Insureds May Still Have a Claim for Insurance Bad Faith Even If Their Insurer Offered to Pay the Policy Limits

Under California law, an insurer has an obligation to, among other things, make reasonable efforts to settle a third party’s lawsuit against an insured.  As a recent decision rendered by the California Court of Appeals illustrates, “reasonable efforts” entail more than timely offering the policy limit to settle a claim from a third party.  The insurer’s conduct must be reasonable given the circumstances and they must do everything reasonably within their power to effect a settlement.  An insurer’s responsibilities are not necessarily complete when they offer to pay their policy limits or other amounts agreed-upon by the parties. 

Barickman v. Mercury Casualty Company, 2 Cal. App. 5th 508 (2016), arose from a personal injury claim where an individual insured of Mercury struck two pedestrians with her automobile while intoxicated and then fled the scene.  The individual then reported the claim to Mercury the following day as an accident.  The insured was subsequently arrested, sentenced to prison, and ordered to pay restitution to the injured pedestrians.  Mercury offered the policy limits of $15,000 to each of the injured pedestrians to settle their claims against Mercury.  The injured pedestrians accepted the settlement, but insisted upon additional language in the release agreement assuring that the $15,000 payments did not cover court-ordered restitution.

Mercury failed to respond to the injured pedestrian’s demand to include the additional language in the settlement agreement by the deadline provided to them.  Mercury was later informed by criminal counsel that the language requested by the injured individuals should not be accepted because it could be interpreted as waiving the insured’s right to offset the restitution she is required to pay with the $15,000 insurance payments from Mercury.  However, the injured parties’ attorney had conversations with the Mercury agent assuring them that he was simply trying to preserve his client’s basic rights to restitution, and not attempting to eliminate the insured’s right to an offset.  Mercury never attempted to revise the language requested by the injured pedestrian’s attorney to clarify that the right to offset the restitution owed was preserved.  After the insured assigned her rights to sue Mercury, the injured pedestrians filed suit against Mercury for breach of contract and insurance bad faith which resulted in a $3 million judgment against Mercury.

Mercury appealed claiming that it acted in good faith by offering the policy limits to the injured pedestrians and the only reason the case did not settle was because the injured pedestrians’ attorney insisted upon unacceptable additional language in the settlement agreement.  The Appellate Court disagreed with Mercury’s argument, reasoning that Mercury’s position would mean that just because an insurer acted in good faith at one point in a settlement negotiation, it discharged its obligations to act in good faith and had no further responsibility to make reasonable efforts to settle a third-party lawsuit.  The Appellate Court upheld the $3 million judgment, determining that Mercury’s policy limits offer was not enough to defeat the insurance bad faith claim.  The Court determined that Mercury unreasonably rejected the modified settlement instead of at least attempting to amend the release to clarify the parties’ mutual intent.  The Court also noted that the language requested by the injured pedestrians should not have affected the settlement, because a release in a civil case would not release a defendant from the criminal court’s restitution order and did not disturb the insured’s right to offset under California law.  Therefore, Mercury did not make reasonable efforts to settle the injured parties’ claim.

Our take: This decision is important because it correctly demonstrates that insurers must make reasonable efforts to settle third-party lawsuits beyond simply offering to pay for a claim based on a settlement offer at or within policy limits, and they cannot fail to engage in reasonable negotiations related to the terms of settlement or release agreements.  All of an insurer’s conduct surrounding settlement of a claim must be reasonable given the circumstances.  If a conflict arises regarding the terms of a settlement or release, an insurer must pursue all reasonable avenues to resolve a dispute in order to satisfy their obligation to act in good faith.

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