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Robert J. McKennon was recently extensively quoted in an article which appeared on October 23, 2013 in the highly respected legal news service Law360 entitled “California Court Releases Insurers From Strict Duty To Settle” discussing when an insurer’s duty to settle begins under the case of Reid v. Mercury Insurance Company. The Law360 article concludes with McKennon’s recommendation that claimants ask insurers for information on policy limits and express an openness to settling within policy limits. “That’s going to be critical in order for plaintiffs to set up and activate the duty to settle,” McKennon said.
One of the hottest issues in California insurance law has been whether a breach of the good faith duty to settle can be found in the absence of a within-policy-limits settlement demand, thus giving rise to an insurer’s liability for an excess judgment.
The frenzy of interest came with the Ninth Circuit case of Du v. Allstate Insurance Co., 681 F.3d 1118 (9th Cir. 2012) which held that under California law “an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.” However, on October 5, 2012, the Court issued an amended opinion in the case, Du v. Allstate Ins. Co., 697 F.3d 753 (9th Cir. 2012), in which it expressly declined to resolve the legal issue of whether a breach of the good faith duty to settle can be found in the absence of a settlement demand within-policy-limits. As a result, Du may no longer be cited for this proposition. Nevertheless, there existed some uncertainty as to whether an insurer can be exposed to liability under California law for breach of the implied covenant of good faith and fair dealing if it fails to settle in the absence of a within-policy-limits settlement demand.
An insurer’s duty to settle is not precipitated solely by the likelihood of an excess judgment against the insured. In the absence of a settlement demand or any other manifestation the injured party is interested in settlement, when the insurer has done nothing to foreclose the possibility of settlement, we find there is no liability for bad faith failure to settle.
For bad faith liability to attach to an insurer’s failure to pursue settlement discussions, in a case where the insured is exposed to a judgment beyond policy limits, there must be, at a minimum, some evidence either that the injured party has communicated to the insurer an interest in settlement, or some other circumstance demonstrating the insurer knew that settlement within policy limits could feasibly be negotiated.
For now, the California Court of Appeals has put this issue to rest with its decision in Reid v. Mercury Insurance Company, Reid v. Mercury Insurance Company, __ Cal. App. 4th __, 2013 Cal. App. LEXIS 798, 2013 WL 5517979 (October 7, 2013). In Reid, that court held that absent a settlement demand or some indication the injured party is interested in settlement, an insurer is not liable for a failure to act, so long as the insurer did not foreclose the possibility of settlement. In fact, the court clarifies that even when there is clear liability and a high likelihood that recovery would exceed policy limits, an insurer is not liable for failing to act if it did not foreclose the possibility of settlement.
The case involves a multi-vehicle collision in which the Plaintiff Shirley Reid (“Plaintiff”), through her son, Paul Reid (“Reid”), brought an action against Defendant Mercury Insurance Company that insured Zhi Yu Huang (“Huang”), the other driver’s insurer. Mercury covered Huang under a policy that provided coverage for up to $100,000.00 per person and $300,000.00 per accident. On June 24, 2007, Huang failed to stop at a red light and collided with the Plaintiff, her passenger and another vehicle. The Plaintiff was hospitalized, and her son communicated with Mercury on her behalf. Reid requested Huang’s policy limits, but Mercury declined to provide the information. Upon further inquiry, Mercury told Reid the investigation was still ongoing, and therefore they could not discuss policy limits. Reid was interested in Huang’s policy coverage and his mother’s underinsured motorist coverage. Before Reid could collect under the underinsured motorist policy, he had to first settle the claim with Mercury. Therefore, Reid hired an attorney to settle the claim “as quickly as possible.” Reid’s attorney provided Mercury with proof of injury and requested Huang’s policy information. According to Reid, his attorney informed him in August 2007 that the policy limits were $100,000.00, but Mercury did not want to settle. Reid asserted that he would have accepted a $100,000.00 settlement from Mercury to recover the underinsured motorist insurance from his mother’s insurance company. Reid’s attorney declined to write a demand letter to Mercury, because Mercury previously stated it did not have enough information to resolve the case. In October 2007, the Plaintiff sued Huang. Later that month, Mercury again informed the Plaintiff that the claim was “still pending.”
Finally in May 2008, Mercury agreed to tender its $100,000.00 policy limit to the Plaintiff to “resolve the matter in its entirety.” The Plaintiff rejected the offer. After a successful trial against Huang and assignment of the bad faith claim and breach of contract claim, the Plaintiff filed suit against Mercury for breach of the implied covenant of good faith and fair dealing and breach of contract based on the asserted bad faith failure to settle.
