Issue By: David L. Blinn

Sonia Graziano v. Mercury General Corporation, et al.

Court of Appeal, Fourth Appellate District (November 12, 2014)

When a carrier refuses to settle a claim within its insured’s policy limits, it may be exposed to a bad faith claim, either directly from its insured, or on assignment by its insured to the third party plaintiff.  This case considered whether a carrier committed bad faith when it erroneously first denied coverage, but still made an attempt to settle the claim for policy limits within the deadline asserted by the plaintiff.

Plaintiff Sonia Graciano (“Graciano”) suffered severe injuries when she was struck by a Cadillac driven by Saul Ayala (“Saul”).  Saul was insured by a policy issued by defendant California Automobile Insurance Company (“CAIC”) with limits of $50,000.  CAIC had also insured Jose Saul Ayala (“Jose”) and the Cadillac was a listed vehicle on his policy.  That policy, with limits of $15,000, expired approximately 6 months before the accident.

A couple of days after the accident, Saul reported the accident to CAIC.  This claim was adjusted by CAIC’s Vista claims unit, and they contacted the CHP to obtain a report, and attempted to inspect the vehicle, which had an “evidence hold” placed on it by the CHP.  Although it did not know the name of the person Saul collided with, CAIC’s Vista unit made a determination within a week that Saul was 100% at fault, and that the claim would likely be an “excess bodily injury claim,” worth more than Saul’s policy limits.

Meanwhile, three days after the accident, Graciano’s attorney contacted a CAIC call center in Texas to report Graciano’s injury.  She gave an incorrect CAIC policy number (previously belonging to Jose Saul Ayala), and listed CAIC’s insured erroneously as “Saulay Ala,” information she apparently obtained from the CHP.  A claim was opened listing Jose as the insured, and identified his correct last policy number, which had expired 6 months before the accident.  That claim was transferred to Sacramento.  On November 1, the adjuster in Sacramento advised Graciano’s attorney that they were having a problem confirming coverage, and she also attempted to contact Jose without success.

On November 5, 2007, Graciano’s attorney made a demand letter to CAIC, identifying Jose as the named insured, and listing Jose’s (rather than Saul’s) policy number, and describing Graciano’s injuries.  A policy limits demand was made, set to expire in 10 days (November 15).  The previous day, the adjuster first received the police report.  This listed Saul as the driver, but listed Jose’s old policy as the applicable policy.  Despite this, on November 8, CAIC responded to the demand requesting an extension of time to complete its coverage investigation.  Graciano’s attorney refused.  By November 12, even though CAIC had investigated and determined that Saul did not live at Jose’s address.  However, it was still concerned that he might be a relative or in some other way covered under Jose’s policy, and attempted to contact both Jose and Saul.

By November 14, CAIC had not heard back from Jose or Saul, and wrote to Graciano’s attorney that they had not completed their investigation, but that to date it appeared that Jose’s policy was not in effect at the time of the accident, and it could not accept the policy limit demand at that time.  The adjuster again called and left messages for Jose and Saul to follow up on her investigation.  Shortly after noon the next day, she spoke on the phone with Saul, who told him he did have insurance, and that it was with CAIC.  This was the first time the adjuster on this claim discovered the existence of the claim Saul had opened himself less than three weeks earlier.  She contacted the adjuster at the Vista office, and gave them the claim and demand from Graciano’s attorney.  The Vista claims office called Graciano’s attorney and asked for a 24-hour extension to respond to the demand, but the attorney refused.  The Vista claims department immediately prepared a letter that day (November 15) offering $50,000, which was identified as the full limits on Saul’s policy, in full and final settlement of Graciano’s injury claim.

Graciano’s attorney stipulated that the offer was received before the November 15 deadline on the demand had expired.  Nevertheless, Graciano did not accept the demand, and proceeded with her action against Saul.  She recovered $2,000,000 from Saul at trial and obtained an alleged assignment of Saul’s rights against CAIC.  Graciano then sued CAIC for bad faith, based on its alleged unreasonable refusal to settle Graciano’s claim against Saul.  The jury returned a verdict in Graciano’s favor, and CAIC appealed.

