When a Policy Limits Offer is Not Enough: A Cautionary Tale of a Failure to Settle Case

by Cozen O'Connor

In a recent unpublished decision, the California Court of Appeals upheld a $3 million judgment against an auto liability insurer that rejected proposed language in a settlement agreement, notwithstanding the insurer’s policy limits offer. Barickman v. Mercury Opinion, 2016 WL 3975279 (Cal. Ct. App. 2016) (unpublished). Although unpublished and not binding precedent, Barickman raises several claim handling issues which may be useful for carriers to consider.

Barickman arises from a personal injury claim in which the insured, Timory McDaniel struck two pedestrians while driving under the influence. McDaniel fled the scene but was later apprehended. She reported the claim the following day to her insurer Mercury Casualty Company as an accident without further detail. Within eight weeks of receiving notice and following its investigation of the claim, Mercury offered policy limits of $15,000 to each injured party. While the offer was pending, a criminal court sentenced the insured to three years in prison and ordered her to pay approximately $165,000 in restitution. The injured parties accepted the $15,000 settlement, but countered with the additional language, “This does not include court-ordered restitution.”

Mercury sought to clarify whether the new language precluded an offset of the policy limits payment against the restitution order. While waiting for input from the insured’s mother, acting as her attorney in fact, and from the criminal defense counsel, the plaintiffs’ demand expired. Criminal counsel responded a few days later instructing Mercury not to accept the offer to the extent it waives the right of offset, citing a newly published decision of People v. Vasquez, 190 Cal.App.4th 1126 (2010) (insurance settlement as a matter of law reduces a criminal restitution order).

Plaintiffs filed suit.  After suit was filed, the insured’s mother requested that the policy limits be paid regardless of the qualifying language added by plaintiffs to the release.  Mercury did not do so, and there was conflicting evidence regarding its discussions with plaintiffs’ counsel, both before and after suit was filed.  Mercury appointed defense counsel, but the case ultimately resulted in a $3 million consent judgment. The insured assigned all of her rights against Mercury in exchange for a covenant not to execute on the judgment against her.

The plaintiffs then filed claims for breach of contract and bad faith against Mercury, seeking recovery of the full $3 million consent judgment. The parties submitted the case to a referee to determine all issues of law and fact.

The referee determined that Mercury’s policy limits offer was not enough to defeat the bad faith claim. Mercury had unreasonably rejected the modified policy limits settlement instead of accepting or further amending the release to clarify the parties’ mutual intent. Further, the referee determined the modified release language was superfluous and should not have affected the deal, because as a matter of law, 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. The Court of Appeals affirmed.

Barickman raises several considerations for carriers faced with similar issues. First, Brickman stands for the proposition that even a timely policy limits offer may be insufficient to defeat a bad faith claim based on failure to settle. California’s test is whether the insurer’s conduct was unreasonable under all of the circumstances. Graciano v. Mercury General Corp., 231 Cal.App.4th 414, 427 (2014). In Barickman, the California Court of Appeals noted there were “significant issues of credibility, as to whether Mercury did all within its power to effect a settlement” once plaintiffs proposed the modified release. Barickman highlights the importance of memorializing settlement negotiations in writing, especially where the other party takes a difficult or unclear position on settlement language. Barickman’s referee appeared to place greater evidentiary weight on plaintiffs’ email correspondence after the settlement had fallen through, than on Mercury’s claim notes during the negotiations.

Next, particularly where defense counsel has not yet been retained, involving outside counsel at the onset of the negotiations may help evaluate the legal effect of certain settlement terms in the given jurisdiction. Coverage counsel may further help clarify the insurer’s duties in responding to a settlement demand. The court in Barickman seemed particularly swayed by the fact that case law would have clarified that insurance proceeds reduce restitution orders as a matter of law.

As a final consideration, the Barickman parties elected to submit all issues of law and fact to a referee. Distinct factual issues and legal precedent typically warrant careful evaluation of the benefits, drawbacks, and options of available forums, whether state court; federal court; retired judge or referee.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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