Insurance Law Alert: Defective Policy Limit Demand Precludes Bad Faith

In Graciano v. Mercury General Corp. (No. D061956, filed 10/17/14), a California appeals court reversed a jury’s verdict, ruling that a defective demand letter from the claimant’s attorney precluded a finding of bad faith failure to settle as a matter of law.

In Graciano, the insured called to report he’d been in an accident and the insurer opened a claim file based on a policy that was in force on the date of loss. Three days later, counsel for the claimant called the insurer’s Texas call center to report the loss, but gave the number for a canceled policy that had been issued to the driver’s father, which had also insured the vehicle and which was listed in the police report. She also misstated the driver’s name, all of which resulted in a second claim file being opened in a different claim unit.

This was shortly followed by a very time-limited demand letter, again listing the number of the canceled policy. The demand letter also identified the driver’s father as the named insured and demanded the policy limit to settle all claims for injuries “arising out of an event in which your above-referenced insured and/or their vehicle struck [the claimant].”

On receiving the police report, the claim representatives were able to figure out the errors and attempted to settle for the limit on the policy that was in force at the time of the loss. Specifically, they called the claimant’s counsel, but she refused to extend the deadline. Then, when they tried to call to offer a settlement, they only got her voicemail. On the date the demand was set to expire, they attempted to send her faxes but the fax machine was switched off (contrary to the attorney’s office practice). Finally, they sent her a letter offering to pay the policy limits, conditioned on releases of all claims and satisfaction of any emergency healthcare liens. That offer was rejected.

The claimant obtained a $2 million judgment, an assignment of rights and sued the insurer for breach of contract and bad faith. Although a jury returned a verdict of bad faith for failure to accept a policy limit demand, the appeals court reversed, finding no bad faith as a matter of law.

The appeals court listed the principles governing the duty to settle, saying that there must be proof of an offer from the claimant in the first instance. (Citing Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858.) The offer has to be sufficiently certain to form an enforceable contract. (Citing Coe v. State Farm (1977) 66 Cal.App.3d 981.) All claimants must join the demand and it must provide for a complete release of all insureds. (Citing Strauss v. Farmers (1994) 26 Cal.App.4th 1017.) Any time limit imposed on the demand must not deprive the insurer of an adequate opportunity to investigate. (Citing Critz v. Farmers (1964) 230 Cal.App.2d 788.) And when a liability insurer timely tenders its full policy limits in an attempt to effectuate a reasonable settlement, the insurer has acted in good faith as a matter of law. (Citing Boicourt v. Amex Assurance Co. (2000) 78 Cal.App.4th 1390.)

Applying those principles, the Graciano court ruled that there was no bad faith. The court first pointed out that the demand was itself defective, since it only referenced the named insured under the cancelled policy, who was actually the father of the driver involved in the accident. The court then stated that the insurer had, in fact, timely attempted to settle for the driver under the policy that was in force, but had been rebuffed in phone calls, the fax machine was turned off and the insurer was ultimately reduced to sending a letter.

The Graciano court also engaged in a lengthy discussion regarding the delay engendered by confusion over policy numbers, distinguishing Safeco v. Parks (2009) 170 Cal.App.4th 992, which found bad faith for a failure to defend an insured when a claim was tendered under the wrong policy. The Graciano court said that Safeco was a notice/prejudice case involving no prejudice to the insurer from the erroneous tender. By contrast, the instant case did establish prejudice to the insurer because the tender by the claimant’s counsel using the wrong policy number had delayed the insurer’s investigation to the point where it could not accept the policy limit demand within the time provided. Consequently, the adequacy of the investigation could not serve as a basis for finding bad faith.

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November 13, 2014