Filed 10/17/14; mod. & pub. orders 11/12/14 (see end of opn.)
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
SONIA GRACIANO, D061956
Plaintiff and Respondent,
v. (Super. Ct. No.
37-2010-00055207-CU-IC-NC)
MERCURY GENERAL CORPORATION et
al.,
Defendants and Appellants.
APPEAL from a judgment of the Superior Court of San Diego County, Timothy
M. Casserly, Judge. Reversed.
Hager Dowling Lim & Slack, John V. Hager and Alison M. Bernal for Defendants
and Appellants.
Dabney Finch and Carla DeDominicis for Plaintiff and Respondent.
Plaintiff Sonia Graciano suffered severe injuries when she was struck by a car
driven by Saul Ayala (Saul). Saul was insured by a policy issued by defendant California
Automobile Insurance Company (CAIC), which had policy limits of $50,000. Less than
three weeks after Graciano's attorney first contacted CAIC alleging Graciano was injured
by one of CAIC's insureds, during which time Graciano misidentified both the name of
the driver and the applicable insurance policy, CAIC completed its investigation of the
accident, identified the correct insurance policy and driver, and tried to settle Graciano's
claim against Saul by delivering to Graciano's attorney a "full policy limits offer."
Graciano did not accept CAIC's full policy limits offer and, in the present action,
asserts CAIC and its parent and affiliated companies (together Defendants) acted in bad
faith, based on an alleged "wrongful failure to settle." Graciano argues CAIC could have
and should have earlier discovered the facts, and should have made the full policy limits
offer more quickly. The jury found in favor of Graciano and this appeal followed.
CAIC asserts that, as a matter of law, there was no evidence to support the verdict
that CAIC acted in bad faith by unreasonably failing to settle Graciano's claim against
Saul. We agree, and reverse the judgment.1
I
FACTUAL BACKGROUND
A. The Accident
In the early morning hours of October 20, 2007, Graciano was severely injured
when she was struck by a 2004 Cadillac driven by Saul, who had been drinking before
the accident.
1 CAIC alternatively asserts on appeal that, even assuming the evidence could have
supported the verdict, the trial court prejudicially erred by excluding evidence elaborating
on CAIC's attempt to convey its offer to settle Graciano's claim against Saul. CAIC also
argues the court erred by summarily adjudicating that entities other than CAIC were
jointly and severally liable for the judgment under alter ego principles. Because of our
conclusion that no substantial evidence supports the finding CAIC wrongfully did not
settle Graciano's claim against Saul, we do not address CAIC's alternative claims.
2
B. The Two CAIC Policies
Saul was a named insured on CAIC policy No. 040115180005897, in effect on the
date of the accident (Saul's policy) with a policy limit of $50,000. The Cadillac was a
listed vehicle on Saul's policy.
CAIC had also insured Jose Saul Ayala (Jose) under a separate policy (policy
No. AP00401514, Jose's policy), and the Cadillac was also a listed vehicle on Jose's
policy. Jose's policy, which had policy limits of $15,000, had been canceled
approximately six months before the accident.
C. The Two Reports of the Accident
Saul's Report (CAIC Claim No. 20070032006723-81)
Late on the afternoon of October 23, 2007, CAIC first learned of the accident
when Saul contacted an adjuster working for CAIC to report he had been in an accident
in the early morning hours of October 21, 2007. Saul reported he fell asleep while
driving and had struck a woman and injured her. Saul's claim was handled by the
adjusters of the Vista claims unit, and CAIC immediately began investigating this claim.
CAIC contacted the California Highway Patrol (CHP) that same day to order a copy of
the police report and, at that time, learned the actual date of the accident was October 20,
2007. CAIC also contacted the tow yard the following day and learned the CHP had an
"evidence hold" on the Cadillac, which would require permission from the CHP to allow
CAIC to inspect it.
Based on the preliminary information, CAIC believed the driver was 100 percent
at fault. By October 30, 2007, CAIC's adjuster believed it would likely be an "excess
3
bodily injury claim," meaning the amount for which Saul was liable would exceed the
amount of coverage provided by CAIC's policy. However, CAIC apparently did not
know at that point the identity of the person injured by Saul.
Graciano's Report (CAIC Claim No. 20070065006697-01)
Three days after Saul's report, Ms. DeDominicis contacted a CAIC call center in
Texas to report her client (Graciano) had been injured by a driver insured by CAIC.
DeDominicis reported Graciano was injured on October 21, 2007, gave the call center
"AP00297623" as the driver's policy number with CAIC, and told CAIC the driver's
name was "Saulay Ala."2
CAIC assigned this report to a different claim identification number (claim
No. 20070065006697-01), which identified Jose as the insured and identified his last
effective policy number as AP00401514.3 Graciano's claim was assigned to the La Mesa
claims unit. The La Mesa claims unit transferred Graciano's claim to the Factfinder unit
in Sacramento, which did coverage investigations, because the listed policy (policy
No. AP00401514) appeared to have been canceled before the date of the accident and the
Factfinder unit needed to determine whether policy No. AP00401514 had validly been
2 Graciano's sister-in-law provided the name "Saulay Ala, Jr.," along with
"AP00297623" as the driver's policy number, to DeDominicis when she began acting as
Graciano's attorney. Graciano's sister apparently obtained that name and policy number
from the CHP.
3 Jose had previously been insured under the policy identified by DeDominicis (i.e.,
policy No. AP00297623) but, in March 2007, that policy had been canceled and a new
policy immediately replaced it that insured Jose and bore the new policy number of
AP00401514.
4
canceled. Ms. Talley of the Factfinder unit attempted to contact Jose without success,
requested the underwriting file, and also confirmed it appeared Jose's policy had been
canceled in April 2007. Talley also corresponded with DeDominicis on November 1,
2007, to inform DeDominicis it was investigating a "coverage problem" for Jose under
policy No. AP00401514 and had been unable to confirm coverage. Talley also spoke
with DeDominicis on November 6, 2007, confirming the coverage investigation was still
ongoing but had not been completed.
