2 Cal. App. 5th 508
Cal. Ct. App.2016Background
- In July 2010 Timory McDaniel, driving while intoxicated, ran a red light and severely injured pedestrians Laura Barickman and Shannon Mcinteer; she was later convicted and ordered to pay restitution.
- Mercury Casualty (insurer) offered Timory’s policy limits ($15,000 per claimant) to Barickman and McInteer; their counsel signed Mercury’s releases but added the sentence: “This does not include court-ordered restitution.”
- Mercury hesitated to accept the modified release, consulted the insured’s representatives and criminal counsel, and ultimately refused the edited release; plaintiffs sued the insured in a personal injury action instead.
- The personal injury action settled by stipulated judgments (McInteer $2.2M; Barickman $800K); the insured assigned her rights against Mercury to the plaintiffs; Mercury paid the $15,000 policy limits.
- Plaintiffs sued Mercury for breach of contract and breach of the implied covenant of good faith and fair dealing, alleging Mercury unreasonably refused to settle within policy limits because of the release language dispute.
- After a trial by reference the referee found Mercury acted in bad faith by refusing the modified release and awarded plaintiffs the full underlying judgments plus interest; the trial court entered judgment and the Court of Appeal affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did Mercury breach the implied covenant by refusing the modified release and thereby expose the insured to excess liability? | Mercury unreasonably refused a minor, clarifying change and thus failed to protect the insured from excess judgment. | Mercury acted reasonably to protect insured’s offset rights and properly refused language that might waive those rights. | Held: Substantial evidence supports that Mercury unreasonably refused the release; breach of covenant established. |
| Does a timely policy-limits offer automatically preclude a bad-faith claim as a matter of law? | N/A (plaintiffs argue insurer still must act reasonably under all facts). | A timely offer of full policy limits shows good faith as a matter of law (relying on Graciano). | Held: No; a timely policy-limits offer does not automatically preclude bad-faith liability when other circumstances show unreasonable conduct. |
| Did the added sentence regarding restitution necessarily waive the insured’s right to offset restitution? | The added language simply preserved victims’ restitution rights and did not affect the insured’s statutory offset rights; plaintiffs’ counsel so advised Mercury. | The language could be read to waive the insured’s offset and thus Mercury reasonably refused. | Held: The referee credited plaintiffs’ counsel’s intent and found the language was limited, unnecessary, and did not affect offset rights; Mercury unreasonably rejected it. |
Key Cases Cited
- PPG Industries, Inc. v. Transamerica Ins. Co., 20 Cal.4th 310 (1999) (insurance covenant implies obligation to make reasonable settlement efforts)
- Murphy v. Allstate Ins. Co., 17 Cal.3d 937 (1976) (insurer must settle within policy limits when substantial likelihood of excess judgment exists)
- Comunale v. Traders & General Ins. Co., 50 Cal.2d 654 (1958) (insurer liable for excess judgment when it unreasonably refuses reasonable settlement)
- People v. Vasquez, 190 Cal.App.4th 1126 (2010) (civil settlement does not extinguish criminal restitution; defendant entitled to offset for payments from defendant’s own insurance)
- People v. Bernal, 101 Cal.App.4th 155 (2002) (same principle on offset for defendant’s own insurance)
- Graciano v. Mercury General Corp., 231 Cal.App.4th 414 (2014) (timely policy-limits offer may show good faith, but does not automatically resolve all bad-faith questions)
- Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal.App.4th 847 (2000) (reasonableness often a factual question)
- Wilson v. 21st Century Ins. Co., 42 Cal.4th 713 (2007) (bad-faith settlement analysis principles)