Mercury moved for summary judgment, arguing it could not be held liable for refusing to settle because Reid never made a formal settlement demand. The trial court granted the motion.
The California Court of Appeals affirmed. The court ruled that for an insurer to be held liable for bad faith in pursuing settlement discussions, the injured party must have communicated their interest in settling the matter to the insurer. Without that, the insurer could not be liable for bad faith failure to settle:
An insurer’s duty to settle is not precipitated solely by the likelihood of an excess judgment against the insured. In the absence of a settlement demand or any other manifestation the injured party is interested in settlement, when the insurer has done nothing to foreclose the possibility of settlement, we find there is no liability for bad faith failure to settle
The court’s decision addressed several arguments advanced by the Plaintiff. First, the court conceded that a formal settlement demand was not necessary for bad faith liability to attach. However, the insurer must know of the claimant’s interest in settlement and have ignored it. In the case at hand, Reid never made a clear settlement demand, and there was no evidence to suggest Mercury knew Reid was willing to settle. Furthermore, the Mercury’s responses did not constitute rejections of opportunities to settle or discourage demands. In light of the facts, the court decided Mercury could not be held liable for bad faith failure to settle. Second, the Plaintiff cited to Rova Farms Resort, Inc. v. Investors Insurance Company of America, 323 A.2d 495 (N.J. 1974) as requiring an insurer to explore settlement possibilities. The court distinguished this case because there were many instances where the claimant made informal requests to settle. Therefore, Rova Farms did not apply to the present facts.
Next, the court rejected the Plaintiff’s argument that Insurance Code section 790.03 (h)(5) “expressly imposes” an “affirmative duty” on insurers to settle when liability is clear. The court clarified that an insurance company may be liable for bad faith if its general business practices include refusing to settle on issues of clear liability. However, the Insurance Code does not create a private cause of action if an insurer commits one of the acts listed in the subsection. Accordingly, the court held that the Plaintiff’s interpretation of the statute is overly broad, and no such affirmative duty exists.
The court rejected Plaintiff’s request for an instruction that an insurer’s failure to effectuate settlement after liability is established constitutes bad faith. The Plaintiff relied on Du which originally held that bad faith liability may be premised on an insurer’s failure to effectuate settlement in the absence of a reasonable demand. However, the Ninth Circuit Court of Appeals noted held there was no evidentiary basis showing the insurer could have made an earlier settlement offer, and therefore no basis for such an instruction. Similarly, the California Court of Appeal found no basis for the instruction in the present case. Therefore, the court argues, there is no precedent to impose this duty to settle on insurers.
Finally, the court rejected the Plaintiff’s contention that Mercury’s requests for medical records and interviews served to discourage the Plaintiff from making a settlement demand, stating no reasonable juror could reach that conclusion.
Ultimately, the California Court of Appeals agreed that the Plaintiff could not support his case for bad faith failure to settle claim based on the evidence. Absent a demonstrated interest in settlement or demand for settlement within policy limits, the court refused to impose an affirmative duty on insurers to settle claims for the insured.
This case is likely to be appealed to the California Supreme Court given the gravity of the issue and its implications to policyholders. It will be interesting to see what transpires next. Nonetheless, this case gives some clear guidance on how to set up a within-policy-limits- demand , or at least the steps an insured must take to attempt to make one, that will give rise to insurer liability for an excess judgment. Therefore, it is good reading.
Can a pretrial California Code of Civil Procedure section 998 offer to settle above an insurer’s policy limits result in opening up a policy’s liability limits? Interestingly, a California Court of Appeal has said “yes” to this question under certain limited circumstances if the offer is reasonable and made in good faith. In Aguilar v. Gostischef, ___ Cal. App. 4th ___, 2013 Cal. App. LEXIS 816, 2013 WL 5592976 (Oct. 11, 2013) (“Aguilar”), the California Court of Appeal held that where an injured party rationally believed an insurer may be liable for excess judgment, and the insurer refuses to provide this third-party with the amount of policy limits when requested prior to litigation, a section 998 offer above policy limits may open up the policy to an excess judgment.
The Aguilar case arose out a personal injury suit following an automobile accident involving Aguilar and Gostischef. Aguilar suffered extensive injuries, including $507,718 in medical expenses, and sought to recover against Farmers Insurance Exchange, Gostischef’s insurer. Farmers issued Gostischef a policy containing a $100,000 limit for each person injured. Aguilar’s attorney contacted Farmers three times requesting discovery of the policy limit so as to negotiate a policy demand, but Farmers did not respond. Subsequently, Aguilar brought a personal injury action against Gostischef. A few months later, Farmers offered to pay Aguilar its $100,000 limit, and advised Aguilar that Gostischef had no real property assets and lived on Social Security. Gostischef presented Aguilar a section 998 offer to compromise for $100,000. Aguilar argued that because Farmers ignored three attempts to settle within policy limits, it would be responsible for an excess judgment. Aguilar then made a section 998 offer for $700,000, and Farmers countered by renewing its $100,000 offer.