D. Graciano's Demand Letter
On November 5, 2007, DeDominicis mailed a demand letter to Talley. The letter
identified Jose as the "named insured," the policy as "Policy # AP00401514," the "Date
of Loss [as] October 21, 2007," and described Graciano's extensive injuries.
DeDominicis stated she had been retained to pursue Graciano's remedies "arising out of
an event in which your above-referenced insured and/or their vehicle struck [Graciano]."
(Italics added.) DeDominicis stated that, considering Graciano's extensive injuries:
"demand is made that Mercury immediately provide a copy of the
declaration page and payment of the maximum bodily injury policy
limits to Mrs. Graciano. [¶] The offer to settle for verified policy
limits shall expire within ten days of today's date, and shall not
be renewed. [¶] Thereafter, Mrs. Graciano shall take the position
that Mercury is responsible for any extra-policy judgment that is
certain to be rendered . . . . [¶] If there is anything else you need to
consider and respond in a timely fashion to this policy limit demand,
please do not hesitate to call immediately. . . ."
That letter was not received by Talley until November 8.
5
The previous day, Talley first received the police report of the incident. The
police report correctly reflected Saul was the driver but still listed Jose's old policy (i.e.,
policy No. AP00297623) as the applicable insurance policy.4
E. CAIC's Response to the Demand for Jose's Policy Limits
In the late afternoon of Thursday, November 8, 2007, although its initial
investigation indicated Jose's policy had been canceled for underwriting reasons, CAIC
nevertheless requested DeDominicis grant an extension on Graciano's demand for a
policy limits settlement to give it time to complete its coverage investigation before
responding to her demand. DeDominicis refused CAIC's request.
By Monday, November 12, CAIC's investigation of Graciano's report and claim
had determined Saul, whom the newly obtained police report listed as the driver who
struck Graciano, was a "non-listed driver" on Jose's policy and, according to the police
report, did not reside at Jose's address. However, CAIC was still concerned Saul could
have been the son of the named insured, even though Saul's address did not match that of
Jose. That day, CAIC again tried, without success, to speak with DeDominicis about
Graciano's claim.
On November 14, 2007, CAIC responded to DeDominicis's "policy limit demand"
on Jose's policy and informed her that its preliminary investigation over the preceding
seven days, although not yet complete, made it appear that Jose's policy was not in force
4 Although Graciano's brief on appeal states the police report received by CAIC
listed "Saul Ayala as the driver . . . with his [CAIC] policy number" (italics added), the
police report contains no reference to Saul's policy No. 040115180005897 and instead
listed only Jose's old policy number as the applicable insurance policy.
6
at the time of the accident, and therefore CAIC could not accept DeDominicis's policy
limit demand before the November 15, 2007, deadline. CAIC cautioned that its
determination was not final, but did advise Graciano to pursue her Uninsured Motorist
coverage with her own insurer.
F. CAIC Connects Saul's Report With Graciano's Report and Offers Policy Limits
On the late afternoon of November 14, Talley of the Factfinder unit again called
Jose to inform him the claimant was seriously injured and might pursue Jose. Talley also
left messages with the driver named in the police report, Saul, to ask whether Saul had
any insurance. However, Talley did not at that time know whether Saul had any
insurance, much less that he had insurance with CAIC.
Shortly after noon the following day, Talley spoke on the phone with Saul, who
told Talley he did have insurance and that his insurance was with CAIC. This was the
first time Talley discovered a claim under Saul's name and policy had already been
opened in the Vista claims unit. Talley immediately gave Graciano's claim and demands
to the persons in the Vista claims unit handling Saul's claim. Around 1:45 p.m., an
adjuster in the Vista claims unit contacted DeDominicis to explain they were the unit
handling Saul's claim and had just found out that Graciano was the person whom Saul
had reported he had injured, and asked DeDominicis for a 24-hour extension to respond
to her settlement demand. DeDominicis refused and stated that if CAIC could not "get its
act together on what policy handles what, it's not her problem." The adjuster
immediately forwarded his recommendation to the Vista claims supervisor, who
7
recommended CAIC make a full policy limits offer on Saul's policy to settle Graciano's
claims against him, and the supervisor immediately approved this offer.
CAIC immediately prepared a letter offering $50,000, which it identified as the
full policy limits on Saul's policy, in full and final settlement of Graciano's injury claim.
The letter specified the settlement would include any lien claims (noting the hospital at
which Graciano was treated would have a statutory lien) and any loss of consortium
claims, and asked DeDominicis to advise whether Graciano was married. Graciano
stipulated DeDominicis received CAIC's settlement offer letter before the deadline of her
demand on Jose's policy expired.5
Graciano did not accept CAIC's offer to settle her claims against Saul. Instead,
she pursued her action against Saul.6 Graciano obtained a judgment against Saul for over
$2 million and obtained an alleged assignment of Saul's rights against CAIC.
5 However, CAIC was also prepared to prove that CAIC tried twice to reach
DeDominicis by phone before the deadline expired to orally convey the offer, but she did
not answer. Before preparing and sending the letter offer, CAIC's adjuster apparently
called DeDominicis to convey the offer, but was only able to reach her voicemail. She
left a message conveying CAIC's policy limits offer and asked that DeDominicis return
her call. She also tried to reach DeDominicis by phone around 4:30 and again was
unsuccessful. CAIC also sought to show it tried to fax the letter to DeDominicis at 3:21
p.m., at 3:28 p.m., and again at 4:08 p.m., but the fax failed on each occasion because
DeDominicis had turned off her fax machine. Because Graciano stipulated DeDominicis
timely received the letter, the court excluded this evidence pursuant to Graciano's motion
in limine.
6 DeDominicis had filed an action, naming Saul, Saul's wife, and Saul's corporation,
approximately one week before the expiration date set forth in Graciano's demand letter
on Jose's policy. However, because of the court's in limine rulings, that evidence was
excluded from the jury's consideration.
8
G. The Other Admitted and Excluded Evidence
Graciano introduced evidence that CAIC could have more promptly obtained the
police report, or at a minimum could have more promptly obtained the "face pages" from
the police report of the accident, but negligently did not do so. Had CAIC earlier
obtained these pages, it would have earlier learned the driver's identity. Once the driver's
identity was known, CAIC could have searched its computers to determine whether
CAIC insured the driver.
