Tuesday, April 12, 2011
C.A. Reverses Trial Court, Says Insured Must Reimburse Insurer Who Settled Non-Covered Claim
By KENNETH OFGANG, Staff Writer
A trial judge erred in ruling that an insurance company lost its right to reimbursement for the settlement of a non-covered claim by giving the insured insufficient time to respond to the company’s offer to relinquish his defense rather than pay the claim, the Fourth District Court of Appeal has ruled.
Div. Three Friday reversed a judgment in favor of homebuilder Sohail Famiahn. The panel held that American Modern Home Insurance Company, which paid a $300,000 settlement to a worker on a residence Famiahn and his company, Provident Housing, Inc., were building, is entitled to recover those funds from Famiahn, along with such additional costs and expenses are as reimbursable under the terms of his policy, plus interest and costs.
The claim arose out of a 2005 lawsuit by a worker who claimed the builder was responsible for an accident in which the plaintiff was shot in the eye with a nail gun. The defense was tendered to American Modern, which agreed to defend under a reservation of rights.
The plaintiff’s attorney offered to settle for policy limits of $300,000. The insurer informed Fahmian on July 1, 2005 that it intended to settle on those terms unless Fahmian agreed to take over his own defense, or to waive any potential bad-faith claim.
On July 8, American Modern agreed to settle for policy limits. Three months later, it brought a declaratory relief action seeking determinations that it was not obligated to cover the claim, and that it was entitled to reimbursement of the settlement costs.
At trial, the insurer presented evidence that it informed Fahmian that July 8 was the last day it could accept the offer, and that it needed to hear from him by July 6. A letter to that effect, sent by overnight delivery, was received on July 2 and signed for by “S. Fahmian.”
The insurer also presented testimony that its coverage counsel spoke to Fahmian on July 5, electronically transmitted additional copies of the relevant documents to him that day, and offered to wait to hear from him until the morning of July 8 regarding his decision. There was no communication from Fahmian, however, after July 5, according to the testimony, prompting the company to settle.
Fahmian denied having read the reservation of rights letter, and also denied having read the July 1 letter.
An Orange Superior Court jury returned a special verdict, finding, among other things, that Fahmian’s policy with American Home did not cover business pursuits; that Fahmian received an express offer to allow him to take over his defense or waive a potential bad faith claim in lieu of having the company settle the claim; that he did not accept that offer; and that the company provided him with reasonably sufficient information to make a reasoned decision regarding the offer.
The jury also found, however, that the insurer did not “[u]nder all circumstances... provide sufficient time” for him “to make a reasoned reply.”
Judge Franz Miller determined, on the basis of the verdict, that the insurer was not entitled to reimbursement, and judgment was entered accordingly.
The Court of Appeal, however, in an opinion by Justice Richard Fybel, found several flaws in the judgment, including the addition of a requirement, not recognized in the case law, that an insured be given “sufficient” time to respond to the insurer’s expression of intent to settle.
The controlling case, Fybel said, is Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489.
That case, Fybel explained, held that there were three prerequisites to an insurer’s right to reimbursement from its insured when it paid a claim not covered by the policy—a timely and express reservation of rights, an express notification to the insured of its intent to settle the claim, and an express to allow the insured to assume the defense rather than have the insurer pay the claim.
Adding a requirement that the time given the insured to make a decision be sufficient under all of the circumstances is not within the Blue Ridge rule, the justice said, and fails to consider the effect of the deadline imposed by the plaintiff for the insurer to accept a settlement demand.
The jurist elaborated:
“While Blue Ridge requires that the insurer’s reservation of rights must be timely and express, it requires only that the notice of the insurer’s intent to settle and its offer that the insured may assume its own defense be express....It is fair to conclude, based on the language used in the opinion as well as the court’s overall analysis, that the Supreme Court did not intend to include a requirement of sufficient time for the insured to consider the notice of intent to settle and offer to the insured to assume its own defense. Indeed, a plaintiff’s settlement offer might come at any time and usually contains its own time limits; therefore, a defendant and its insurer might have little or no control over th
e deadline to respond to that offer.”
Fybel rejected the argument that it was unfair to the insured to require him to make a decision on a complex set of options within a five-day timeframe. He noted that the reservation of rights letter, sent months earlier, advised Fahmian of his right to seek advice of counsel regarding coverage.
“The insured cannot be permitted to derail the Blue Ridge process by failing to obtain separate coverage counsel until a request for consent to settle is received, and then claiming insufficient time to respond to that request due to lack of such counsel,” the justice wrote.
“We hasten to add that our holding is premised on the insurer’s timely provision of a settlement advisement letter to the insured, after receiving the plaintiff’s settlement demand,” Fybel said. “...[T}he applicable timeframe in this case is not appreciably different from the timeframe in Blue Ridge.”
Attorneys on appeal were David W. Evans and Bruce Cleeland of Haight Brown & Bonesteel for the insurer and Maziar Mafi for Fahmian.
The case is American Modern Home Insurance Company v. Fahmian, G042799.
Copyright 2011, Metropolitan News Company