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September 2013

Settlement With Insurer Precludes Subsequent Claims

The California Court of Appeal, Fourth Appellate District, recently held that an insured’s claims for negligence and breach of the implied covenant of good faith and fair dealing against the insurer were precluded by reason of an earlier settlement agreement. 

On Aug. 23, the Fourth Appellate District issued its decision in Brandwein v. Butler.  Plaintiff Howard Brandwein ran his yacht, the Sea Bear, aground off of the coast of Mexico.  Western Maritime, a salvage company, performed the salvage operation.  Western was retained by Oversea Brokers, a marine insurance broker allegedly acting on behalf of the Sea Bear’s insurer, ACE Global Markets, Ltd. et al. (the Underwriters).  The Sea Bear was insured under a policy issued by the Underwriters to Brandwein with limits of insurance of $1.54 million. 

Brandwein contended that the Sea Bear was worth significantly more than the limit under the Underwriters’ policy due to upgrades and added equipment.  Brandwein and the Underwriters eventually entered into a settlement agreement regarding the loss of the Sea Bear with the Underwriters agreeing to pay the full policy limit of $1.54 million.  The court described the settlement agreement as follows:

The … settlement agreement … released the Underwriters from “any and all liability, claims, demands, lines, mortgages and all other claims of ownership or interest” in the Sea Bear “for damage to and loss of the vessel and personal effects,” subject to certain specified reservations of rights.  Brandwein also “tender[ed] and surrender[ed] the policy of insurance … relative to any accident or incident post-dating the subject loss, the vessel having been declared a total loss, in full and complete satisfaction of the claim and damages presented herein.”  Finally, the settlement agreement obligated the Underwriters “to assist and co-operate with Dr. Brandwein in any action brought by him for recovery against any person or entity regarding claims other than the claims against the Underwriters settled here relating to SEA BEAR.” 

Despite the settlement agreement, Brandwein later sued the Underwriters alleging that the Underwriters were negligent in the hiring and supervision of Western Maritime and that they acted in “bad faith” in handling the claim.  Brandwein also argued that the Underwriters had breached an oral “side agreement.” 

The Fourth Appellate District held that Brandwein’s claim that the Underwriters were negligent in the hiring and supervision of Western Maritime was barred by the settlement agreement as a pre-settlement negligence claim that had been released.  The court concluded that the settlement agreement clearly and broadly released the Underwriters from any and all liability for damage to and loss of the Sea Bear, subject to reservations that did not apply.  The court also rejected Brandwein’s interpretation that the settlement agreement did not apply to his negligence claim reasoning that it would render other terms of the agreement illusory.

As support for Brandwein’s alleged “bad faith” claim, he argued that the Underwriters failed to provide him with all of the information relevant to the loss, the potential liability of third parties, and failed to acknowledge full coverage.  The Fourth Appellate District rejected this claim noting that “the ultimate test of bad faith liability is whether the withholding of policy benefits is unreasonable” and that “there is no cause of action for breach of the covenant of good faith and fair dealing when no benefits are due.”  The court concluded that because Brandwein had admitted that the Underwriters paid the full policy limit and had surrendered the policy by virtue of the settlement agreement, there was no contract and therefore no claim for “bad faith.”

The Fourth Appellate District also rejected    Brandwein’s claim for breach of the alleged “side agreement.”  The court relied on California Code of Civil Procedure §1856, which provides that “terms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement.”  The court concluded that the settlement agreement between Brandwein and the Underwriters was a fully integrated expression of their settlement and, as a result, Brandwein was not permitted to introduce evidence of the “side agreement” and could not succeed in arguing its breach.

Brandwein also had brought suit against Oversea Brokers arguing that it was negligent in not inquiring as to the full value of the Sea Bear.  The court held that Brandwein could not maintain this claim, relying on California Insurance Code §1900, which provides that in the context of marine insurance, each party is bound to communicate all information material to the risk.  The court concluded that Brandwein had a duty to disclose the full value of the Sea Bear, breached that duty, and could not pass on the consequences of that breach to Oversea Brokers. 

To read the opinion, please click here.

The opinion in Brandwein v. Butler (2013) 2013 Cal. App. LEXIS 675, 13 C.D.O.S. 9265, is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority in California state courts.

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Matthew S. Foy