Although the Factfinder unit did receive the police report on November 7, and
therefore knew Saul was the driver, no one in the Factfinder unit searched its
computerized database under "Saul Ayala" to determine if he was insured by CAIC. Had
anyone conducted that search, they could have earlier learned he was insured by CAIC,
and this could have led the Factfinder unit to learn of the claim Saul had opened two
weeks earlier being processed by the Vista claims unit.7 Additionally, the Factfinder unit
had (by November 12) made a preliminary determination that Jose's policy had expired
and therefore there was no coverage, and at that time the supervisor noted (among other
tasks to be performed) someone should contact Jose to determine if he had any "excess"
coverage that might be applicable, and also "verify if [Saul] has his own insurance."
7 The Vista claims unit supervisor apparently received an "ISO ClaimSearch
Automatic Update" on November 14 that indicated there were at least two claims arising
out the accident. The claim number assigned to Graciano's claim on Jose's policy did
appear in that update, but the "claimant" was listed as Saul and Graciano's name did not
appear on this ISO ClaimSearch Automatic Update. By the following day, this confusion
was resolved and the two claims had been consolidated by CAIC.
9
These calls to Jose and Saul were made two days later, and when Saul returned this call
the next day, Talley first learned of his insurance with CAIC.
When CAIC tendered their policy limits on November 15, it was unaccompanied
by either a check or by the declarations page for Saul's policy. This offer was also
subject to the conditions that the policy limits offer of settlement would include (1) any
loss of consortium claim and (2) all lien claims "known and unknown."8
The court excluded evidence proffered by the defense to support its argument that
DeDominicis's offer to settle for the policy limits was not a genuine offer and that, once
CAIC informed her that it appeared there was no coverage under Jose's policy, its
8 CAIC's offer observed that "Palomar Medical Center [the hospital at which
Graciano was treated] will have a statutory lien." Although Graciano's evidence showed
CAIC had not yet placed a "lien stamp" on either of the claim files indicating a notice of
the statutory hospital lien had been received, CAIC could not have at that time known
whether the statutory lien nevertheless had become effective, because a lien apparently
would have been effective (and Saul would have potential liability to Palomar Hospital
under Civ. Code, § 3043.4) had the lien notice been "mailed by registered mail . . . prior
to the payment of any moneys to the injured person" by Saul or his insurer. (Civ. Code,
§ 3045.3, italics added.) Thus, at the time of the offer, CAIC could not "rule out the
potential of a hospital lien from Palomar hospital." Also, considering the compressed
time frame, in which the only contact between the Vista claims unit and DeDominicis
was a short phone conversation in which DeDominicis declined CAIC's request for an
extension, the Vista claims unit could not have excluded potential loss of consortium
claims against its insured because DeDominicis's letters described her client as Mrs.
Graciano. Regardless, Graciano cites no law suggesting an insurer can be held liable for
bad faith failure to settle if it makes a "full policy limits" offer and conditions the offer on
a full resolution of all potential claims against its insured, and the law appears to be to the
contrary. (Cf. Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 871 (Merritt)
["Patently, the carrier cannot settle its share of the assured's liability and turn the assured
adrift, exposed to a suit for excess liability financed by the carrier's settlement."]; accord,
State Farm Mut. Auto. Ins. Co. v. Crane (1990) 217 Cal.App.3d 1127, 1136 (Crane)
["[T]he insurer is authorized to settle lawsuits, not to pay unilaterally the policy limits to
a plaintiff. Moreover, it is generally recognized that such an unconditional payment,
which has the effect of bankrolling a plaintiff's case against the insured, is not made in
good faith."].)
10
subsequent efforts to settle on behalf of Saul were hampered by DeDominicis's
machinations. For example, although DeDominicis knew (not later than November 7,
2007) that the driver's name was Saul Ayala, Jr., her November 5 demand letter, as well
as her November 7 letter enclosing Graciano's medical bills and her November 8 letter
reiterating the November 15 deadline for CAIC to respond, continued to refer solely to
Jose and Jose's policy number without any mention of Saul. Additionally, the court
excluded evidence that CAIC tried to reach DeDominicis telephonically on the afternoon
of November 15 to convey the offer to settle, but those calls went unanswered, and
excluded evidence that CAIC's efforts to fax the offer of policy limits during this same
time frame were prevented because DeDominicis had (in a departure from ordinary
procedures) turned her fax off. (See fn. 5, ante.)
II
PROCEDURAL HISTORY
Graciano disregarded CAIC's full policy limits offer and instead pursued her
previously filed action against Saul. She obtained a judgment of over $2 million and
obtained a partial assignment of Saul's rights against CAIC to pursue the present action.
The present action alleged a claim for insurance bad faith based on CAIC's alleged
unreasonable refusal to settle Graciano's claim against Saul. The jury returned a verdict
in Graciano's favor, and CAIC timely appealed.
11
III
APPLICABLE LEGAL STANDARDS
A. Substantive Standards
Because this action was limited to a claim that CAIC breached its duties to Saul by
not taking reasonable steps to settle Graciano's claim against him, we outline the
principles applicable to the claim.
"In each policy of liability insurance, California law implies a covenant of good
faith and fair dealing. This implied covenant obligates the insurance company, among
other things, to make reasonable efforts to settle a third party's lawsuit against the
insured. If the insurer breaches the implied covenant by unreasonably refusing to settle
the third party suit, the insured may sue the insurer in tort to recover damages
proximately caused by the insurer's breach." (PPG Industries, Inc. v. Transamerica Ins.
