Steven Plitt, Expert Witness Steven Plitt, Expert Witness
Insurance Bad Faith Claim Handling Expert Serving Clients Nationwide

INSURANCE COMPANIES HAGGLING OVER RELEASE LANGUAGE CAN RESULT IN BAD FAITH LIABILITY

In Barickman v. Mercury Cas. Co., 2 Cal.App.5th 508, 206 Cal.Rptr.3d 699 (2d Dist. 2016), an insurance company's refusal to consent to additional release language which was designed to preserve the claimant's rights to receive criminal restitution from the insured tortfeasor caused the case not to settle and, as a result, it was found that the insurance company breached the implied covenant of good faith and fair dealing by not doing all that it could do within its power to effectuate the settlement.

In Barickman, the insured ran a red light and struck two pedestrians in a crosswalk. The insured was driving while intoxicated. At the time of the accident the insured had automobile liability coverage with Mercury Casualty Co. with minimal limits of $15,000 per person. Less than one month after receiving a letter from the pedestrians' attorney describing the extensive injuries that had taken place, Mercury made a policy limits settlement offer for each pedestrian. While the settlement offer was pending, the insured was sentenced to 3 years in state prison and ordered to pay approximately $165,000 in restitution to the pedestrians. The pedestrian's' attorney accepted Mercury's policy limits and to effectuate the settlement, returned signed releases on the form provided by Mercury with the exception that a sentence was added indicating that the settlement did not include court-ordered restitution. Generally, under California law, civil settlements against a criminal defendant and the release of that defendant by the crime victim did not discharge the criminal defendant's obligation to pay restitution which was ordered in a criminal proceeding against the defendant. However, the criminal defendant was entitled to reduce the restitution obligation by the amount of any civil settlement. Because of this, the additional language requested in the release to preserve the pedestrians' rights to seek reimbursement had no effect on the rights of the pedestrians or the insured tortfeasor. The legal effect of the language would increase the amount of restitution the insured was required to pay only if the language's purpose was to eliminate the insured's set off rights. In that regard, the attorney for the pedestrians explained to Mercury both orally and in writing that the sole purpose for adding the language was to preserve the pedestrians' right to restitution and that the pedestrians had no intention of eliminating the insured's set off rights. Mercury's claim adjuster requested an short extension of time in order to consult with the insured's criminal defense lawyer. The pedestrians' attorney refused to grant the extension. After the time for completing the settlement had passed, the insured's criminal defense attorney instructed Mercury not to accept the revised releases.

Because no settlement had been finalized, the parties to the personal injury action entered into a no-personal-liability settlement under which the insured stipulated to a $3M judgment in exchange for a covenant not to execute. The pedestrians then sued Mercury for a bad faith failure to settle.

A bad faith trial was held before a court referee and concluded that Mercury's refusal to settle without an unedited Release despite the assurances made by the pedestrians' attorney that the attorney and the pedestrians had no intention of interfering with the insured's set-off rights constituted bad faith. On appeal, the California Court of Appeals concluded that the liability insurer could not unreasonably refuse to settle when there was a substantial likelihood of recovery in excess of the policy limits. The Court of Appeals affirmed the trial court finding of bad faith. The Court found that Mercury did not attempt to remove the obstacle to settlement by presenting the claimants' attorney with a revised release clarifying the attorney's intent to preserve his clients' rights to restitution without interfering with the insured's set-off rights. Instead, what Mercury purported to do was to place the decision on whether to settle in the hands of the insured's criminal defense lawyer without providing him with the information about the claimants' attorney's stated reasons for modifying the release. The Court refused to conclude that where an insurer at one point acted in good faith during settlement negotiations had no further responsibility to make reasonable efforts to conclude the settlement.

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