Third-Party Claimant’s Failure to Make Effective “Policy Limits Demand” Against Correct Insured Insulates Insurer From Liability for Failure to Settle

A third-party claimant’s failure to make an effective “policy limits demand” against the correct insured insulated the insurer from liability for alleged bad faith failure to settle. ( Graciano v. Mercury General Corp. (2014) 2014 WL 5860297)

Facts

Sonia Graciano (Graciano) was severely injured when she was struck by a car driven by Saul Ayala (Saul). At the time of the accident, Saul was the named insured on a California Automobile Insurance Company (CAIC) auto policy with bodily injury liability limits of $50,000. Previously, Saul’s father, Jose Saul Ayala (Jose), had been the named insured on a CAIC auto policy with bodily injury liability limits of $15,000; however, Jose’s policy had been cancelled six months before the accident.

A few days after the accident, Saul reported the matter to CAIC. CAIC opened a claim file, assigned a claim number, and began investigating the matter. However, at least initially, neither Saul nor CAIC knew the identity of the injured party, Graciano.

Three days later, Graciano’s lawyer separately reported a claim to CAIC. However, Graciano’s lawyer incorrectly identified the responsible driver as ” Saulay Ala ,” and mistakenly identified the relevant policy as the one issued to Jose . As a result, CAIC opened another claim file under a separate claim number and began investigating. Shortly thereafter, a CAIC claim representative informed Graciano’s lawyer that CAIC was investigating a “coverage problem” for Jose because it appeared that Jose’s policy had been cancelled before the accident.

A few days later, Graciano’s lawyer sent CAIC a letter which mistakenly identified the insured as Jose and mistakenly identified the policy as Jose’s policy . In that letter, Graciano’s lawyer gave CAIC ten days to pay its policy limits in settlement of any liability “your above-referenced insured [i.e., Jose]” might have to Graciano. Prior to expiration of Graciano’s settlement demand against Jose, CAIC informed Graciano’s lawyer that Jose’s policy through CAIC had been cancelled before the accident.

The following day, CAIC claim representatives realized that although CAIC had two open claim files with separate claim numbers, there had only been one accident , the responsible driver was Saul , and Saul had a policy with a $50,000 liability limit . CAIC thus immediately sent Graciano’s lawyer a letter offering to pay CAIC’s $50,000 policy limit in settlement of any liability Saul might have to Graciano, Graciano’s spouse and any lien claimant.

Graciano did not accept CAIC’s offer to pay its $50,000 policy limit in settlement of any liability Saul might have. Instead, Graciano obtained a judgment against Saul for over $2 million and then obtained an assignment of Saul’s rights against CAIC.

Graciano then sued CAIC for insurance bad faith based on CAIC’s alleged unreasonable refusal to settle Saul’s liability to Graciano. The jury in the bad faith case returned a verdict in Graciano’s favor. CAIC appealed.

Holding

The Court of Appeal reversed, holding that as a matter of law CAIC had not acted in bad faith.

The appellate court reasoned that an insured’s claim for “wrongful refusal to settle” cannot be based on the insurer’s failure to initiate settlement discussions with the injured third party. Rather, there must be proof that the third party made a reasonable offer to settle the claim against the insured for an amount within the policy limits. Here, however, Graciano never offered to settle her claim against Saul for an amount within Saul’s policy limits; rather, Graciano had only made a settlement demand against Jose for an amount within Jose’s policy limits. Because Graciano had never offered to settle her claims against Saul for an amount within Saul’s policy limit, CAIC did not breach any duties to Saul. Thus, Saul’s assignee, Graciano, had no viable claim against CAIC for failure to settle.

Nor was there any evidence that CAIC’s eventual “full policy limits offer” on behalf of Saul was unreasonable. The appellate court reasoned that a liability insurer cannot offer to pay its policy limits on behalf of an insured without attempting to get a complete release of any liability the insured might have to all third-party claimants. Thus, CAIC was fully justified in tendering its $50,000 policy limit in settlement of any liability that Saul might have to Graciano, Graciano’s spouse and any lien claimant.

Comment

A claim for bad faith based on an alleged wrongful refusal to settle requires proof that the insurer unreasonably failed to accept an otherwise reasonable offer within the time specified by the third party for acceptance. However, when a liability insurer timely tenders its “full policy limits” in an attempt to effectuate a reasonable settlement of its insured’s liability, the insurer has acted in good faith as a matter of law because, by offering the policy limits in exchange for a release, the insurer has done everything within its power to effect a settlement.