Co. (1999) 20 Cal.4th 310, 312.) The standard of good faith and fairness examines the
reasonableness of the insurer's conduct, and mere errors by an insurer in discharging its
obligations to its insured " 'does not necessarily make the insurer liable in tort for
violating the covenant of good faith and fair dealing; to be liable in tort, the insurer's
conduct must also have been unreasonable. [Citations.]' " (Brandt v. Superior Court
(1985) 37 Cal.3d 813, 819; accord, Walbrook Ins. Co. v. Liberty Mutual Ins. Co. (1992) 5
Cal.App.4th 1445, 1460 ["so long as insurers are not subject to a strict liability standard,
there is still room for an honest, innocent mistake"]; Tomaselli v. Transamerica Ins. Co.
(1994) 25 Cal.App.4th 1269, 1280-1281 ["The law clearly states that erroneous denial of
12
a claim does not alone support tort liability; instead, tort liability requires that the insurer
be found to have withheld benefits unreasonably."].)9
An insured's claim for bad faith based on an alleged wrongful refusal to settle first
requires proof the third party made a reasonable offer to settle the claims against the
insured for an amount within the policy limits. (Merritt, supra, 34 Cal.App.3d at p. 877.)
The offer satisfies this first element if (1) its terms are clear enough to have created an
enforceable contract resolving all claims had it been accepted by the insurer (Coe v. State
Farm Mut. Auto. Ins. Co. (1977) 66 Cal.App.3d 981, 992-993 (Coe)), (2) all of the third
party claimants have joined in the demand (ibid.), (3) it provides for a complete release of
all insureds (Strauss v. Farmers Ins. Exchange (1994) 26 Cal.App.4th 1017, 1021), and
(4) the time provided for acceptance did not deprive the insurer of an adequate
opportunity to investigate and evaluate its insured's exposure. (Critz v. Farmers Ins.
Group (1964) 230 Cal.App.2d 788, 798 (Critz) [One-week limitation attached to
settlement offer does not preclude a finding of bad faith rejection where insurer's
investigation and evaluation of claim had been completed; claimant "had a right to attach
a time limit to her offer, but the insurer was not bound by it. [Citation.] Had the
9 We recognize that Brandt and Tomaselli, as well as many other cases on which we
rely, involved insurers who allegedly breached the implied covenant of good faith and
fair dealing in the context of "first party" coverage claims, whereas the present case
involves an alleged breach the implied covenant of good faith and fair dealing in the
context of "third party" coverage. However, the controlling principles have equal
applicability in both contexts. (See, e.g., Brehm v. 21st Century Ins. Co. (2008) 166
Cal.App.4th 1225, 1241, fn. 8 ["Although the question whether an insurer failed to accept
a reasonable settlement offer within policy limits of a third party claim against its insured
is analytically distinct from the question whether an insurer unreasonably withheld
benefits due under the policy in a first party coverage context [citation], both turn on the
reasonableness of the insurer's position . . . ."].)
13
company needed more time for investigation, for a good faith assessment of the claim's
value or for consultation with its policyholder, it might have chosen neither to accept nor
reject her offer, but rather to suggest additional time."], disapproved on other grounds in
Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 433.)
A claim for bad faith based on an alleged wrongful refusal to settle also requires
proof the insurer unreasonably failed to accept an otherwise reasonable offer within the
time specified by the third party for acceptance. (Critz, supra, 230 Cal.App.2d at p. 798.)
However, when a liability insurer timely tenders its "full policy limits" in an attempt to
effectuate a reasonable settlement of its insured's liability, the insurer has acted in good
faith as a matter of law (Crane, supra, 217 Cal.App.3d at p. 1136; accord, Boicourt v.
Amex Assurance Co. (2000) 78 Cal.App.4th 1390, 1400) because "by offering the policy
limits in exchange for a release, the insurer has done all within its power to effect a
settlement." (Lehto v. Allstate Ins. Co. (1994) 31 Cal.App.4th 60, 73.)
B. Standard of Review
When a verdict is challenged for lack of substantial evidence, we must determine
whether there is evidence that is " ' "reasonable in nature, credible, and of solid value;
[constituting] 'substantial' proof of the essentials which the law requires in a particular
case." [Citations.]' " (DiMartino v. City of Orinda (2000) 80 Cal.App.4th 329, 336.) "In
evaluating the legal sufficiency of the evidence, the following basic approach is required:
'First, one must resolve all explicit conflicts in the evidence in favor of the respondent
and presume in favor of the judgment all reasonable inferences. [Citation.] Second, one
must determine whether the evidence thus marshaled is substantial. While it is
14
commonly stated that our "power" begins and ends with a determination that there is
substantial evidence [citation], this does not mean we must blindly seize any evidence in
support of the respondent in order to affirm the judgment. The Court of Appeal "was not
created . . . merely to echo the determinations of the trial court. A decision supported by
a mere scintilla of evidence need not be affirmed on review." [Citation.] "[I]f the word
'substantial' [is to mean] anything at all, it clearly implies that such evidence must be of
ponderable legal significance. Obviously the word cannot be deemed synonymous with
'any' evidence. It must be reasonable . . . , credible, and of solid value . . . ." [Citation.]' "
(Valenzuela v. State Personnel Bd. (2007) 153 Cal.App.4th 1179, 1184-1185, quoting
Kuhn v. Department of General Services (1994) 22 Cal.App.4th 1627, 1632-1633.) "The
ultimate determination is whether a reasonable trier of fact could have found for the
respondent based on the whole record. [Citation.] While substantial evidence may
consist of inferences, such inferences must be 'a product of logic and reason' and 'must
rest on the evidence' [citation]; inferences that are the result of mere speculation or
conjecture cannot support a finding [citations]." (Kuhn, at p. 1633.)
When a claim is based on the insurer's bad faith, alleging either the insurer
unreasonably refused to pay policy benefits or did not conduct an adequate investigation,
the ultimate test is whether the insurer's conduct was unreasonable under all of the
circumstances. (Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co.
(2001) 90 Cal.App.4th 335, 346.) Although "the reasonableness of an insurer's claims-
handling conduct is ordinarily a question of fact, it becomes a question of law where the
15
evidence is undisputed and only one reasonable inference can be drawn from the
evidence." (Ibid.)
IV
ANALYSIS
A. There Is No Substantial Evidence CAIC Unreasonably Rejected an Offer to
Settle Saul's Liability
An insured's claim for "wrongful refusal to settle" cannot be based on his or her
insurer's failure to initiate settlement overtures with the injured third party (Reid v.
