Insurer Can Breach Duty by Refusing to a Modification of a Release

Insurer Can Breach Duty by Refusing to a Modification of a Release Woodland hills personal injury lawyer Barry P. Goldberg analyzes insurance company obligations particularly involving ‘Releases.” Mr. Goldberg recently handled a drunk driving accident case wherein “Restitution” was ordered by the Court. The question arose whether the Release affected the separate payment of restitution. The Court of Appeal has definitively made that determination in Barickman v.Mercury Casualty Company (August 15, 2016).

In that case, the plaintiff injured by a drunk driver insisted on some simple language to be added to Mercury’s Release to the effect that the Release did not prejudice the recovery of Restitution. The plaintiff was going to accept the minimum policy limits. Since Mercury (and other insurance companies)rarely permit their pre-printed Releases to be modified, Mercury delayed approval of the modification. The plaintiff filed suit, went to trial and obtained a huge award.

Mercury tried to avoid the award and contended that it “offered” its policy limits early on– -that was all it had to do in order to comply with its obligation of good faith and fair dealing. The Court of Appeal disagreed relying on insurance fundamentals:

“In each policy of liability insurance, California law implies a covenant of good faith and fair dealing. This implied covenant obligates the insurance company, among other things, to make reasonable efforts to settle a third party’s lawsuit against the insured. If the insurer breaches the implied covenant by unreasonably refusing to settle the third party suit, the insured may sue the insurer in tort to recover damages proximately caused by the insurer’s breach.” (PPG Industries, Inc. v. Transamerica Ins. Co.

(1999) 20 Cal.4th 310, 312; see id. at pp. 314-315 [“covenant imposes a number of obligations upon insurance companies, including an obligation to accept a reasonable offer of settlement”].) “The duty to settle is implied in law to protect the insured from exposure to liability in excess of coverage as a result of the insurer’s gamble—on which only the insured might lose. (Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 941.) Thus, “the insurer must settle within policy limits when there is substantial likelihood of recovery in excess of those limits.” (Ibid.; see Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 792, fn. 12 [“reasonableness of a settlement offer is to be evaluated by considering whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer”].)

“[A]n insurer, who . . . refuses to accept a reasonable settlement within the policy limits in violation of its duty to consider in good faith the interest of the insured in the settlement, is liable for the entire judgment against the insured even if it exceeds the policy limits.” (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 661; accord, Coe v. State Farm Mut. Auto Ins. Co. (1977) 66 Cal.App.3d 981,989, emphasis added.)

In the Barickman case, the Court pointed out that although Mercury did initially act in good faith by offering its policy limits in exchange for a general release of all claims, there were questions as to whether Mercury did all within its power to effect a settlement once plaintiff accepted that offer but proposed a slightly modified version of the accompanying release. Here, as is true in many bad faith cases, the reasonableness of the insurer’s claims-handling conduct was a question of fact to be resolved following a trial. (See Lee v. Fidelity National Title Ins. Co. (2010) 188 Cal.App.4th 583, 599; McCoy v.Progressive West Ins. Co. (2009) 171 Cal.App.4th 785, 794; see also Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 430 [“liability based on an implied covenant exists whenever the insurer refuses to settle in an appropriate case and that liability may exist when the insurer unwarrantedly refuses an offered settlement where the most reasonable manner of disposing of the claim is by accepting the settlement”].)

The lesson in the Barickman case is two-fold: 1) Plaintiffs can make reasonable modifications to Releases; and 2) Insurers can breach the obligation of good faith and fair dealing by refusing slight modifications.