The case went to trial, and a jury ultimately awarded Aguilar $2,339,657 after a reduction for contributory negligence. Farmers obtained a judgment notwithstanding the verdict, which the Court of Appeals reversed on appeal. The trial court reinstated the judgment for Aguilar. Aguilar also sought $1,639,451.14 in costs, which included prejudgment interest beginning from the date of his section 998 offer. The trial court held that Aguilar’s section 998 offer was “realistically reasonable under the circumstances” and in good faith, explaining that:
The purpose of section 998 is to encourage the settlement of litigation without trial. To effectuate the purpose of the statute, a section 998 offer must be made in good faith to be valid. Good faith requires that the pretrial offer of settlement be “realistically reasonable under the circumstances of the particular case. . . .
The trial court awarded costs, and Farmers appealed the award. On appeal, the Court of Appeals determined Aguilar’s section 988 offer was made in good faith and awarded costs. Farmers argued Aguilar’s section 988 offer of $700,000 was not made in good faith because there was no reasonable anticipation of acceptance of the offer by Gostischef who lacked the financial means to pay and no reasonable expectation Farmers could be liable for the amount of the section 998 offer in light of the $100,000 policy limit.
The Court of Appeals explained that a good faith 998 offer must have had a “reasonable prospect of acceptance” in light of the information available to the parties at the time of the offer. Reasonableness depends on a two-prong determination. First, an offer is reasonable if it represents a reasonable prediction of what the defendant would have to pay the plaintiff following a trial, discounted by money received by the plaintiff before trial, and premised on the information known to the defendant at the time. Secondly, the offeree must have reason to know the offer is a reasonable.
Under this analysis, the Court of Appeals found that the trial court did not abuse its discretion in holding the section 998 offer was made in good faith. First, by refusing the disclose its policy limits, Farmers exposed itself to liability in excess of policy limits. Next, the court found that Aguilar’s expectation that Farmers may be liable for damages in excess of policy limits was reasonable. Aguilar suffered demonstrable injuries beyond $100,000 and sought several times to discover Farmer’s policy limits prior to litigation so he could attempt to negotiate a settlement.
The court relied on Boicourt v. Amex Assurance Company, 78 Cal. App. 4th 1380 (2000), which authorized an excess judgment against an insurer where the insurer refused to disclose policy limits, which closed the door on reasonable settlement negotiations. In Boicourt, the court held that an insurer’s blanket policy of refusing to disclose policy limits in advance of litigation may give rise to a bad faith claim. Id. at 1392. As relevant here, the Boicourt court reasoned that “a liability insurer ‘”is playing with fire”‘ when it refuses to disclose policy limits. Such a refusal ‘”cuts off the possibility of receiving an offer within the policy limits”‘ by the company’s ‘”refusal to open the door to reasonable negotiations.”‘ Id.
The Aguilar court explained:
Here, no evidence indicated Farmers had a blanket policy of refusing to disclose a policy limit, but there was evidence Farmers delayed, perhaps unreasonably in disclosing Gostischef’s policy limit, and that delay may support bad faith liability. (See Boicourt v. Amex Assurance Co., supra, 78 Cal.App.4th at p. 1394.) Aguilar’s letter stating that he would settle for policy limits reasonably can be understood as a settlement opportunity (regardless of whether it is ultimately determined to be such). In the current appeal, Farmers has not shown Aguilar could have no reasonable expectation of acceptance of his $700,000 offer such that the trial court abused its discretion in finding Aguilar acted in good faith.
Finally, the Court of Appeals affirmed the trial court decision that Aguilar’s offer to settle in excess of policy limits was reasonable, and awarded costs.
This is a very good case for policyholders and affirms that the practice by some insurers of not disclosing policy limits upon the request by injured third-parties can give rise to liability in excess of policy limits (i.e., opening up the policy, rendering an insurer liable for an excess judgment).
Insurers providing general liability insurance cannot shirk their duty to defend insureds at the outset of litigation by relying on self-insured retention (SIR) provisions in those policies unless the policies expressly and unambiguously make the insurer’s duty to defend contingent upon the SIR. So held the Fourth District Court of Appeals in American Safety Indemnity Company v. Admiral Insurance Company, __ Cal. App. 4th ___, 2013 Cal. App. LEXIS 779 (2013). The court’s decision in American Safety is highly favorable to insureds because it substantially limits the ability of insurers to circumvent their obligation to pay first-dollar for the defense of their insured by arguing that the SIR has not been exhausted.