Mercury Ins. Co. (2013) 220 Cal.App.4th 262, 277 ["nothing in California law supports
the proposition that bad faith liability for failure to settle may attach if an insurer fails to
initiate settlement discussions, or offer its policy limits, as soon as an insured's liability in
excess of policy limits has become clear"]), but instead requires proof the third party
made a reasonable offer to settle the claims against the insured for an amount within the
policy limits. (Merritt, supra, 34 Cal.App.3d at p. 877.) We conclude there is no
substantial evidence Graciano ever offered to settle her claims against Saul for an amount
within Saul's policy limits.
The only settlement "offer" CAIC could have accepted was DeDominicis's
November 5, 2007, letter. It identified Jose as the named insured, the relevant policy as
Jose's policy (e.g. "Policy # AP00401514"), and (after describing Graciano's extensive
injuries) stated DeDominicis had been retained to pursue Graciano's remedies "arising out
of an event in which your above-referenced insured and/or their vehicle struck
[Graciano]" (italics added), and demanded that CAIC "immediately provide a copy of the
16
declaration page and payment of the maximum bodily injury policy limits . . . ." (Italics
added.) Even assuming (as Graciano contends on appeal) the letter implicitly contained
an agreement to release "the above referenced insured" in exchange for the "policy
limits" of the referenced policy, the plain import of this letter is that Graciano offered
only to settle her claims against Jose.10 Because Graciano never demanded payment of
Saul's policy limits in exchange for a release of Saul's liability, Saul would not have been
protected even had CAIC accepted the terms of Graciano's demand.
Graciano cites no authority that an offer to release one potentially liable party
(here, Jose) in exchange for that party's policy limits, if rejected by the insurer, can serve
as the basis for a "wrongful refusal to settle" claim by a different potentially liable party
(here, Saul), and analogous authorities suggest a contrary rule. In McLaughlin v.
National Union Fire Ins. Co. (1994) 23 Cal.App.4th 1132, the injured party made a
settlement demand that was apparently within policy limits, but the offer contained no
10 Graciano appears to argue the November 7 letter did demand Saul's policy limits
because it "demand[ed] the policy limits of Mercury's 'insureds' [and] nowhere refers to
the policy limits of Jose" and therefore was "obviously referring to Saul." We reject
Graciano's argument to the extent it suggests that a third party claimant, after specifically
identifying a named insured and his or her policy number, may demand the policy limits
of a company's "insureds" and by such plural reference thereby widen the net to make a
demand encompass the universe of unidentified persons and entities who have coverage
with the insurer and who may have potential liability for the accident. For example, had
Saul been under 21 years of age and been furnished alcohol by a social host (against
whom Graciano apparently would have a claim) (Civ. Code, § 1714, subd. (d)) and the
host happened to be insured by CAIC, Graciano's theory would expose CAIC to a
wrongful refusal to settle claim by that social host for failing to discover the policy and
proffer to the social host's policy limits in response to Graciano's demand on Jose's
policy. We decline to adopt a rule that a settlement demand seeking the policy limits of a
specifically identified insured may, simply by employing the plural term "insureds,"
constitute a demand seeking the policy limits of the universe of persons and entities with
whom an insurer may have issued policies.
17
suggestion the injured party would release the insured, and the McLaughlin court rejected
the argument that such offer could support the verdict against the insurer for wrongful
refusal to settle. (Id. at p. 1145, fn. 5.) Similarly, in Strauss v. Farmers Ins. Exchange,
supra, 26 Cal.App.4th 1017, the plaintiff's demand for policy limits did not include an
offer to release all of the insureds, and the court concluded rejection of such an offer
could not support an action for wrongful refusal to settle. (Id. at pp. 1020-1022.) Finally,
in Coe, supra, 66 Cal.App.3d 981, the court concluded the insurer's failure to accept the
plaintiff's settlement demand could not provide a basis for a wrongful refusal to settle the
claim because it would not have released the insured from all potential claims. (Id. at
pp. 992-993.)
Graciano argues these cases do not support reversal because claimants are not
required "to begin settlement overtures with letter-perfect offers to which insurers need
only respond 'Yes' or 'No.' An insurer's duty of good faith would be trifling if it did not
require an insurer to explore the details of a settlement offer that could prove extremely
beneficial to its insured." (Allen v. Allstate Ins. Co. (9th Cir. 1981) 656 F.2d 487, 490, fn.
omitted; see Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688, 708, fn. 7 [noting in
dicta that where insurer deems settlement offers ambiguous or incomplete it should
attempt to seek clarification rather than rejecting offer].) Indeed, Graciano's argument on
appeal is that McLaughlin and Strauss are distinguishable because her November 7 letter
never refused to release Saul; by the same token, however, neither did her November 7
letter ever offer to release Saul in exchange for Saul's policy limits. Graciano also
suggests that, even if there was some ambiguity as to whether Saul would have been
18
encompassed in her settlement demand, "if [CAIC] had contacted Ms. DeDominicis
before the settlement expiration date to verify her client would sign releases, as did the
insurer in Coe, that issue could have been resolved." This argument, however, ignores
the undisputed evidence CAIC did contact Ms. DeDominicis before the settlement
expiration date to inquire whether her client would agree to release Saul in exchange for
his policy limits, and those inquiries were rebuffed.
Graciano alternatively argues that, even assuming the November 7 demand letter
incorrectly identified the insured and the applicable policy number, those defects were
attributable to CAIC because it was CAIC that, in response to Graciano's report of the
injury, changed the driver's name from "Saulay Ala" (as reported by DeDominicis) to
Jose. Graciano argues it is CAIC―not a third party―who is obligated to investigate
claims against its insured, and therefore any defect in her demand letter must be
attributed to CAIC's default of their obligations. However, the undisputed evidence is
that CAIC did comply with its obligations to investigate potential coverage on this
reported claim, because once CAIC received this report from Graciano (which tied her
claim to an apparently canceled policy) it tried to contact Jose, immediately began
investigating whether the policy had been validly canceled, and kept Graciano apprised
of its progress. The defect in her demand letter thus had its genesis in the defect in
DeDominicis' first report of Graciano's claim, and was not impacted by the investigation
undertaken by the Factfinder unit in response to her initial claim.
