Graciano v. Mercury General Corp.

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 to 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 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 that 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

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 subsequent efforts to settle on behalf of Saul were hampered by DeDominicis’s machinations. For example, although DeDominicis knew (not later than Nov. 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 that those calls went unanswered, and excluded evidence that CAIC’s efforts to fax the offer of policy limits during this same timeframe were prevented because DeDominicis had (in a departure from ordinary procedures) turned her fax machine off. (See fn. 5, ante.)

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.

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.

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 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 [ 58 Cal.Rptr. 13 , 426 P.2d 173 ].)

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 [ 93 Cal.Rptr.2d 763 ]) 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 [ 36 Cal.Rptr.2d 814 ].)

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 [ 95 Cal.Rptr.2d 16 ].) “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 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 [ 63 Cal.Rptr.3d

529 ], quoting Kuhn v. Department of General Services (1994) 22 Cal.App.4th 1627 , 1632-1633 [ 29 Cal.Rptr.2d 191 ].) “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 [ 108 Cal.Rptr.2d 776 ].) Although “the reasonableness of an insurer’s claims-handling conduct is ordinarily a question of fact, it becomes a question of law where the evidence is undisputed and only one reasonable inference can be drawn from the evidence.” (Ibid.)

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 [ 162 Cal.Rptr.3d 894 ] [“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

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 [ 201 Cal.Rptr. 528 ] [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 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’s 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 [ 88 Cal.Rptr.3d 730 ] (Safeco), arguing that an insurer is charged with constructive knowledge of its own insuring agreements and, if it fails to search for,

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 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.] ‘[Wjithout 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 [ 221 Cal.Rptr. 171 ].)]” (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 [ 15 Cal.Rptr.2d 815 ].)] 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 Co. (1978) 22 Cal.3d 865 , 883 [ 151 Cal.Rptr. 285 , 587 P.2d 1098 ].)] ‘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 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 records 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 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, Inc. v. Royal Globe Ins. Co., supra, 175 Cal.App.3d at p. 54 (California Shoppers)), 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 added by California Shoppers.) The California Shoppers court then noted that “[t]o refine further 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 [ 39 Cal.Rptr. 342 ]), 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 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

DISPOSITION

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.

Huffman, Acting P. J., and O’Rourke, J., concurred.

A petition for a rehearing was denied November 12, 2014, and the opinion was modified to read as printed above. Respondent’s petition for review by the Supreme Court was denied January 21, 2015, S223002.