When it comes to bad faith cases, very rarely do they involve claims that an insurer wrongly interpreted a policy provision. Based on the high standard for establishing bad faith, unless an insurer is blatantly ignoring clearly applicable, and binding precedent in making its decision, it would be difficult to prove that the insurer’s conduct rose to the necessary level of culpability.

Rather, bad faith cases almost exclusively involve the manner in which an insurer handled a case. Did it do something that failed to adequately protect its insured’s interests? Did the insurer do something that can be seen as placing its own interests ahead of its insured’s? In addition, for various reasons, bad faith cases have a way of growing out of low limits auto policies. Springsteen made this point in a song called “From small things big things one day come.”

Barickman v. Mercury Cas. Co., No. B260833 (Cal. Ct. App. July 25, 2016) is a bad faith case that never should have happened. It offers a very clear lesson to insurers about how not to turn an easy $30,000 case into a $3,000,000 case, not to mention the declaratory judgment transaction costs. This was policyholder alchemy. And it was easily preventable.

Brickman started out as a straightforward automobile claim. The court described the facts like this: “Timory McDaniel, driving while intoxicated in a car insured by Mercury Casualty Company, ran a red light, struck and seriously injured Laura Beth Barickman and Shannon Mcinteer, who were in a crosswalk with the walk signal in their favor. Barickman and Mcinteer agreed to settle their claims against Timory for her insurance coverage limits, $15,000 each; but Mercury would not agree to additional language inserted by Barickman and Mcinteer’s lawyer in Mercury’s form release of all claims: ‘This does not include court-ordered restitution.’”

The restitution issue came about because Timory was sentenced to three years in prison and ordered to pay $165,000 in restitution. Counsel for the plaintiffs sought the language in the release, that it did not include court-ordered restitution, simply to make clear that his clients were not waiving such right by entering into the settlement. Plaintiffs’ counsel also made clear to Mercury that the insurance payment would be a set-off against the insured’s restitution obligation – as the law allowed. So Mercury was doing anything to harm its insured on that issue.

Mercury spent several months considering whether it would agree to the restitution language in the release. Timory’s criminal defense lawyer instructed Mercury not to accept the added language.

Counsel for the plaintiffs got fed up with the delay in getting the case settled and filed suit against Timory. The case “was settled with a stipulated judgment in favor of Mcinteer against Timory for $2.2 million and in favor of Barickman against Timory for $800,000. Timory assigned her rights against Mercury to Barickman and Mcinteer in exchange for their agreement not to attempt to collect the judgment against her. Mercury paid each woman the $15,000-per-person policy limits.”

Barickman and Mcinteer filed a bad faith action against Mercury. “The complaint alleged Timory’s liability for the catastrophic injuries caused to Barickman and Mcinteer was virtually certain, as was the likelihood that their damages would result in judgments against Mercury's insured well in excess of the $15,000/$30,000 policy limits. As a result, Mercury’s failure to make an offer without unacceptable terms and conditions, its refusal to settle the case at policy limits when it had the opportunity to do so, and its unwillingness to make efforts to reach a reasonable settlement constituted a breach of its obligation of good faith and fair dealing, exposing Timory to excess damages.”

The case went to trial before a retired judge serving as a referee. The referee found in favor of Barickman and Mcinteer and upheld the settlement. Mercury appealed. The appeals court – applying a bad faith test that examined whether the insurer’s conduct was reasonable under all of the circumstances -- affirmed, explaining its decision as follows [lengthy quote to follow but it sums it up in a neat and tidy package]:

“Barickman and Mcinteer each agreed in mid-December 2010 to settle her civil claims against Timory for $15,000, as offered by Mercury, after their lawyer had finished his due diligence regarding Timory’s insurance, assets and employment. The only obstacle to completion of the settlement was the dispute between Algorri [plaintiffs’ counsel] and Mercury over the language of the accompanying release. Mercury contends the addition proposed by Algorri could have been interpreted as a waiver by Timory of her right to an offset and it had an obligation to its insured not to jeopardize that right. . . . However, after hearing conflicting testimony from Algorri and Chang [Mercury representative] regarding their conversations as to the import of the language added by Algorri—‘this does not include court-ordered restitution’—the referee found, in the portion of his statement of decision quoted above, that Algorri assured Mercury both orally and in writing that he intended only to preserve his clients' basic restitution rights and was not seeking to eliminate Timory’s right to an offset for the amounts paid by Mercury. In view of that finding, Algorri’s added language was simply intended to incorporate and make explicit what [2 cited cases] required: A civil settlement does not eliminate a victim’s right to restitution ordered by the criminal court, but the defendant is entitled to an offset for any payments to the victim by the defendant’s insurance carrier for items included within the restitution order. Based on these foundational findings and Timory’s certain exposure to substantial liability, the referee could properly conclude that Mercury’s refusal to accept the release as amended by Algorri or, at least, to present to Barickman and Mcinteer in a timely fashion a revised release that included both Algorri’s language and his explanation of its meaning (for example, by inserting after Algorri's addition, ‘and does not affect the insured's right to offset’) was unreasonable.”

The court also put blame on Mercury for placing the decision whether to settle in the hands of Timory’s criminal defense lawyer, without telling him that plaintiffs’ counsel only sought to preserve his clients’ right to seek criminal restitution and not to disturb Timory’s offset rights.

My take on Barickman is that it seems like a situation of an insurer not being willing to agree to something proposed by the other side, simply because, well, it was proposed by the other side. It seems that it could not have been clearer that the insurer’s concerns were unfounded – based on both the representations by plaintiffs’ counsel and the state of the law. But, no matter, the insurer objected to the requested release language. The lesson is obvious. Choose your battles wisely. Otherwise, from small things big things one day come.