The Court of Appeal started by noting that a claim for bad faith based on an alleged wrongful refusal to settle requires proof the insurer unreasonably failed to accept an otherwise reasonable offer within the time specified by the third party.  However, when a liability insurer timely tenders its full policy limits in an attempt to effectuate a reasonable settlement of its insured’s liability, then the insurer has acted in good faith as a matter of law.  The test is whether the insurer’s conduct was reasonable under all the circumstances.

Here, the Court of Appeal noted that there was no substantial evidence under which a jury could determine CAIC unreasonably rejected an offer to settle Saul’s liability.  In the first place, the demand letter from Graciano’s attorney on November 5 referenced Jose, rather than Saul as CAIC’s insured, and the relevant policy was Jose’s.  There was no evidence Graciano ever offered to settle her claims against Saul for an amount within Saul’s policy limits.  The Court was not persuaded by Graciano’s argument that a subsequent letter on November 7, referring to “the policy limits of Mercury’s insureds” was sufficient to amount to an offer to release any and all claims against Saul under his policy limits.

Likewise, the Court was not persuaded that CAIC was charged with knowledge of its own insuring agreements, and once it became aware that Saul was the driver listed in the police report (on November 4), it can be held liable for wrongful failure to defend and to settle.  In support of this argument, Graciano had cited Safeco Ins. Co. of America v. Parks (2009) 170 Cal.App.4th 992.  In Safeco, the carrier denied coverage under a condominium policy issued to the defendant’s mother’s friend, where defendant sometimes visited, and later determined there was coverage under a similar policy it issued to defendant’s grandmother, where defendant actually lived with her father.  Safeco had issued both policies, and argued it could not be charged with not knowing about the second policy at the time demands were made.  The Safeco court determined that to rely on the defense of lack of notice of its own policy, the carrier would have to show it did not suffer prejudice by the late notice it received.  In the Safeco decision, the carrier’s determination was the same under both policies.

In the case at bar, the Court noted that CAIC was definitely prejudiced by the late discovery, since it denied coverage under the earlier, expired policy, but in fact did attempt to tender the policy limits on behalf of its insured in a timely fashion once it learned of the second policy.  Moreover, the Safeco court had determined that once the carrier learned of the second policy, it was obligate to investigate whether there was other potential coverage.  Here, CAIC had done so early on, and once it learned of Saul’s name, it began trying to contact him to determine whether there was other insurance.  CAIC in fact undertook the type of investigation it was required to do under the Safeco decision, and thus plaintiff’s claims that CAIC had failed to investigate were not supported.

Finally, the Court noted that a bad faith claim requires something beyond breach of the contractual duty, and that something more is “refusing, without proper cause,” to compensate its insured for a loss covered by the policy.  Although there was some delay by CAIC in locating and connecting Graciano’s claim with Saul’s policy, resulting in a mistaken “withholding” of policy benefits for about a 24 hour period, this mistake was “contributed to by the very party claiming those policy benefits” (Graciano), and this supplied the “proper cause” fatal to Graciano’s bad faith claim.

The Court of Appeal reversed the judgment based on the jury’s ruling in the plaintiff’s failure.

Comment

For a carrier to be liable for bad faith, there has to be more than merely failing to meet its contractual obligations; and this case confirms that a carrier’s mistaken actions, when perpetuated by the party who seeks recovery from the carrier, may as a matter of law not be sufficient to expose the carrier to bad faith for failure to settle.

For a copy of the complete decision, see: Graciano v Mercury General

Write a comment:

You must be logged in to post a comment.

© 2015 LOW, BALL & LYNCH | DISCLAIMER | PRIVACY

CONNECT WITH US: