C "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> Insurer's Demand is Enforced Despite Being Unreasonable : California Insurance Law Observer

Insurer's Demand is Enforced Despite Being Unreasonable

Something is seriously wrong with this case.

Where an insurer defends a claim under a reservation of rights, it may put its insured on the spot by putting this choice to him:  The insurer proposes to fund a settlement (within policy limits) with the third party claimant, but gives the policyholder notice of that claim and offers the policyholder the option of allowing the insurer to settle the claim – with the insurer then having the right to try to collect the settlement from the policyholder if the reservation of rights proves well taken – or having the insured take over the defense and the responsibility for damages, if any.  The California Supreme Court allowed this course in Blue Ridge Insurance Co. v. Jacobsen (2001) 25 Cal. 4th 489.  In Blue Ridge, the plaintiff had given a tight time limit for the settlement, and the insurer put the same limit minus 2 days to complete the settlement if the insured accepted, to its insured; but nothing in Blue Ridge discussed whether the time limits were appropriate or too short.  Nobody had raised that issue.

Now comes the case of Mr. Fahmian.  Fahmian was sued for an injury a workman suffered while working on the construction of a residence for Fahmian.  He tendered the suit to his insurer, which defended under a reservation of rights and eventually received a policy limits ($300,000) settlement offer from the plaintiff, which it put to Fahmian under the same conditions as in the Blue Ridge case:  here’s the offer; we will accept it and may sue you later for the settlement amount; or tell us to reject it and then take over the defense of the case.

Fahmian did not reply at all.  The insurance company settled a few days later and then sued Fahmian for the amount of the settlement.

That case was tried to a jury, which found many facts including this one:

Under all circumstances, did American Modern [the insurer] provide sufficient time for Sohail Fahmian to make a reasoned reply to the insurer’s proposal?  Answer:  No.

Because of this answer the court entered judgment for Fahmian.  But the court of appeal reversed.  American Modern Home Ins. Co. v. Fahmian (2011) 194 Cal. App. 4th 162.

How did the court reach that result?  By reasoning that in Blue Ridge there had been only one more day for the insured to decide whether to take the deal than had been true for Mr. Fahmian; and that nothing in Blue Ridge stated anything about what time would be sufficient to evaluate such a complex offer!

This ruling amounts to a rule that if the three conditions of the Blue Ridge case are fulfilled (reservation of rights, offer to fund but seek recovery, and insured’s right to take over the defense if he refuses), then the time allowed for the insured to consider such a complex and foreboding offer does not matter: as a matter of law, in all cases, and regardless of the circumstances, the insurer may sue the policyholder to recover the settlement.

This, despite the jury’s finding that Fahmian had not been given enough time for a reasoned evaluation of this complex and high-risk situation!

That should not be the law.  Compare it with the recent holding of the federal court of appeal in New York, which ruled under California law (which applied because the parties had made the insurance contract in California) that a very large settlement had been properly put to his insurance companies by the insured (who was defending the case subject to recovery from the insurers) because the insurers were completely up to date and closely familiar with the facts, risks and values of the case, and thus had sufficient time to evaluate the settlement.  Schwartz v. Liberty Mutual Ins. Co. (2 Cir. 2008) 539 F. 3d 135.

The Fahmian case is a great error.  The jury saw and heard evidence about the way in which the insurance company put the problem to Mr. Fahmian and found that Fahmian had not been given enough time to evaluate it.  Without discussing the evidence beyond counting the number of days, the court of appeal ruled that whether Fahmian had enough time didn’t matter: he was stuck with the whole bill.  Would the outcome have been the same if the insurance company had given Fahmian two hours, or asked him to decide on the spot?

Injustices do happen!

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