Graciano v. Mercury General Corporation

(Insurer’s response to policy limits demand within time limit set by third party claimant, notwithstanding claimant’s counsel’s failure to identify the proper insured and policy number, constituted good faith requiring reversal of underlying bad faith lawsuit judgment.)

In Graciano v. Mercury General Corp., 231 Cal.App.4th 414 (October 17, 2014), the California Fourth District Court of Appeal reversed the entry of a judgment for $2 million against California Automobile Insurance Company (“CAIC”) arising out of CAIC’s alleged failure to respond to a policy limits demand in good faith. After an automobile accident, wherein, the claimant was seriously injured, the claimant’s counsel contacted CAIC’s call center in Texas to report that her client (“Graciano”) had been injured by a driver insured by CAIC. Counsel reported Graciano was injured on October 21, 2007 and provided the call center with an improper policy number and the incorrect name of the insured, “Saulay Ala”. In fact, the insured’s name was Saul Ayala (“Saul”) and he was a named insured on CAIC policy number 040115180005897 affording limits of $50,000 per accident. The vehicle Saul was driving at the time of the accident, a Cadillac, was insured under Saul’s policy.

CAIC assigned the report to a different claim identification number which identified insured, Jose Saul Ayala (“Jose”) under the incorrect policy number provided by the claimant’s counsel, AP00401514. CAIC’s investigation determined that the incorrect policy issued to Jose had been cancelled six months before the accident.

On November 5, 2007, the claimant’s counsel mailed a demand letter to CAIC offering to settle Graciano’s claim for policy limits. The letter identified the named insured as Jose and the policy number as Jose’s policy. The letter did not refer to the correct named insured or policy number. The letter advised that it would remain open for 10 days. If CAIC failed to respond to the demand within that time period, the letter advised that Graciano would not settle the lawsuit and, instead, would obtain a judgment against CAIC’s insured for an amount in excess of its policy limits. The letter took the position that failure to respond within the deadline would open up the policy limits.

On November 14, 2007, CAIC responded to counsel’s policy limit demand on Jose’s policy and informed her that its preliminary investigation over the proceeding seven days, although not yet complete, made it appear that Jose’s policy was not in force at the time of the accident and therefore CAIC could not accept counsel’s policy limits demand before November 15, 2007. CAIC cautioned that its determination was not final, but did advise Graciano to pursue her uninsured motorist coverage with her own insurer.

Thereafter, in the late afternoon of November 14, 2007, CAIC’s fact finder unit again called Jose to inform him the claimant was seriously injured and might pursue Jose. Shortly, thereafter, CAIC spoke on the phone with Saul, who informed the representative he did have insurance and that his insurance was with CAIC. This was the first time CAIC discovered that a claim under Saul’s name and correct policy had already been opened in its Vista claims unit. A CAIC representative, Talley, immediately gave Graciano’s claim and demand to the persons in the Vista claims unit handling Saul’s claim.

Around 1:45 p.m. on December 14th, an adjuster in the Vista claims unit contacted the claimant’s counsel to explain that they were the unit handling Saul’s claim and had just found out that Graciano was the person who Saul had reported he had injured and asked counsel for a 24-hour extension in which to respond to a settlement demand. Counsel refused and stated that if CIAC could not “get its act together on what policy handles what, it was not her problem.”

The adjuster immediately forwarded his recommendation to the Vista claims supervisor, who recommended CAIC make a full policy limits offer on Saul’s policy to settle Graciano’s claims against him, and the supervisor immediately approved this offer. CAIC immediately prepared a letter offering $50,000 which he had identified as the full policy limits on Saul’s policy, in full and final settlement of Graciano’s injury claim. The letter specified the settlement would include any lien claims (noting the hospital at which Graciano was treated would have a statutory lien) and any loss of consortium claims, and asked claimant’s counsel to advise whether Graciano was married.

Graciano stipulated that her counsel received CAIC’s settlement offer letter before the deadline of her demand on Jose’s policy expired. Nonetheless, Graciano did not accept CAIC’s offer to settle her claims against Saul. Instead, she pursued her action against Saul. Graciano obtained a judgment against Saul for over $2 million and obtained an alleged assignment of Saul’s rights against CAIC.

In reversing the judgment in favor of Graciano, the Court of Appeal held that CAIC had acted reasonably under the circumstances in responding to Graciano’s policy limits demand. In noting that there was no substantial evidence supporting Graciano’s claim of bad faith, the Court of Appeal stated as follows:

An insured's claim for “wrongful refusal to settle” cannot be based on his or her insurer's failure to initiate settlement overtures with the injured third party (Reid v. Mercury Ins. Co. (2013) 220 Cal.App.4th 262, 277 [“nothing in California law supports the proposition that bad faith liability for failure to settle may attach if an insurer fails to initiate settlement discussions, or offer its policy limits, as soon as an insured's liability in excess of policy limits has become clear”]), but instead requires proof the third party made a reasonable offer to settle the claims against the insured for an amount within the policy limits. (Merritt, supra, 34 Cal.App.3d at p. 877.) We conclude there is no substantial evidence Graciano ever offered to settle her claims against Saul for an amount within Saul's policy limits.

