) --- Cal. App.4th ----, 2016 WL 4156686)

Facts

John Franco was working on a film set when a special effects accident caused him to suffer catastrophic injuries. Thereafter, Franco and his wife sued Warner Brothers Entertainment, Inc. for personal injuries and loss of consortium.

At the time of the accident, Warner Brothers had a $2 million primary policy issued by Fireman's Fund Insurance Company; a $3 million umbrella policy also issued by Fireman's Fund; and a $50 million excess policy issued by Ace American Insurance Company.

Fireman's Fund defended Warner Brothers against the Francos' lawsuit. While that lawsuit was pending, the Francos made settlement demands against Warner Brothers that were within the combined $5 million limits of the two Fireman's Fund policies, but Fireman's Fund failed to accept those demands. Later, the Francos settled their lawsuit against Warner Brothers for an amount "substantially in excess" of the $5 million limits of the Fireman's Fund policies. As part of the settlement, Fireman's Fund paid its $5 million limits and Ace American contributed the amount in excess of the Fireman's Fund limits.

Ace American then sued Fireman's Fund for equitable subrogation and breach of the covenant of good faith and fair dealing. Ace American alleged that in the underlying lawsuit the Francos had made reasonable settlement demands against Warner Brothers within the limits of the Fireman's Fund policies; that there was a substantial likelihood that a jury verdict against Warner Brothers would exceed the limits of the Fireman's Fund policies; and that due to Fireman's Fund's wrongful failure to settle the underlying lawsuit within the Fireman's Fund policy limits, Ace American as excess insurer was compelled to contribute toward the eventual settlement in the underlying lawsuit.

The trial court dismissed Ace American's lawsuit against Fireman's Fund at the pleading stage. The trial court reasoned that because the Francos' lawsuit was settled and there was no excess judgment against Warner Brothers, neither Warner Brothers (as insured) nor Ace American (as subrogated excess insurer) could recover against Fireman's Fund. Ace American appealed.

Holding

The Court of Appeal reversed. According to the appellate court, it was irrelevant whether the underlying action was resolved by a settlement or by a judgment. As long as the insured (or a subrogated excess insurer) is liable for an amount beyond the limits of the primary policy due to the primary insurer's bad faith refusal to settle within policy limits, the insured (or the subrogated excess insurer) is entitled to pursue the primary insurer for failure to settle. In this situation, the insured (or the insured's assignee) may sue the primary insurer "despite the absence of a litigated excess judgment." The court stated, "We see no persuasive reason to hold that either Warner Brothers or its assignee, Ace American, must suffer the loss with no remedy simply because the case reached an eventual settlement instead of being litigated through trial [with a resulting excess judgment]."

Accordingly, Ace American had stated a cause of action against Fireman's Fund, and Ace American was entitled to move forward with its case against Fireman's Fund.

Comment

California appellate courts have dealt with the same issue in prior cases but have reached conflicting results. Thus, in Fortman v. Safeco Insurance Co. (1990) 221 Cal.App.3d 1394, the court held that an excess insurer could pursue an equitable subrogation action against a primary insurer that initially breached its duty to settle a case within policy limits, resulting in a settlement that exceeded the primary policy limits. By contrast, in RLI Insurance Company v. CNA Casualty of California (2006) 141 Cal.App.4th 75, the court held that an excess insurer could not pursue an equitable subrogation action against the primary insurer under those same circumstances, because the insured's (and hence the subrogated excess insurer's) cause of action against the primary insurer "hinges upon a judgment in excess of policy limits."

The appellate court in the above Ace American case followed the reasoning of Fortman rather than that of RLI. Thus, according to the Ace American court,if an excess insurer is required to contribute to a settlement of an underlying case due to the primary insurer's failure to reasonably settle within the primary policy limits, the lack of an excess judgment against the insured in the underlying case does not bar the excess insurer's action for equitable subrogation and breach of the duty of good faith and fair dealing against the primary insurer.

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