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August 2016

Insurer’s Unreasonable Refusal to Settle Obligated It to a Stipulated Judgment in Excess of Policy Limits

In Barickman v. Mercury Casualty Company, 1016 Cal. App. LEXIS 681 (July 25, 2016), the Court of Appeal affirmed a judgment against an insurer holding the insurer was obligated on an excess of limit stipulated judgment due to the insurer’s refusal to settle.

Mercury Casualty Company’s intoxicated insured ran a red light and struck two pedestrians (“the Claimants”).  The driver was sentenced to three years in jail and ordered in criminal court to pay $165,000 in restitution to the claimants.  

The Claimants accepted Mercury’s offer of the driver’s policy limits of $15,000 each.  But Mercury would not agree to include language the Claimants’ inserted in the release providing: “This does not include court-ordered restitution." The claims did not settle. 

The Claimants sued the driver and entered into a stipulated judgment for $3 million.  The insured assigned her rights against Mercury to the Claimants for breach of contract and bad faith.

Following a trial by reference conducted pursuant to Code of Civil procedure section 638, the referee entered judgment for the Claimants for $3 million plus interest from the date of the stipulated judgment.  The referee found Mercury had breached the implied covenant of good faith by refusing to accept the releases with the Claimants’ additional language. Mercury argued that, by rejecting the requested language, it was protecting its insured’s right to a set off for Mercury’s payment of the restitution ordered. The referee found it compelling, however, that Mercury had been assured by the Claimants’ attorney several times that his intent was to preserve his client’s restitution rights and he was not seeking to affect the insured driver’s right to an offset.  Mercury appealed. 

The court of appeal affirmed concluding substantial evidence supported the finding that Mercury unreasonably refused to accept the modified release. 

Mercury argued it acted in good faith as a matter of law because it timely offered its policy limits to the Claimants and the only reason the case did not settle was the Claimants’ attorney’s insistence on the unacceptable additional language.  The court held that Mercury initial offer of its policy limits was not sufficient itself to defeat a bad faith claim as a matter of law. 

The court noted the ultimate test for bad faith liability is whether the insurer’s conduct is unreasonable under all of the circumstances. Although Mercury initially acted in good faith by offering its policy limits, there remained disputed facts whether Mercury acted reasonable to effect a settlement once the Claimants accepted the offer but proposed a slightly modified version of the release. 

The court of appeal found it compelling Claimants’ attorney had assured Mercury both orally and in writing the added language was intended only to preserve his clients’ restitution rights and was not seeking to eliminate the insured’s right to an offset. Thus, the additional language was simply intended to incorporate and make explicit what California case law required: A civil settlement does not eliminate a victim’s right to restitution ordered by the criminal court, although the defendant is entitled to an offset for any payments to the victim by the defendant’s insurance carrier or items included within the restitution order. 

The court of appeal found the referee could properly conclude Mercury’s refusal to approve the release as amended by the Claimants’ attorney was unreasonable. 

Click here for the opinion. 

This opinion 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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