No Bad Faith Failure To Settle Where Insurer Refused Stipulated Judgment Potentially In Excess of Policy Limits Coupled With A Covenant Not To Execute Against The Insured
Dorroh v. Deerbrook Ins. Co., 2016 U.S. Dist. LEXIS 171622 (E.D. Cal., Dec. 12, 2016)
Categories: Bad Faith Rejection of Settlement Demand – Settlement Demand Not Within Limits – Non-Party Lienholders
In Dorroh v. Deerbrook Insurance, the district court concluded as a matter of law that no bad faith refusal to settle claim existed against an insurer that had agreed to pay its $15,000 policy limits to settle a claim against its insured by way of a check made payable jointly to the injured party, his wife, and the workers compensation insurer to whom he had submitted a claim. The district court considered that the insurer timely tendered its full policy limits, which the claimants rejected. And the district court concluded that the undisputed facts showed no settlement demand within policy limits was ever made, as “[a] settlement demand is not within policy limits if it involves an excess judgment or exposes insurers to claims from lienholders.”
Cedar Warren was at fault for a car accident in which Robert Dorroh was seriously injured. Deerbrook Insurance Company insured Warren under a policy with a $15,000 limit. Dorroh and his wife requested that Deerbrook settle the claim against Warren for $15,000, and Deerbrook agreed. Meanwhile, Dorroh’s workers compensation carrier notified Deerbrook of a potential lien. Because Dorroh was driving to work at the time of the accident, he applied for workers’ compensation. Deerbrook told the Dorrohs that it would issue the check with both the Dorrohs and the workers compensation carrier as the payee. The Dorrohs replied that the workers’ compensation claim had been denied and demanded that Deebrook’s check be made payable solely to them, ultimately offering to “indemnify your insured and hold your insured harmless from any third parties.” In the end, Deerbrook and the Dorrohs were unable to agree.
The Dorrohs proceeded to sue Warren, and eventually proposed to Deerbrook a stipulated judgment against Warren for an unspecified amount potentially in excess of the policy limits in exchange for a covenant not to execute against Warren. Again, the parties could not agree. Later, Warren filed for bankruptcy, listing a “bad faith” claim against Deerbrook as an asset. After the granting of relief from the automatic bankruptcy stay, the Dorrohs’ suit went to a bench trial and the Dorrohs were awarded a judgment exceeding $16 million against Warren.
The trustee in Warren’s bankruptcy initiated a suit against Deerbrook and agreed to assign the claim to the Dorrohs in exchange for $215,000 and a promise not to execute on the judgment against Warren. The Dorrohs and Warren then substituted into the suit against Deerbrook as plaintiffs. The operative complaint asserted two causes of action against Deerbrook for: (i) breach of the insurance contract, including breach of the implied duty of good faith and fair dealing, based on Deebrook’s failure to accept the pre-litigation $15,000 settlement; and (ii) “bad faith” based on Deerbrook’s failure to accept the pre-litigation $15,000 settlement, failure to enter into the proposed stipulated judgment, and allegedly advising Warren to file for bankruptcy. The parties then proceeded to file cross motions for summary judgment or partial summary judgment. The district court granted Deerbrook’s motion and denied the rest.
With respect to the pre-litigation $15,000 settlement proposal, the district court stated that, “[u]nder California law, Deerbrook’s timely tender of full policy limits precludes any bad faith claims premised on a claimed refusal to settle.” Further, the district court concluded that the Dorrohs’ insistence that Deerbrook pay them the $15,000 policy limit while Deerbrook was yet exposed to potential liability from a known lienholder (the workers’ compensation carrier) meant that the Dorroh’s demand was not a reasonable within-limits demand. Lastly, the district court noted, “[a]lthough plaintiffs claim they offered to indemnify Deerbrook from subsequent liability to third parties, they have not established that such a promise can transform a settlement proposal that ignores known lienholders into one within policy limits.”
With respect to the proposed stipulated judgment potentially in excess of the policy limit, and relying primarily on Graciano v. Mercury Gen. Corp., 231 Cal. App. 4th 414, 425 (2014), the district court concluded: “a liability insurer cannot be liable for bad faith failure to settle if they reject a settlement offer with unclear terms, or one that is in excess of the policy limits. Here, plaintiffs have simply failed to present any legal arguments to the contrary and do not offer any evidence on summary judgment suggesting that the terms of [the] stipulated judgment offer were definite and did not involve a judgment potentially in excess of the policy limits.”
Lastly, as to the theory that the insurer advised Warren to file for bankruptcy, the district court stated that it could find “no evidence before the court on summary judgment that [the insurer’s] counsel … ever specifically advised Warren to file for bankruptcy.” To the extent that such allegations might be based on alleged statements made by defense counsel, the court added that, “because an attorney retained by an insurer to defend its insured is an independent contractor, a liability insurer cannot be held liable for the attorney’s tortious conduct.”
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