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No good deed goes unpunished – Plaintiff abused the tort of bad faith
Julio Palma and Miriam Cortez (Plaintiffs) appealed from an order granting summary judgment in a bad faith insurance action against Mercury Insurance Company (Mercury). Mercury insured Frank McKenzie, who killed the plaintiff’s son in a car accident. Plaintiff obtained $3 million verdict in wrongful death action against McKenzie. McKenzie then assigned plaintiff its rights against Mercury, and plaintiff brought this action against Mercury on the basis that it did not accept their reasonable offer to settle their wrongful death claim. The trial court granted Mercury’s motion for summary judgment after finding that plaintiff never offered to settle its claims.
IN Julio Palma et al. v. Mercury Insurance CompanyB309063, California Court of Appeals, Second District, Third Division (August 23, 2022), the appellate court refused to buy the plaintiffs’ bad faith claims.
ACTUAL BACKGROUND
In September 2012, Frank McKenzie drove a vehicle that hit and killed Oscar Palma, who was riding a moped. At the time, McKenzie was insured under a Mercury policy with bodily injury liability limits of $15,000 and property damage limits of $10,000.
On October 15, 2012, attorney Paul Zuckerman sent Mercury a settlement letter identifying “Oscar Palma (deceased) estate of Oscar Palma” as “our clients” and stating: “Oscar Palma (deceased) estate of Oscar Palma, demands that Mercury Insurance bid full insurance limits to Oscar Palma (deceased) estate of Oscar Palma to settle their claims.
The letter stated that the offer would be open for 14 days until October 29, 2012.
Mercury retained attorney Jeffrey Lim and instructed him to accept the offer. On October 19, 2012, Lim faxed a letter to the Carpenter company stating that Mercury is “tendering the estate and all heirs of Oscar Palma Mr. McKenzie’s $15,000 policy limit. [¶] To confirm that all heirs are included in the release of insurance limits, we ask that you have the heirs complete and sign the attached Declaration of the Heirs.” Carpenter did not respond to the letter.
On 24 October 2012, Lim told the Mercury that McKenzie agreed to a settlement. That same day, Lim wrote a letter to the Carpenter firm accepting “the offer to settle Oscar Palma’s death claim.” Lim enclosed a check for $15,000 and certified that, apart from the Mercury policy, there were no other policies for the loss. However, Lim inadvertently failed to attach McKenzie’s explanation to the letter.
Lim included in the letter his office’s standard release of claims form, which required the release of all “bodily injury claims and personal injury claims and property damage claims and wrongful death claims ….” Lim told the Carpenter company if “you have any changes to my release, please notify me before October 29, 2012.” The Carpenter firm did not respond to Lim’s letter or request any changes to the release.
Between March and July 2013, Mercury sent six letters to the Carpenter company “reiterated[ing]” its offer of $15,000 bodily injury policy limits. Lim responded by sending a copy of McKenzie’s declaration to the Carpenter firm. He assured that “the declaration had been received, but was inadvertently omitted from my October 24, 2012 letter to the Carpenter firm. Mercury sent a separate response to the Carpenter firm stating their position that they “timely offered their $15,000 bodily injury policy limits to your customers to settle their claims against mr. McKenzie.
Plaintiff’s Wrongful Death Action Against McKenzie
On August 28, 2013, the Carpenter firm filed a lawsuit against McKenzie on behalf of the plaintiff, Ana Guzman-Palma, and “the estate of Oscar F. Palma, a deceased individual.” The complaint asserted causes of action for negligence, “survival action” and wrongful death. After a jury trial, the court entered a verdict against McKenzie and in favor of the plaintiffs for $3 million on their wrongful death claim. Mercury paid plaintiff its $15,000 limits for bodily injury.
Plaintiff’s Bad Faith Action Against Mercury
McKenzie assigned his rights against Mercury to the plaintiff in exchange for a covenant not to enforce the judgment against his personal assets.
Mercury’s motion for summary judgment
Mercury moved for summary judgment and presented evidence supporting the facts summarized above.