Graciano attempts to bring the circumstances of this case under the aegis of Safeco
Ins. Co. of America v. Parks (2009) 170 Cal.App.4th 992 (Safeco), arguing that an insurer
19
is charged with constructive knowledge of its own insuring agreements and, if it fails to
search for, discover and disclose potential coverage under a policy other than the one
under which the claim is made, it can be held liable for wrongful failure to defend and to
settle. However, even under the analysis of the Safeco court,11 we are unpersuaded that
case supports the judgment here.
Our reason for rejecting Graciano's reliance on Safeco requires a nuanced
understanding of the facts presented to, and the resulting analysis by, the Safeco court.
There, the victim (Parks) sued three tortfeasors, including Miller, for injuries he sustained
in 1999 when he was struck by a third person after Miller and the others left Parks at the
side of a road. (Safeco, supra, 170 Cal.App.4th at p. 998.) Miller, a minor, lived with
her father and grandmother in a condominium rented by the grandmother. Miller's
mother was living with Mr. Barnette, who had a homeowner's insurance policy issued by
Safeco, and Miller occasionally stayed with her mother at Barnette's house. (Ibid.)
Miller tendered her defense to Safeco under the homeowner's policy issued to Barnette
(the Barnette policy), but Safeco declined the defense (ibid.), apparently contending an
automobile exclusion precluded coverage for this accident. (Id. at p. 1004.) In a
subsequent action, Parks recovered a judgment against Miller, who settled with Parks by
11 The Safeco court itself cautioned that, "[i]n this unusual context, we conclude
[insurer's] failure to conduct a reasonable search for other Safeco policies breached duties
arising under the [other] policy to reasonably investigate and settle [the claim]" and
concluded the insurer could not breach its duty to conduct a reasonable investigation and
then use the resulting ignorance "to shield itself from liability for breach of the related
duty to accept a reasonable settlement demand." (Id. at p. 1009, italics added.) Even
assuming we were to agree with all aspects of the analysis of the Safeco court, we would
limit that case to the peculiar facts and the self-described "unusual context" presented in
Safeco.
20
assigning to him any claims she might have against Safeco and, in 2002, Parks sued
Safeco to recover the judgment he obtained against Miller (the bad faith action). He
alleged that Safeco breached the Barnette policy by refusing, in bad faith, to defend
Miller under the Barnette policy and to settle within the limits of that policy. (Id. at
p. 998.) Sometime later, apparently in 2003 and well after Parks's bad faith action was
filed, Miller's father asked her grandmother (Evelyn) whether she had any insurance on
her condominium and discovered Safeco insured Evelyn under a renter's insurance policy
(the Evelyn policy). Miller's father then gave the Evelyn policy to Miller or to her
lawyer. (Id. at p. 999.)
In a bifurcated proceeding in the original bad faith action, the trial court entered a
declaratory judgment in favor of Parks, finding Safeco had a duty to defend and to
indemnify Miller because she was an insured under the Barnette policy. However,
Safeco appealed and, in 2004, the appellate court reversed and held Safeco had no duty to
defend Miller under the Barnette policy because she was not an insured under that policy.
(Safeco, supra, 170 Cal.App.4th at p. 999.) Thereafter, Parks's counsel demanded Safeco
pay the policy limits under the Evelyn policy, and the adjuster for Safeco (within a week
of receiving the demand letter) concluded Miller was an insured under the Evelyn policy
and that its automobile exclusion did not preclude coverage. Parks then amended his bad
faith action to allege for the first time that Safeco had a duty under the Evelyn policy to
pay the judgment and that it breached the implied covenant of good faith by refusing to
defend or indemnify Miller under that policy. (Id. at pp. 999-1000.) The trial court
ultimately concluded Safeco had breached the implied covenant of good faith by refusing
21
to defend or indemnify Miller based on a policy (the Evelyn policy) under which Miller
had never sought a defense. (Id. at p. 1000.)
The lynchpin of the Safeco court's analysis, upon which the balance of its
remaining holdings depended, was its discussion of the insurer's claim that its duty of
good faith and fair dealing under the Evelyn policy "never arose because . . . Miller
tendered her defense only under the Barnette policy and there was no evidence Safeco
had actual knowledge of the [Evelyn] policy when it declined the defense." (Safeco,
supra, 170 Cal.App.4th at p. 1003, fn. omitted.) The Safeco court, after noting the duty
of good faith and fair dealing includes a duty on the part of the insurer to investigate
claims submitted by its insured, specifically noted that the "duties, however, arise after
the insured complies with the claims procedure described in the insurance policy.
[Citations.] '[W]ithout actual presentation of a claim by the insured in compliance with
claims procedures contained in the policy, there is no duty imposed on the insurer to
investigate the claim.' [Quoting California Shoppers, Inc. v. Royal Globe Ins. Co. (1985)
175 Cal.App.3d 1, 57 (California Shoppers).]" (Safeco, at p. 1003.) However, the
Safeco court noted the insured's failure to comply with the notice or claims provisions
will not excuse the insurer's obligations under the policy
"unless the insurer proves it was substantially prejudiced by the late
notice. [Citations.] 'Prejudice is not presumed from delayed notice
alone. [Citations.] The insurer must show actual prejudice, not the
mere possibility of prejudice.' [Quoting Shell Oil Co. v. Winterthur
Swiss Ins. Co. (1993) 12 Cal.App.4th 715, 761.] Where, as here, the
insurer denies coverage, it may establish substantial prejudice only
by demonstrating that, 'in the event that a timely tender of the
defense [in the underlying action] had been made, it would have
undertaken the defense.' [Quoting Clemmer v. Hartford Insurance
22
Co. (1978) 22 Cal.3d 865, 883.] 'If the insurer asserts that the
underlying claim is not a covered occurrence or is excluded from
basic coverage, then earlier notice would only result in earlier denial
of coverage. To establish actual prejudice, the insurer must show a
substantial likelihood that, with timely notice, and notwithstanding a
denial of coverage or reservation of rights, it would have settled the
claim . . . .' [Quoting Shell Oil Co. v. Winterthur Swiss Ins. Co.,
supra, 12 Cal.App.4th at p. 763.]" (Safeco, supra, 170 Cal.App.4th
at p. 1004, italics added.)
