California Appellate Court Affirms Finding Car Insurer Breached Duty of Good Faith and Fair Dealing and was Liable for Judgment Against Insured

A car accident in Long Beach evolved into a lawsuit over whether a car insurer had satisfied the covenant of good faith and fair dealing on behalf of the defendant. The appellate court stated the rules regarding the implied covenant and the requirement that insurance companies must settle within policy limits when there is a substantial likelihood that there will be a compensation award in excess of those amounts.

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Timory McDaniel was driving while intoxicated, in a car insured by Mercury Casualty Company, when she ran a red light and struck Laura Barickman and Shannon Mcinteer. Ms. Barickman and Ms. Mcinteer were pedestrians in a crosswalk with the walk signal in their favor. Ms. Barickman and Ms. Mcinteer agreed to settle their claims against Ms. McDaniel, but Mercury rejected the additional language inserted into the release.  Ms. Barickman and Ms. Mcinteer had agreed to accept the Mercury policy limits offered, in the amount of $15,000 per person.

Ms. Barickman and Ms. Mcinteer sued Ms. McDaniel and settled with a stipulated judgment of $3 million. Ms. McDaniel assigned her rights against Mercury to both Ms. Barickman and Ms. Mcinteer. They then filed this action against Mercury Casualty Company for breach of contract and breach of the implied covenant of good faith and fair dealing.

In their complaint, Ms. Barickman and Ms. Mcinteer alleged that it was certain their damages would result in judgments against Mercury’s insured in excess of the policy limits. Since Mercury failed to make an offer without unacceptable terms, and it refused to settle when it had the opportunity do so, it breached its obligation of good faith and fair dealing, exposing Ms. McDaniel to excess damages. Judgment was entered in their favor for $3 million plus interest from the date of judgment in the personal injury lawsuit.

During the trial, the referee stated that the totality of the evidence showed that the release was in fact superfluous.  The law made clear that the language dealt only with Ms. Barickman and Ms. Mcinteer’s right to restitution, rather than the insured’s right to offset money paid by Mercury against restitution ordered by the criminal court. (Ms. McDaniel had been sentenced to three years in prison and was ordered to pay approximately $165,000 in restitution.)

In their analysis of the appeal concerning Mercury’s alleged breach of contract and breach of the implied covenant of good faith and fair dealing, the court stated that the covenant of good faith and fair dealing underlies all liability insurance in California law. An implied covenant obligates the insurance company to make a reasonable effort to settle a third-party lawsuit against their insured. If it unreasonably refuses to settle a third-party lawsuit, the insured can bring a lawsuit against the insurance company in tort for damages caused by the insurance company’s breach.

In other words, an insurance company is required to settle within the policy limits if there is a substantial likelihood of recovering more than those limits.  By refusing to accept reasonable settlement offers within policy limits, and by violating its good-faith duty to the insured, the company may be liable for the entire judgment against the insured, even if it is above the policy limits.

The court stated the principle that when reviewing a claim based on an insurer’s bad faith, the issue is whether the insurance company’s conduct was unreasonable under the circumstances.  Here, whether Mercury’s handling of the claim was reasonable depends on the facts. Mercury argued that it acted in good faith during the settlement negotiations. But the court held that this is not enough to satisfy its obligations under the implied covenant of good faith, and there must be further reasonable efforts to settle a third-party lawsuit against its insured.

Next, the court addressed Mercury’s contention that the proposed addition appeared to waive Ms. McDaniel’s right to an offset.  Mercury contended that it had an obligation to Ms. McDaniel, as her insurer, not to jeopardize that right. The court stated that here, the referee could find it unreasonable that Mercury refused to accept the release, or at the least, present to Ms. Barickman and Ms. Mcinteer the release that stated that the insured’s right of offset was not affected.

In conclusion, the court affirmed the judgment, stating that Mercury breached its duty of good faith and fair dealing, and it was therefore liable for the judgment amount entered against its insured.

At Sharifi Firm, our car accident attorneys guide Southern California victims of car accidents through both settlement proceedings and litigation as they seek compensation for their injuries. Contact our office today for a free consultation at 866-422-7222 or complete our online form.

More Blog Posts:

California Court of Appeal Finds in Favor of Plaintiff in Car Accident Lawsuit When Evidence Fails to Show Plaintiff’s Consent to Settlement Agreement, Southern California Injury Lawyer Blog, June 9, 2016

California Court of Appeal Finds Settlement Offer in Car Accident Lawsuit Invalid Because Plaintiff was Required to Sign Undescribed “Settlement and Release” Section, Southern California Injury Lawyer Blog, April 25, 2016

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