National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

The HOA claimed its insurer misrepresented the limits of its policy, which fact did not come to the HOA’s attention until after it compromised its claim for property damage from the Northridge earthquake. The settlement agreement between the HOA and its insurer contained many "boilerplate" but necessary provisions including that the parties had disputed claims, were compromising, were buying their peace, and were waiving Civil Code § 1542 so as to assume the risk that there may be additional claims arising out of the same facts. Valuable consideration was received by the HOA.

Upon discovering information that the policy limits were substantially larger than believed at the time of setlement, the HOA went back to the well and when that did not work, sued.  Repeatedly, the HOA indicated it did not intend to rescind the earilier , the settlement funds having already been spent on repairs. Rather, the HOA sought to affirm the settlement and obtain dmaages for fraud. This the court found the insured could not do since to affirm the settlement was to agree to all of its terms including that there had been a release of all claims.

Other equitable arguments were also rejected. This is not a pronouncement that insurers are free to misrepresent policy limits (if that even were the case) but rather that the only way to get out of a settlement agreement with the types of provisions this one contained (which are the usual provisions found in settlement agreements) is to seek to rescind the agreement on the basis of fraud or mistake and tender the consideration given.

The other decision that left the parties where they stood was Essex Ins. Co. v. Richard Heck, MD, 2010 Cal.App.Lexis 1256 (2010). Starting the decision with its pronouncement of "What the heck?!" and its agreement with the trial court that the case was "screwed up," the appellate court went on to find that the insurer, having created the situation, was stuck with it.

Essex

was a messy case. The insurer defended the wrong person in a personal injury case arising out of an injury during construction repairs. The mix up was due to the very similar names of son (insured, owner of the property) and father (not insured, purchaser of the property). Judgment was entered against the father for over $800,000. Essex denied any coverage based on an exclusion in the policy (which was not explained further in this decision). Essex brought a coverage case to try to iron out the problem of who it insured and what it covered, but its motion for summary judgment was denied. Meanwhile the claimant as judgment creditor sued Essex, the son, the father, and defense counsel for bad faith and fraud. Much time and money having been spent without a resolution, Essex settled all the cases for $700,000, obtaining releases from all parties. The settlement agreement did not (as is often the case) specify how much was paid for which claim.

Thereafter – two years later - Essex sought equitable subrogation from the doctor who allegedly in treating the claimant had exacerbated the injuries. The doctor defended against the claim on the basis that Essex waived its claims and failed to prove its claims. Most importantly, there was no proof that the settlement was for the same injuries for which the doctor was allegedly responsible. The settlement agreement displaced the judgment. The settlement agreement was for release of much more than the judgment and did not allocate amounts to the claims released. Extrinsic evidence as to the parties' intentions was inadmissible. Thus, the court concluded the insurer was not entitled to recover from the doctor – the insurer must lie in the bed it made.

The appellate court disagreed. While it acknowledged there were authorities holding an insured's deliberate or intentional conduct negates an accident, the court construed California authority as requiring that the harm also be intended. Id. at 328 (construing the test developed in Merced Mutual Insurance Company v. Mendez (1989) 213 Cal.App.3d 41 which found no coverage for a claim of sexual battery even if the insured did not intend to harm the claimant). 

The Mendez court had explained that:

An accident, however, is never present where the insured performs a deliberate act unless some additional, unexpected, independent and unforeseen happening occurs that produces the damage. Clearly, where the insured intended all of the acts that resulted in the victim's injury, the event may not be deemed an "accident" merely because the insured did not intend to cause injury. Conversely, an "accident" exists when any aspect in the causal series of events leading to the injury or damage was unintended by the insured and a matter of fortuity. Id. at 50.

State Farm distinguished Mendez and other authorities as involving situations where "the insured intended all of the acts in the causal chain, including the injury." State Farm, 164 Cal.App.4^th at 328. Thus, the court held that, because the insured had not intended the plaintiff to land on the pool steps and had miscalculated the force needed to clear the steps, there was unintentional conduct satisfying the accident requirement. 

The State Farm decision confuses the analysis and focuses on the resulting injury, when the focus should only be on the action taken by the insured. But, the debate is not over. The new year may bring additional decisions on the issue. Another accident case, Delgado v. Inter-Insurance Exchange, etc. (2007) 153 Cal.App.4^th 571 (review granted), is presently pending before the California Supreme Court. Delgado focuses on whether unreasonable self-defense can create an accident, but the Supreme Court may clarify the accident rules and comment upon State Farm.

Excess Insurer Liability Where Primary Settles

As previously reported, the California appellate court held that full primary insurance limits must be paid prior to excess coverage attaching where the excess policy requires that the underlying policy “have paid or have been held liable to pay the full amount” of underlying limits. Qualcomm v. Certain Underwriters at Lloyd’s, London (2008) 161 Cal.App.4^th 184 (review denied).

The primary insurer, with $20 million in liability limits, settled with Qualcomm for $16 million. Qualcomm then sued London, its excess insurer, for declaratory relief and breach of contract for the remaining $9 million owed on the claim. London successfully demurred to Qualcomm’s complaint. The appellate court affirmed this decision, finding that the “have paid or have been held liable to pay” language in the policy [the “attachment” clause], meant only actual payment of the $20 million of primary limits would suffice to meet that policy requirement. The appellate court ruled that public policy considerations, including those favoring settlements, could not supersede plain and unambiguous policy language.

The case is consistent with the literary approach taken by California’s appellate courts (or most of them) in analyzing insurance policy language. While insurers have made these arguments before, until this decision there was little published authority upon which to buttress the argument. One perhaps unfortunate ramification of the decision is that, depending on the strength of the coverage defenses and other issues that factor into settlement, it may be more difficult for primary insurers to settle for less than policy limits where there is a larger than limits potential exposure. The case has it s limits since not all excess insurance policies have the same “have paid or have been held liable to pay” requirement.