The Safeco court then concluded the "notice defense" was correctly rejected by the
trial court (on a motion for summary adjudication) and later by the jury because the
insurer did not establish it had been prejudiced by the delayed notice, reasoning Safeco
had attempted to justify its rejection of coverage under the Barnette policy by asserting its
automobile exclusion precluded coverage for this accident, and "Safeco now relies on the
same automobile exclusion to contend there was no potential for coverage under the
substantially identical [Evelyn] policy. As a result, both the trial court and the jury could
reasonably infer that Safeco was not prejudiced by the late notice because it would have
relied on the automobile exclusion to decline the defense under the [Evelyn] policy."
(Safeco, supra, 170 Cal.App.4th at p. 1004.)
Here, in contrast, there is no evidence Graciano's misidentification of the
applicable policy in her settlement demand did not cause prejudice to CAIC, because
there is no evidence CAIC would have relied on the same basis for declining to pay the
policy limits on Saul's policy (had Graciano correctly submitted her claim under Saul's
policy) as it cited when it declined her request for the policy limits under Jose's policy.
To the contrary, the only evidence in the record is that Graciano's misidentification of the
applicable policy did cause " 'actual prejudice [because] the insurer . . . show[ed] a
23
substantial likelihood that, with timely notice, . . . it would have [attempted to] settle[] the
claim . . . .' " (Safeco, supra, 170 Cal.App.4th at p. 1004.) The undisputed evidence
showed CAIC rejected Graciano's request for the policy limits under the misidentified
policy because it had expired but, once it learned of the applicable policy, it did not
decline coverage for the same reason (or for any reason) but instead proffered the full
policy limits in an attempt to protect its insured. We are convinced Safeco does not
support the verdict here.
Moreover, Safeco provides no support for Graciano's argument for a second
reason: the same conduct the Safeco court opined should have been undertaken by the
insurer (and whose absence supported the wrongful failure to settle verdict there) was
undertaken by CAIC here. Once the Safeco court concluded Miller's misidentification of
the applicable policy caused no prejudice to the insurer, and hence the insurer's duty to
investigate was not excused, it concluded Safeco was obligated to investigate whether
any other policy potentially covered her liability to the claimant, and its failure to
investigate and discover the Evelyn policy led to the insurer's rejection of the policy limit
demand. (Safeco, supra, 170 Cal.App.4th at p. 1005.) The Safeco court specifically
noted the insurer determined Miller did not reside with her mother and therefore was not
an insured under the Barnette policy, and declined coverage, and thereafter there was "no
evidence [the insurer] ever searched its own files for potentially applicable Safeco
policies issued to the adults with whom Miller resided[;] . . . [n]or did Safeco interview
Miller's father or grandmother to determine whether they had Safeco policies that might
cover her claim." (Id. at p. 1008.) Because this search or interview would have produced
24
the applicable Evelyn policy, the Safeco court concluded the absence of this search
breached the insurer's duty to investigate and to attempt to settle Miller's liability. (Id. at
p. 1009.) Here, in contrast, after CAIC determined the identified Jose policy did not
cover Graciano's claim, it did not stop there: it did try to interview Jose and Saul to
determine whether they had policies that might cover Graciano's claim, this search did
discover another applicable policy, and CAIC did attempt to settle Saul's liability.
Because the undisputed evidence shows CAIC was actually prejudiced by the
misidentification of the applicable policy, and also shows (notwithstanding the
misidentification) CAIC undertook the type of continued investigation the Safeco court
concluded was required, we reject Graciano's argument that there was substantial
evidence under Safeco to support the verdict.
Graciano's argument under Safeco is not, at bottom, that CAIC did not conduct
any effort to locate and provide coverage for Saul, but is instead an argument that there
was substantial evidence CAIC "bungled its investigation" and, but for its errors, could
have sooner discovered there was a policy providing coverage for her claim. Although
this claim is true, it is also irrelevant. A bad faith claim requires "something beyond
breach of the contractual duty itself" (California Shoppers, supra, 175 Cal.App.3d at
p. 54), and that something more is " 'refusing, without proper cause, to compensate its
insured for a loss covered by the policy . . . .' [Citation.] Of course, the converse of
'without proper cause' is that declining to perform a contractual duty under the policy
with proper cause is not a breach of the implied covenant." (Ibid., italics supplied by
California Shoppers.) The California Shoppers court then noted that "[t]o refine further
25
the nature and extent of the duty here under analysis, in terms of a particular application
of 'with proper cause,' it is our view that a mistaken withholding of policy benefits, at
least where, as here, such mistake (as to the insured's identity and not as to the matter of
coverage) has been contributed to by the very party claiming those policy benefits, is
consistent with observance of the implied covenant of good faith and fair dealing because
the mistake supplies the 'proper cause.' " (Id. at p. 55.) Applying California Shoppers
here, although there was some delay by CAIC in locating and connecting Graciano's
claim with Saul's policy, resulting in a mistaken "withholding" of policy benefits for a
24-hour period, such mistake was "contributed to by the very party claiming those policy
benefits" and "supplies the 'proper cause' " (ibid.), fatal to Graciano's bad faith claim.
