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Fitzgerald v. State Farm Insurance Co.

January 11, 2008


The opinion of the court was delivered by: Hon. Barbara L. Major United States Magistrate Judge


The parties have filed cross motions for summary judgment. Having carefully considered the arguments and evidence submitted thereto, the Court enters the following decision.


Plaintiff Brent Fitzgerald ("Fitzgerald") brought an action in state court against Andrew W. Barclay ("Barclay")*fn2 alleging Barclay was negligent with respect to a motor vehicle accident that occurred on May 17, 2003. Barclay is an insured of defendant State Farm Insurance Company ("State Farm" or "defendant") which defended Barclay in the state court action. The case was tried to a jury in June 2004. While the jury was deliberating, Fitzgerald made an offer to dismiss the pending action against Barclay, defendant's insured, in exchange for State Farm's payment of the $100,000 bodily injury liability coverage plus some but not all court costs incurred that included court reporter fees, jury fees, cost of preparation of an edited version of a videotaped deposition and $2,000 incurred when plaintiff's medical expert was required to return the next day in order to accommodate defendant's medical expert. State Farm rejected plaintiff's settlement offer of bodily injury policy limits and $5,200 of court costs. The jury did not reach a verdict and a mistrial was declared. (FAC, ¶¶ 7, 12). The case was then heard before a newly convened jury and the jury found in Fitzgerald's favor and against Barclay, and damages were awarded in the sum of $937,283.98, plus costs of $31,527.17, and interest. (Exh. 2 to FAC).

Barclay's policy with State Farm has a per person bodily injury liability limit of $100,000 which is set forth on the declaration page and in the body of the insurance policy. The insurance policy also expressly provides supplemental cost coverage for "court costs of any suit for damages that we defend" that is in addition to the bodily injury liability limit and is not limited to a particular dollar amount. (Exh. 1 to FAC). As a result of the state court judgment, State Farm paid Fitzgerald the entire $100,000 bodily injury liability limit and the full cost award of $31,527.17 under the supplemental cost coverage provision of the policy. (FAC, ¶ 17). Thereafter, Barclay filed a Chapter 7 bankruptcy petition in which he sought to discharge the balance of the judgment entered in Fitzgerald's favor. Eventually Barclay and Fitzgerald entered into a stipulation that assigned Barclay's contractual rights to Fitzgerald while Barclay retained his right to seek tort damages against State Farm for the unreasonable failure to settle within policy limits.

Fitzgerald brought the present action in state court, which State Farm removed to this Court, seeking to recover the portion of the judgment exceeding the bodily injury policy limit on the ground that plaintiff had standing, as a judgment creditor, to recover the excess judgment under California Insurance Code § 11580(b)(1). After removal, defendant filed a motion to dismiss and plaintiff filed a motion for remand contending that diversity jurisdiction was not present. The Court denied the motion for remand and ordered a response to defendant's motion to dismiss. Rather than respond to the motion to dismiss, plaintiff filed a first amended complaint ("FAC") alleging in the sole cause of action that State Farm is obligated under California law to pay the balance of the judgment -- $837,283.98 -- obtained by Fitzgerald against Barclay because State Farm had an opportunity to reasonably settle the action within policy limits, i.e., the $100,000 bodily injury limit along with certain supplemental court costs, but unreasonably failed to do so.

Defendant moved to dismiss the FAC with prejudice contending that the settlement plaintiff offered was not within the policy limits, and a claim for the full amount of the underlying judgment that was in excess of the policy limit based on State Farm's wrongful failure to settle had not been assigned effectively to plaintiff. In its November 3, 2006 Order, the Court denied State Farm's motion finding, for purposes of a motion to dismiss for failure to state a claim, plaintiff had established that the offer of bodily injury liability limits plus a demand for court costs or a portion of the costs incurred was within the policy limits when the policy was read as a whole, and further, the assignment of contractual rights by Barclay to Fitzgerald covered plaintiff's claim for breach of the covenant of good faith and fair dealing based on State Farm's alleged unreasonable failure to settle the underlying case within policy limits. (Order filed November 3, 2006 [doc. #29]).

As noted above, the parties have filed cross motions for summary judgment. State Farm again contends it did not have the opportunity to accept a settlement offer for an amount within the policy limits and plaintiff does not possess the right to recover the excess judgment against State Farm under the assignment from Barclay to Fitzgerald. Plaintiff argues that State Farm unreasonably rejected his offer to settle the action within the policy limits and he has a valid assignment to pursue the excess judgment against State Farm.


A. Bad Faith Claim

1. Legal Standard

The legal basis for a bad faith claims was presented earlier in defendant's motion to dismiss; nevertheless, it will be repeated here. There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. Comunal v. Traders & General Ins. Co., 50 Cal. 2d 654, 658 (1958). The implied covenant of good faith and fair dealing and the duty of good faith are applicable in the insurance context. Id. at 659. In order to be liable for bad faith refusal to accept a reasonable settlement offer, the insurer must have an opportunity to settle a claim for an amount within its policy limits. McLaughlin v. National Union Fire Ins. Co. of Pittsburg, 23 Cal. App. 4th 1132, 1146-47, 29 Cal. Rptr. 2d 559, 566-67 (1994). Additionally, the insurer must settle within policy limits when there is substantial likelihood of recovery in excess of those limits. Id. The duty to settle is implied in law to protect the insured from exposure to liability in excess of coverage as a result of the insurer's decision for which only the insured might suffer. An insurer that breaches its implied covenant of good faith and fair dealing by unreasonably refusing to accept a settlement offer within policy limits will be held liable for the full amount of the judgment against the insured in excess of its policy limits. Kransco v. American Empire Surplus Lines Ins. Co., 23 Cal. 4th 390, 97 Cal. Rptr. 2d 151 (2000), as modified, (July 26, 2000). The California Supreme Court stated that "when 'there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing of the claim is a settlement which can be made within those limits, a consideration in good faith of insured's interest requires the insurer to settle the claim.'" Crisci v. Security Ins. Co., 66 Cal. 2d 425, 429, 58 Cal. Rptr. 13, 16 (1967)(quoting Comunale, 50 Cal. 2d at 659). An insurer must give as much consideration to the financial interests of its insured as it gives to its own interests.

2. Settlement Offer Within the Policy Limits

It is undisputed that the declaration page of the insurance policy at issue had a stated bodily injury liability limit of $100,000. (FAC ¶10). The policy provides in relevant part:

Limits of Liability

The amount of bodily injury liability coverage is shown on the declarations page under "Limits of Liability -- Coverage A -- Bodily Injury, Each Person, Each Accident." Under "Each Person" is the amount of ...

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