The trial court granted Mercury’s motion for summary judgment after determining that the Carpenter firm’s letter offered only to settle a survivorship action on behalf of the estate.
DISCUSSION
Plaintiffs argued that the trial court erred in granting Mercury’s motion for summary judgment because there are disputed facts as to whether Mercury unreasonably failed to accept their settlement offer.
Bad Faith’s refusal to settle
California courts have inferred an implied duty on the part of the insurer to accept reasonable settlement demands for such claims within the policy limits.
An insured’s bad faith claim based on an alleged wrongful refusal to settle first requires proof that the third party made a reasonable offer to settle the claims against the insured for an amount within the policy limits. The plaintiff must also prove that the insurer has failed or refused to fulfill its contractual obligations, not due to an honest mistake, bad judgment or negligence, but rather by a knowing and intentional act, which unfairly defeats the agreed common purposes and disappoints the reasonable expectations of the other. party and thereby deprive that party of the benefits of the agreement. In assessing whether an insurer acted in bad faith, the critical question is the reasonableness of the insurer’s actions based on the facts of the particular case. To hold an insurer liable for bad faith in failing to settle a third-party claim, the evidence must show that the failure to settle was unreasonable.
Plaintiffs did not offer to settle their wrongful death claims
Snickarfirman’s letter of October 15, 2012 cannot reasonably be interpreted as an offer to settle the Plaintiff’s wrongful death claim. A wrongful death claim is a statutory action that enables a decedent’s heirs to recover for the economic loss and deprivation of consortium they personally suffered as a result of the decedent’s death. Wrongful death claims belong to the heirs, not the estate or estate. However, the carpentry firm’s letter does not name the plaintiff or Palma’s heirs, let alone identify them as bidders. It is clear that Snickarfirman’s letter offered to settle the estate’s compliance claim, and not the Plaintiff’s wrongful death claim.
Because Mercury’s undisputed evidence shows that plaintiffs did not offer to settle their wrongful death claims, they cannot state a cause of action for bad faith refusal to settle those claims.
Mercury did not act in bad faith
Even if the Carpenter firm’s letter had offered to settle plaintiffs’ claims, Mercury would be entitled to summary judgment because no reasonable person could infer that it acted in bad faith. The undisputed evidence shows that Mercury urged Lim to accept the Carpenter company’s settlement offer under the terms of the October 15, 2012 letter. The only reasonable inference from this evidence is that Mercury would have settled the claims under plaintiff’s terms but for Lim’s negligence in not delivering McKenzie’s declaration. However, negligence alone is insufficient to support a claim for failure to settle in bad faith.
There was no evidence to show that Mercury refused to remove the property damage language from the release or otherwise required it as a condition of settlement. To the contrary, the undisputed evidence shows that Mercury separately attempted to settle any potential damages claims in November 2012, before the Carpenter firm informed it that there was no settlement related to the bodily injury policy limits.
Mercury made considerable efforts to accept the Carpenter firm’s offer. Among other things, it informed McKenzie of the offer, obtained his consent to accept it, submitted his full limitations on the bodily injury policy, made substantial efforts to obtain and deliver the requested information and documents, and expressed a willingness to amend the release of claim form.
The plaintiffs brought legal action against McKenzie, knowing that doing so would damage his credit and subject him and his family to extremely painful and embarrassing post-judgment debt collection proceedings. If anyone acted in bad faith, it was the plaintiffs and the carpentry company.
The Court of Appeals upheld an attempted misappropriation of the tortious bad faith claim that the plaintiffs acted in bad faith against an insurer that reasonably attempted to resolve a dispute against its insured by promptly accepting the settlement offer. The insurer’s good faith acceptance was ignored by the plaintiffs’ counsel who refused to accept the policy limits. Rather, the attorney made silly arguments like expecting a $10,000 property damage limit payment for a moped worth about $1,000.00. This was an incompetent bad faith attempt, with the court concluding that the plaintiffs acted in bad faith, not the insurer.
(c) 2022 Barry Zalma & ClaimSchool, Inc.
Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and zalma@zalma.com. Subscribe and receive videos limited to Excellence in Claims Handling subscribers at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.
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