B. There Is No Substantial Evidence CAIC Unreasonably Failed to Timely Tender
Saul's Policy Limits to Attempt to Settle Saul's Liability
A claim for "wrongful refusal to settle" requires proof the insurer unreasonably
failed to accept an otherwise reasonable offer within the time specified by the third party
for acceptance. (Critz, supra, 230 Cal.App.2d at p. 798.) The third party is entitled to set
a reasonable time limit within which the insurer must accept the settlement proposal
(Martin v. Hartford Acc. & Indem. Co. (1964) 228 Cal.App.2d 178, 185), and even a one-
week limitation attached to a settlement offer does not preclude a finding of bad faith
rejection under some circumstances. (Critz, at pp. 797-798 [insurer given one week to
respond where claimant had not yet incurred costs of a retained attorney, company's
investigation and evaluation was complete, and company never suggested it needed more
time for investigation].) Although the insurer "need not be governed by whatever time
26
limit counsel for plaintiff in a personal injury action may impose" (Martin, at p. 185),
whether the insurer has satisfied its duty to seek to settle in protection of its insured "must
be measured in the light of the time limitation which plaintiff had placed on her offer."
(Ibid.) When a liability insurer does timely tender its "full policy limits" in an attempt to
effectuate a reasonable settlement of its insured's liability, the insurer has acted in good
faith as a matter of law (Crane, supra, 217 Cal.App.3d at p. 1136) because "by offering
the policy limits in exchange for a release, the insurer has done all within its power to
effect a settlement." (Lehto v. Allstate Ins. Co., supra, 31 Cal.App.4th at p. 73.)
Here, in the three weeks after it first learned Graciano was alleging someone
insured by CAIC had injured her, CAIC was able to (1) determine that the policy
identified by Graciano (Jose's policy) could not provide a source of compensation for her,
(2) identify that a person (Saul) different from the one identified by Graciano ("Saulay
Ala") was responsible for Graciano's injuries, (3) determine Saul did have a policy
available as a source of compensation, and (4) tender CAIC's "full policy limits" in an
attempt to effectuate a settlement of Saul's liability. Although there was substantial
evidence from which a jury could have concluded CAIC was able to resolve the
confusion engendered by Graciano's misidentification of the applicable insured and
insurance policy earlier than it did, and to offer to settle earlier than it did, perfection is
not required (see, e.g., Adelman v. Associated Internat. Ins. Co. (2001) 90 Cal.App.4th
352, 369 ["to recover in tort for an insurer's mishandling of a claim, it must allege more
27
than mere negligence"]), and Graciano's evidence showed, at most, that CAIC could have
resolved the confusion more promptly.12
More importantly, the undisputed evidence showed CAIC did timely tender Saul's
full policy limits in an attempt to settle Graciano's claim, and therefore acted in good
faith as a matter of law "by offering the policy limits in exchange for a release [thereby
doing] all within its power to effect a settlement." (Lehto v. Allstate Ins. Co., supra, 31
Cal.App.4th at p. 73.) Although Graciano argues the evidence could have permitted a
trier of fact to conclude the tender of Saul's policy limits was not timely, Graciano herself
selected November 15 as the deadline for offering full policy limits in settlement.
Although an injured third party's unilateral selection of a deadline does not conclusively
govern whether a later tender of policy limits would have been untimely (Martin, supra,
228 Cal.App.2d at p. 185), we conclude at a minimum that the insurer has satisfied its
12 Graciano asserts the evidence showed CAIC was negligent and cites Notrica v.
State Comp. Ins. Fund (1999) 70 Cal.App.4th 911 for the proposition that such evidence
can be circumstantial evidence of bad faith. However, Notrica recognized that mere
negligence does not constitute bad faith and instead held that evidence of negligent
mishandling of claims such as those of the plaintiff, " 'if shown as a pattern, clearly
would be strong circumstantial evidence that SCIF indeed engaged in the complained of
conduct.' " (Id. at p. 931, italics added.) On appeal, Graciano cites the evidence showing
CAIC could have earlier obtained the police report showing Saul was the driver and,
when it did receive that report, could have phoned Saul earlier (but did not) or searched
its computer database to determine whether Saul was an insured. However, Graciano has
not directed this court's attention to evidence in the record demonstrating such
defalcations were part of a pattern by CAIC's claims handling department when dealing
with claims like Graciano's claim. (Cf. Estate of Allen (1971) 17 Cal.App.3d 401, 405,
fn. 2 [when respondent claims judgment is supported by substantial evidence, " 'it is the
duty of a respondent . . . to point out to the appellate court the evidence he deems
sufficient to support such judgment' "].) Instead, the evidence cited on appeal by
Graciano shows negligence in the handling of this specific claim, but that is not enough
to support a verdict for bad faith. (Adelman v. Associated Intern. Ins. Co., supra, 90
Cal.App.4th at p. 369 ["more than mere negligence" required for tort claim].)
28
duty to seek to settle in protection of its insured when, "in the light of the time limitation
which plaintiff had placed on her offer" (ibid.), the insurer tenders its full policy limits
within the time limits imposed by an injured party's demand letter.
DISPOSITION
The judgment is reversed. Defendants shall recover their costs on appeal.
McDONALD, J.
WE CONCUR:
HUFFMAN, Acting P. J.
O'ROURKE, J.
29
Filed 11/12/14
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
SONIA GRACIANO, D061956
Plaintiff and Respondent,
v. (Super. Ct. No.
37-2010-00055207-CU-IC-NC)
MERCURY GENERAL CORPORATION et
al., ORDER DENYING REHEARING
AND GRANTING MODIFICATION
Defendants and Appellants.
THE COURT:
The petition for rehearing is denied.
On the Court's own motion, the disposition is changed to read:
"The judgment is reversed. The trial court is directed to enter
judgment on the complaint in favor of defendants. Defendants shall
recover their costs on appeal.
There is no change in the judgment.
HUFFMAN, Acting P. J.
Copies to: All parties
Filed 11/12/14
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
SONIA GRACIANO, D061956
Plaintiff and Respondent,
v. (Super. Ct. No.
37-2010-00055207-CU-IC-NC)
MERCURY GENERAL CORPORATION et
al., ORDER CERTIFYING OPINION
FOR PUBLICATION
Defendants and Appellants.
THE COURT:
The opinion filed October 17, 2014, is ordered certified for publication.
HUFFMAN, Acting P. J.
Copies to: All parties
James P. Wagoner
Clarke B. Holland
Peter H. Klee
Marc J. Feldman
Graciano v. Mercury General Corp.
Combined Opinion