American Safety involves an underlying claim brought by homeowners against several defendants, including a developer and grading contractor, for damages caused by landslides allegedly caused by defendants’ grading work done in relation to the construction of new homes. The grading contractor was insured by American Safety Indemnity Company under a commercial general liability policy. The developer was insured by Admiral Insurance Company and was also an additional insured under the grading contractor’s policy with American Safety. After American Safety initially rejected the developer’s claim for defense costs for the underlying lawsuit, the developer brought a bad faith claim against American Safety. The case ultimately settled and American Safety paid the defense costs of the developer and two of the developer’s related entities who were represented by the same law firm.
In the case before the court in American Safety, American Safety sued Admiral for equitable subrogation of defense costs alleging that American Safety was entitled to reimbursement of defense costs from Admiral because the developer was insured under the Admiral policy and its related entities were named insured on the Admiral policy. Admiral’s primary defense against American Safety’s claim was the SIR provision in the policy, which stated “[o]ur total liability for all damages will not exceed the limits of liability as stated in the Declarations and will apply in excess of the insured’s self-insured retention (the ‘Retained Limit’). ‘Retained Limit’ is the amount shown below, which you are obligated to pay, and only includes damages otherwise payable under this policy.” The “Retained Limit” in the policy was $250,000. Admiral argued that, because the SIR had not been exhausted, it owed no duty of defense to the insured entities and American Safety, by extension, was not entitled to reimbursement of its defense costs. In essence, Admiral asserted that its duty to defend was contingent upon the SIR.
At trial, the district court held that Admiral’s duty to defend the insured entities was independent of the SIR, and thus, American Safety was entitled to reimbursement of defense costs paid and interest. On appeal, Admiral again argued that the SIR relieved it of its duty to defendant and that it was essentially an excess insurer that owed no duty to the insured entities. The Court of Appeal upheld the trial court’s ruling and rejected Admiral’s contention. In reaching its decision, the court relied heavily on the holding in Legacy Vulcan Corporation v. Superior Court 185 Cal. App. 4th (2010). The court first noted that the face of the Admiral policy identified it as providing primary coverage, and its coverage is excess only when other insurance was available to its insured or “when the insureds are named as additional insured on another party’s policy.” Citing Legacy Vulcan, the court distinguished primary insurance contracts from excess insurance contracts in terms of the reasonable expectations of the insured. Whereas an excess insurer does not have a duty to defend until the primary insurance is exhausted and the insured has no reasonable contrary expectations, insureds under primary policies with a SIR provision do have a reasonable expectation that they will receive a defense. The court specifically noted the reasoning behind the Legacy Vulcan decision that requiring exhaustion of a SIR “before an insured will have a duty to defend would not ensure that the defense obligation rests on the insurer receiving premiums for the risk, but instead would result in no insurer providing a defense prior to exhaustion.”
Thus, the court concluded that, a SIR provision does not automatically relieve a primary insurer of its duty to pay first-dollar in defending its insured. Instead, the court affirmed that the policy must expressly and unambiguously make the insurer’s duty to defend subject to the SIR. The court found that Admiral’s policy did not make its duty to defend the insured entities expressly contingent upon the SIR. In fact, as the court notes, the Admiral policy does the opposite by expressly stating that the “Retained Limit” only includes damages otherwise payable under the policy. As such, the Court of Appeal found that the trial court had not erred in determining that the insured entities were not required to satisfy the SIR as a condition of receiving a defense from Admiral.
This decision provides an insured with a powerful retort to insurers attempting to deny providing a defense by asserting that SIR provision of their policy has not been met. In the absence of express and unambiguous language in the policy conditioning the provision of a defense on exhaustion of the SIR, insureds are entitled to the insurer’s participation in their defense at the outset of litigation even if the SIR has not been exhausted.
Commercial property owners may recover lost rental income from their insurer if they are unable to rent out damaged property, absent clear policy exclusions. The California Court of Appeal recently held the owner of commercial property has a reasonable expectation of coverage for loss of rent, even if the property was not leased out at the time the damage occurred. Ventura Kester, LLC v. Folksamerica Reinsurance Company, 2013 DJDAR 12253 (September 11, 2013). The court explained that if insurers want to limit loss of rent coverage to leases in force at the time of the damages occur, such limitations must be plainly stated in the policy. Ventura is significant because it limits insurers’ abilities to take advantage of ambiguous policy language as a means to deny coverage.
