Daily Journal - May 15, 2014
If an insurance company refuses to settle a claim, once liability has become reasonably clear and there is an opportunity to settle within limits, the defending insurer runs the risk of an excess verdict. Once the verdict is secured, the insured has the option of assigning the breach of contract and bad faith claims to the injured person, in return for the plaintiff's covenant not to collect the excess verdict personally from the insured.
But what about the noneconomic damages? The "personal torts" relating to emotional distress, loss of reputation or potential punitive damages against the insurer that the policyholder generally holds? Are they assignable as well? At present, the answer to that question depends on where the claims arose.
According to the California Supreme Court, personal tort claims for emotional distress and for punitive damages are not assignable. Murphy v Allstate, 17 Cal. 3d 937, 942 (1976). While most all claims are assignable, there is an exception for certain personal torts, Reichert v. General Insurance Company, 68 Cal. 2d. 822, 834 (1968): "As a general proposition it can be said 'that the only causes or rights of action which are not transferable or assignable in any sense are those which are founded upon wrongs of a purely personal nature, such as slander, assault and battery, negligent personal injuries, criminal conversation, seduction, breach of marriage promise, malicious prosecution, and others of like nature.... All other demands, claims and rights of action whatever are generally held to be transferable.'" (Emphasis added; citations omitted).
Early California cases based the conclusion that the right to recover contractual damages under an insurance policy on Civil Code Section 953 and 954, (which define a chose in action and that such claims based on property rights or arising out of an obligation are transferrable.) This is because these insurance recovery rights related to economic loss, a property right or a contractual right, or both. Isn't the right to recover emotional distress damages, as a result of the insurer's obligation of good faith and fair dealing, based on a term implied by a contract which vested upon its breach?
So far, the California Supreme Court has recognized the only transferrable bad faith claims are contractual benefits and Brandt fees - attorney fees reasonably incurred by the insured to enforce payment - both of which are assignable because they are considered economic damages. Essex ins. Co. v. Five Star Dye house Inc., 38 Cal. 4th 1252, 1264-65 (2006).
Should the court rethink the limitations on assignability? It may well be time to reconsider, by following the lead of the courts in Washington.
On April 28, a Washington state Court of Appeals affirmed a bad faith judgment which involving assigned tort claims, including emotional distress. Miller v. Safeco, 2014 Wash. App. LEXIS 1030. The underlying claims arose when Safeco's insured slammed into another vehicle injuring three passengers, one more seriously than the others. Safeco refused to disclose policy limits before the lawsuit, and thereafter refused settlement demands for limits by the most injured passenger. Because the combined demands later exceeded those limits, and because the adjuster undervalued the claims, the case did not settle. Safeco assigned defense counsel, who advised her client to make a global settlement along with an assignment of bad faith claims.
The settlement agreement and assignment of claims was unusual because it assigned all the insured's claims to the injured plaintiffs. Safeco intervened when its assigned defense counsel informed Safeco of the global settlement discussions. While it reserved the right to contest the amount, Safeco did not otherwise object to a settlement of the three passengers' claims, entered as a judgment against their insured.
The parties then assigned their claims to Miller - the most seriously injured passenger - who then launched the bad faith case by dropping the claims against the Safeco's insured and asserting the bad faith claims against Safeco.
Miller claimed that "Safeco could have protected its insured from exposure to an excess judgment by promoting a policy limits settlement earlier." Safeco contended it never had a genuine opportunity to settle because there were three claimants and the most injured kept demanding all limits for himself. The jury sided decisively with Miller, and the court affirmed the insured's assignment of all the personal tort claims to the injury victim. Interestingly, there was no argument that the claims were somehow not assignable.
On appeal, the court noted that the covenant (i.e., stipulated) judgment was the "presumptive measure of an insured's harm caused by an insurer's tortious bad faith."Besel v. Viking Ins. Co., 146 Wn.2d 730, 738-39 (2002). The court then found this was not a limitation - the "harm to the insured is presumptively worth at least the amount of the covenant judgment." The court noted additional "damages might include the insured's loss of credit rating, damage to reputation, loss of business opportunities, and loss of control of the case." This was a key finding when combined with the fact that bad faith is a tort - that is, "an insured is not limited to economic recovery."
This decision has established a road map for insurance bad faith claims, both because before suit the policy limits were not disclosed, and after the suit, the adjuster felt the early policy limits demand for the passengers' injuries were overstated. Miller v. Safeco is an important case advancing bad faith common law and should cause California Courts to reconsider whether all tort recoveries based on the breach of the obligation of good faith and fair dealing may be assigned.