California courts rule against denial of insurance claims for bad faith

Over the past 10 years, policy limit clearance requirements with numerous conditions have become the norm. In many cases, the conditions are imposed in the hope that the insurer will falter in its efforts to comply. Unless all conditions were strictly met, the plaintiffs argued, the claim was dismissed and the policy was “open.” Recently, however, California courts have begun to recognize the common sense limitations of these “gotcha” tactics. In 2021, Pinto v. Farmers Ins. Exchange, 61 cal. app. 5th 676 (2021) clarified that the insurer must have acted unreasonably to be liable for a failure to settle in bad faith. In Palma v. Mercury Ins. Co., 2022 WL 3592722, issued Aug. 23, 2022, the Court of Appeals expressed its distaste for the game that is designed to prevent a settlement an insurer is attempting to secure.

In Palma, the plaintiffs’ son was killed in a car accident in September 2012 involving Mercury’s insured, Frank McKenzie. The following month, the law firm of Carpenter, Zuckerman & Rowley demanded the limit of McKenzie’s Mercury car policy – $15,000. The requirement was subject, among other things, to a declaration of no other insurance and strict compliance with all conditions. Mercury immediately hired an attorney, Jeffrey Lim, to take the necessary steps to accept the offer. Lim met McKenzie, who signed the requested statement. Nine days after the request was made and five days before it expired, Lim wrote to Carpenter, accepted the request, enclosed the settlement check, and said there was no other insurance. However, Lim did not attach McKenzie’s statement. All other conditions were met.

De Palmas claimed the failure to include the statement was a rejection of the claim and the policy was open. They sued McKenzie, received a $3 million judgment, and were granted an award of McKenzie’s alleged bad faith claim in exchange for a pact not to personally execute McKenzie. De Palmas and McKenzie subsequently sued Mercury for bad faith.

Mercury filed for summary judgment, which was granted by the court. The appeals court confirmed. Noting that Lim’s failure to attach McKenzie’s statement to the letter of acceptance was at best negligence, the Court held that mere negligence is not sufficient to substantiate a bad faith failure to settle a claim. The court also had harsh words for the conduct of the Palmas firm and the Carpenter firm:

There is also no doubt that if the plaintiffs or the firm of Carpenter had simply told Mercury that they had not received McKenzie’s statement containing Lim’s letter of acceptance, Mercury would have provided it within the original deadline. The issue could have been resolved with a single phone call or email in October 2012. The firm [waited nine months] to inform Mercury that it had not received the statement from McKenzie, by which time it was clearly preparing for lawsuits with a view to future action in bad faith. Although Mercury responded by providing the statement and reiterating its offer of policy limits, plaintiffs have taken legal action against McKenzie, knowing that it [ ]” his creditworthiness and subjected him and his family to “extremely disturbing and embarrassing” debt recovery proceedings after the verdict. If anyone acted in bad faith, it was plaintiffs and the firm of Carpenter.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 297

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