Lie in the Bed You Made - Impact of Settlement Agreements
Two recent California decisions hold that the parties must lie in the beds they made – in one case preventing the policyholder from contesting a settlement , the other case preventing an insurer from seeking recovery from another allegedly responsible party.
In Village Northridge HOA v. State Farm Fire & Cas. Co., 10 C.D.O.S. 11321 (2010) (another decision following the Northridge earthquake in Southern California), the California Supreme Court held that the way to avoid a settlement is through rescission (which pursuant to statute does not require immediate tender back of the consideration received in settlement). Civil Code § 1693 provides that the party seeking rescission can agree to later restore the consideration as long as doing so does not substantially prejudice the other settled party. Restoration of the consideration can be a condition in the judgment.
However, in that case, the HOA proceeded on an alternative basis - "affirm and sue." This theory, California’s highest court held, was not supported by California law because of the provisions in the settlement agreement. Thus, the HOA had to live with the settlement it made.
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.
