Third Party Bad Faith Liability Not Expanded By Recent California Court Rulings
November, 2009
by Michael W. Goodin and G. Brent Sims
A brief survey of three recent third party coverage cases decided by courts in California indicate that the state judiciary has no inclination to expand the bad faith liability of insurers, or at least that it has yet to find the proper vehicle for such an expansion. In the event that an insurer is held liable, it may be able to establish a valid claim against an independent adjuster in the right factual circumstances.
Lincoln General Ins. Co. v. Access Claims Administrators
In Lincoln General Ins. Co. v. Access Claims Administrators, Inc. 596 F.Supp.2d 1351 (E.D. Cal. 2009), the U. S. District Court for the Eastern District of California began the year by considering the liability of an independent adjuster to its insurer principal. In denying a motion for summary judgment brought by the defendant, the district court found potential viability in the insurer's claims against an allegedly negligent adjuster.
Facts
David and Diana Dias were involved in an automobile accident with another car driven by Manuel Coleman. Diana Dias sustained massive injuries in the accident. Lincoln General ("Lincoln") had issued an auto policy to Coleman with limits of $15,000 per person and $30,000 per accident. Access was the independent adjuster hired by Lincoln. Access evaluated the accident as being 100% Coleman's fault.
Attorneys for the Diases faxed three separate letters to Access. The first letter demanded payment of the policy limits. The second letter confirmed the demand. The third letter requested communications regarding the expired demand. Access failed to respond, and the Diases then filed suit against Lincoln.
Roughly one year into litigation, Lincoln was informed that the Diases had demanded $10 million in settlement. Access denied having received the earlier correspondence from the Diases' attorney demanding payment of Lincoln's policy limits. Lincoln called for a mediation to resolve the Diases' suit and requested that Access participate in the settlement. Access refused this request, and Lincoln proceeded to settle the case without Access' participation.
Lincoln then sued Access, alleging breach of contract, breach of the covenant of good faith and fair dealing and fraud. Lincoln contended that its contract with Access was breached by Access' failure to respond to the demand letters, and its failure to comply with California claims handling statutes and regulations. Access filed for summary judgment on each count of the complaint, alleging, inter alia, Lincoln had no evidence Access ever received the policy limit demand, that Lincoln' settlement was unreasonable, that Lincoln suffered no damages, and that Access had not breached its contract with Lincoln.
Analysis
In deciding the summary judgment motion, the court found that sufficient evidence existed from which a jury could conclude that Access had received the demand letters. It also ruled that Access' conduct could be construed to have violated various California insurance statutes and regulations. The bad faith and fraud allegations against Access were allowed to stand with minor alterations. The court also determined that insofar as Lincoln's claim was based upon alleged violations of its claims manuals, that Lincoln had failed to produce evidence that these manuals were incorporated into the contract.
Next, the court turned to the question of damages for the breach of contract by Access. In California, collateral source rules generally do not apply to breach of contract claims. Access maintained that Lincoln's reinsurance agreements left Lincoln with no compensable damages for the breach of contract claim. The court rejected Access' defense in that the reinsurance agreements all contained clauses requiring Lincoln to seek damages. The court noted that even where a party has been fully compensated for a breach of contract, it may nevertheless seek recovery from the responsible party if it does so to enforce an insurer's subrogation rights. The reinsurance agreements fit within this exception.
Finally, Access argued that Lincoln could not seek recovery on the claim when it had made a voluntary settlement rather than subjecting itself to a judgment. The court disagreed, noting that in California where there is an agreement to indemnify for liability, the party seeking indemnification need not wait for a judgment against it, but may be indemnified for payments made in satisfaction of a settlement. Consequently, the summary judgment motion brought by Access was denied.
Learning Point:
This case does nothing to insulate insurers against the consequences of the negligent actions of its independent adjusters. But it does stand for the proposition that adjusters cannot escape liability merely because the insurer seeks to cap its damages through settlement or reinsurance. Insurers and independent adjusters should review their contractually stated obligations to one another in order to be sure these contracts adequately reflect the risk allocation preferences of the parties.