The case involved a commercial building owner, Ventura Kester, LLC (“Ventura”), whose property and casualty insurance policy covered up to $2.76 million for structures and $552,000 for loss of rents resulting from damage to the covered structure. The insurance company, Folksamerica Reinsurance Company (“Folksamerica”), agreed to cover “net loss of rental income” and “rents accrued but rendered uncollectible by reason of a covered loss.” At the time the policy was issued, the commercial building was leased to a tenant. The tenant later vacated, and Ventura sought prospective tenants, including OfficeMax, Equinox Fitness Club and Crunch fitness club. However, before Ventura could execute a lease agreement, thieves broke into the building and stole copper wire and pipes. Adjusters discovered additional vandalism and estimated the total cost of repair to be $1 million. In addition, a construction company estimated the repairs would take up to one year.
Based on these assessments, Folksamerica provided Ventura with two checks for $383,989.90 and $128,973.71 to repair the damage. However, Ventura could not begin repairs until the claim was paid in full. Folksamerica paid Ventura $414,460.42 for property damage claims, but denied Ventura’s claim for loss of rents because no lease was in effect at the time of loss.
Following the denial, Ventura filed an action against Folksamerica for breach of contract and breach of the covenant of good faith and fair dealing. Ventura claimed Folksamerica’s failure to pay the entire claim caused a total loss of rent in the amount of $3.8 million. Folksamerica filed a motion for summary judgment, claiming Ventura could not establish it lost rent due to the property damage. Ventura opposed the motion, arguing that the policy did not require an executed lease, and also that whether the lost rent was due to property damages was a triable issue of fact. The trial court granted summary judgment for Folksamerica, stating the policy language did not provide coverage for lost rent when a building was vacant.
Ventura appealed the summary judgment, arguing the policy covers lost rents due to property damage, regardless of whether there was a tenant. Folksamerica again asserted that Ventura was required to have a tenant in place to recover lost rent under the policy. The California Court of Appeal reversed lower court, and awarded Ventura its costs on appeal, stating that:
If the insurer had wanted to limit the recovery or calculate the rents based on existing tenants at the time of the building damage, it clearly could have written the policy to provide that.
In its decision, the Court of Appeal noted that policy was ambiguous, and a reasonable policyholder would expect to recover lost rents due to property damages. The court further explained that if an insurer wanted to limit loss of rents to periods when the property was leased, and exclude periods where the property was vacant, the insurer should have expressly stated that in the policy. The court cited Whitney Estate Co. v. Northern Assurance Co. of London, 155 Cal. 521, 522 (1909), which permitted contracting parties to stipulate a reasonable method for computing loss of rents due to damaged and vacated property. In Whitney, the insurance policy calculated coverage based on covered “actual loss of rent.” Calculations of actual loss was limited to the period when the damage occurred until repairs made the building was “tenable,” and profits from rentals in place at the time of damage. The court also recognized the validity of vacancy provisions, and noted such provisions were absent in the present policy. Therefore, Folksamerica could not rely on MDW Enters. V. CNA Ins. Co., 4 A. D. 3d 388 (N.Y. App. Div. 2004), where an insurer’s policy clearly excluded coverage when the building had been vacant for over sixty days before the occurrence. The Court of Appeal noted that Folksamerica’s policy did not specify such express limitations or methods of calculating loss. Finding that the policy language failed to clearly limit coverage, the court applied a reasonable interpretation of the policy and rejected the limitation.
The Court of Appeal also determined that whether Ventura could establish actual loss of rents was a triable issue of fact. On one hand, Folksamerica presented evidence that Ventura’s potential tenants declined to rent the building due to reasons other than property damage. In contrast, Ventura presented evidence of a long-term lease in place prior to the damage, a list of prospective tenants, and OfficeMax’s decline to rent was due in part to the delay in resolving the insurance claim. A trier of fact could have determined that but for the property damages, Ventura would have secured a tenant. Therefore, the court determined summary judgment was inappropriately granted.
Ventura is an important decision because it prevented insurers from denying coverage absent clearly stated exclusions. Although the court recognized the validity of exclusionary provisions and calculations limiting recovery, the court refused to apply Folkamerica’s broad reading of its policy. The court’s decision adheres to established contact law principles by construing ambiguous language against the drafting party, or insurer.
McKennon Law Group PC wins $3.94 million arbitration award in business litigation dispute involving a patent license. Robert McKennon is lauded by Arbitrator for his “exceptional skill in cross-examining” key witnesses.