The only settlement “offer” CAIC could have accepted was DeDominicis's November 5, 2007, letter. It identified Jose as the named insured, the relevant policy as Jose's policy (e.g., “Policy # AP00401514”), and (after describing Graciano's extensive injuries) stated DeDominicis had been retained to pursue Graciano's remedies “arising out of an event in which your above-referenced insured and/or their vehicle struck [Graciano]” (italics added), and demanded that CAIC “immediately provide a copy of the declaration page and payment of the maximum bodily injury policy limits … .” (Italics added.) Even assuming (as Graciano contends on appeal) the letter implicitly contained an agreement to release “the above referenced insured” in exchange for the “policy limits” of the referenced policy, the plain import of this letter is that Graciano offered only to settle her claims against Jose. Because Graciano never demanded payment of Saul's policy limits in exchange for a release of Saul's liability, Saul would not have been protected even had CAIC accepted the terms of Graciano's demand.

Graciano cites no authority that an offer to release one potentially liable party (here, Jose) in exchange for that party's policy limits, if rejected by the insurer, can serve as the basis for a “wrongful refusal to settle” claim by a different potentially liable party (here, Saul), and analogous authorities suggest a contrary rule. In McLaughlin v. National Union Fire Ins. Co. (1994) 23 Cal.App.4th 1132 [29 Cal. Rptr. 2d 559], the injured party made a settlement demand that was apparently within policy limits, but the offer contained no suggestion the injured party would release the insured, and the McLaughlin court rejected the argument that such offer could support the verdict against the insurer for wrongful refusal to settle. (Id. at p. 1145, fn. 5.) Similarly, in Strauss v. Farmers Ins. Exchange, supra, 26 Cal.App.4th 1017, the plaintiff's demand for policy limits did not include an offer to release all of the insureds, and the court concluded rejection of such an offer could not support an action for wrongful refusal to settle. (Id. at pp. 1020–1022.) Finally, in Coe, supra, 66 Cal.App.3d 981, the court concluded the insurer's failure to accept the plaintiff's settlement demand could not provide a basis for a wrongful refusal to settle the claim because it would not have released the insured from all potential claims. (Id. at pp. 992–993.)

In addition, the Court of Appeal held that there was no substantial evidence CAIC unreasonably failed to timely tender Saul’s policy limits in an attempt to settle Saul’s liability. The Court of Appeal stated as follows:

A claim for “wrongful refusal to settle” requires proof the insurer unreasonably failed to accept an otherwise reasonable offer within the time specified by the third party for acceptance. (Critz, supra, 230 Cal.App.2d at p. 798.) The third party is entitled to set a reasonable time limit within which the insurer must accept the settlement proposal (Martin v. Hartford Acc. & Indem. Co. (1964) 228 Cal.App.2d 178, 185 [39 Cal.Rptr. 342]), and even a one-week limitation attached to a settlement offer does not preclude a finding of bad faith rejection under some circumstances. (Critz, at pp. 797–798 [insurer given one week to respond where claimant had not yet incurred costs of a retained attorney, company's investigation and evaluation was complete, and company never suggested it needed more time for investigation].) Although the insurer “need not be governed by whatever time limit counsel for plaintiff in a personal injury action may impose” (Martin, at p. 185), whether the insurer has satisfied its duty to seek to settle in protection of its insured “must be measured in the light of the time limitation which plaintiff had placed on her offer.” (Ibid.) When a liability insurer does timely tender 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 (Crane, supra, 217 Cal.App.3d at p. 1136) because “by offering the policy limits in exchange for a release, the insurer has done all within its power to effect a settlement.” (Lehto v. Allstate Ins. Co., supra, 31 Cal.App.4th at p. 73.)

Here, in the three weeks after it first learned Graciano was alleging someone insured by CAIC had injured her, CAIC was able to (1) determine that the policy identified by Graciano (Jose's policy) could not provide a source of compensation for her, (2) identify that a person (Saul) different from the one identified by Graciano (“Saulay Ala”) was responsible for Graciano's injuries, (3) determine Saul did have a policy available as a source of compensation, and (4) tender CAIC's “full policy limits” in an attempt to effectuate a settlement of Saul's liability. Although there was substantial evidence from which a jury could have concluded CAIC was able to resolve the confusion engendered by Graciano's misidentification of the applicable insured and insurance policy earlier than it did, and to offer to settle earlier than it did, perfection is not required (see, e.g., Adelman v. Associated Internat. Ins. Co. (2001) 90 Cal.App.4th 352, 369 [“to recover in tort for an insurer's mishandling of a claim, it must allege more than mere negligence”]), and Graciano's evidence showed, at most, that CAIC could have resolved the confusion more promptly.

More importantly, the undisputed evidence showed CAIC did timely tender Saul's full policy limits in an attempt to settle Graciano's claim, and therefore acted in good faith as a matter of law “by offering the policy limits in exchange for a release all within its power to effect a settlement.” (Lehto v. Allstate Ins. Co.,supra, 31 Cal.App.4th at p. 73.) Although Graciano argues the evidence could have permitted a trier of fact to conclude the tender of Saul's policy limits was not timely, Graciano herself selected November 15 as the deadline for offering full policy limits in settlement. Although an injured third party's unilateral selection of a deadline does not conclusively govern whether a later tender of policy limits would have been untimely (Martin v. Hartford Acc. & Indem. Co., supra, 228 Cal.App.2d at p. 185), we conclude at a minimum that the insurer has satisfied its duty to seek to settle in protection of its insured when, “in the light of the time limitation which plaintiff had placed on her offer” (ibid.), the insurer tenders its full policy limits within the time limits imposed by an injured party's demand letter.