Sasaguchi v. Commerce West Ins. Co.
Sasaguchi v. Commerce West Ins. Co., 2009 WL 480359 (Cal. App.), an unpublished case from the Second Appellate District involves a situation similar to Lincoln, but without adjuster negligence or catastrophic injuries.
Facts
Yoshi Sasaguchi had automobile coverage through Commerce West ("Commerce"), with limits of $15,000 per person and $30,000 per accident. Sasaguchi was at fault in an auto accident with William Dowdall, who suffered two fractured arms requiring surgery. Dowdall demanded payment of the policy limits by February 3, 2006. Commerce tendered the limits on February 7, 2006, but Dowdall took the position the policy was opened, rejected the offer, and filed suit.
Commerce retained counsel and litigated until November of 2007, when it reached a settlement agreement with Dowdall. Sasaguchi did not contribute to the settlement.
Following the resolution of the first suit, Sasaguchi filed suit against Commerce, seeking damages for emotional distress and $3,000 of legal costs incurred as a result of Commerce's failure to enter into an early settlement with Dowdall. Commerce demurred to the complaint.
Analysis
The court noted that in California, an insurer "...must settle within policy limits when there is a substantial likelihood of recovery in excess of those limits." But California case law also holds that a cause of action for breach of contract based on an insurer's failure to settle does not accrue until a judgment in excess of policy limits has been rendered against the insured. This is because "[a]n essential element of a cause of action for breach of the implied covenant based on the refusal to settle is resulting damages."
The court ruled that the lack of an excess judgment was fatal to Sasaguchi's claims against Commerce. While the court noted other instances when a cause of action can be stated without an excess judgment, each of those exposes the insured to some sort of damages, i.e., coercion in the face of punitive damages, alienation of customers or retention of counsel - all of which were missing from Sasaguchi's claim.
Here, the insured received the benefit of a complete defense and total indemnity of the underlying lawsuit. The court held that there was no reasonable basis for him to retain separate counsel and to incur attorney's fees, and he accordingly had no claim against his insurer for recovery of those fees.
Learning Point:
An insurer faced with a policy limits demand has a narrow path to follow in making its decision whether to accept or reject the demand. If it fails to make the right decision, the insurer faces the potential for damages above its policy limits, and a lawsuit by its insured. But for the insured to prevail, it will have to show actual damages resulting from the breach.
Schafer v. Allstate
In Schafer v. Allstate, 2009 WL 1505302 (E.D. Cal.), the court considered application of the "genuine dispute doctrine" to an underinsured motorist claim.
Facts
Joshua Schafer was a passenger in a single car accident. Schafer suffered injuries greater than the driver's $50,000 limits of a primary auto policy issued to him by Allstate. Schafer was also separately insured through an umbrella policy and an uninsured/underinsured policy issued to him by Allstate.
Allstate refused to pay Schafer, claiming no coverage under the umbrella policy. Allstate also claimed that the UM/UIM policy had lapsed due to nonpayment. It was not until October of 2008, during plaintiff's deposition that Allstate learned Schafer contended he had slipped the premium payment into Allstate's mail slot prior to the policy's expiration.
Allstate sought to adjudicate the bad faith cause of action, conceding that whether or not the policy had lapsed was an issue of fact. But Allstate contended that its belief the policy had lapsed was reasonable, thereby precluding a finding of bad faith.
Analysis
Under California law, an insurer cannot be held liable for bad faith where there is a "genuine dispute" between the insurer and the insured as to coverage.
However, the court noted that a summary judgment motion based on the "genuine dispute doctrine" presents a unique question where, as here, the moving party contends there are disputed facts as a matter of law. Nevertheless, the court decided the issue in Allstate's favor. The court held that Allstate's belief that Schafer's policy was canceled for nonpayment was reasonable as a matter of law. While the cancellation itself remained an issue of fact, Allstate had extricated itself from the bad faith allegations and accompanying damages.
Learning Point:
This case breaks no new ground, but confirms that the genuine dispute doctrine is still available to challenge bad faith causes of action in California, in cases where the insurer has a reasonable belief in non-coverage.
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