Garcia v. GEICO:  No bad faith for rejecting settlement offer that releases only one insured

PDF

With an increasing trend of nuclear excess verdicts around the country against individuals unable to pay millions of dollars, third-party bad faith lawsuits are on the rise. Frequently, attorneys will represent a plaintiff in an underlying suit, with the ultimate goal of transforming a third-party personal injury case—constrained by the policy limits—into one against the tortfeasor’s insurer for bad faith failure to settle, where the limits are allegedly without effect.

The Ninth Circuit Court of Appeals recently affirmed a ruling by the Central District of California granting summary judgment for GEICO in a third-party bad faith suit. Garcia v. GEICO Cas. Co., 674 F. Supp. 3d 842, 847 (C.D. Cal. 2023), aff'd, No. 23-55646, 2024 WL 4532904 (9th Cir. Oct. 21, 2024). Although third-party bad faith is jurisdiction specific – what works in one jurisdiction may not work in another – this case provides good lessons on actions that can be taken by insurers and counsel to limit potential bad faith exposure.

Facts

The underlying case involved a car accident in which GEICO's insured, Luis Herrera, struck and killed Arnold Mena. At the time, Herrera was driving a car owned by his father-in-law, Ramiro Hernandez.

GEICO learned of the incident when a lawsuit was filed against Herrera and Hernandez one year later. GEICO immediately investigated to determine coverage. The carrier found that Hernandez potentially qualified as an insured under the policy because he appeared to be a resident-relative of Herrera, and Herrera used his car with permission.

Following its investigation, GEICO offered $15,000 (the policy limits) for the release of both Herrera and Hernandez. Plaintiffs’ counsel then made a counteroffer for policy limits, but only for the release of Herrera. GEICO had a weekend to respond. At the time, Herrera was in prison.

Three days later, in consideration of the counteroffer, GEICO had a phone call with counsel for the defense. The claims file noted that defense counsel reported, “I am a little unclear why we are offering the settlement on behalf of both defendants. Has there been an agreement to indemnify Mr. Hernandez or some other agreement prior to our involvement in the case”. That same day, counsel for the defense replied to plaintiffs’ counsel by reiterating GEICO’s previous offer. This offer was allegedly made without Herrera’s knowledge.

The case ultimately went to trial, where plaintiffs won a $6 million dollar judgment. Herrera assigned his rights against GEICO. Plaintiffs then sued GEICO for bad faith and breach of contract.

Legal Analysis

Plaintiffs claimed that GEICO had breached the implied covenant of good faith and fair dealing by unreasonably refusing to accept a settlement offer within policy limits, by failing to communicate that offer to Herrera, and by failing to properly investigate the claim.

The Central District of California entered summary judgment for GEICO. The district court highlighted that under California law, “[t]he insurer's duty to defend the ‘insured’ includes both the named insured(s) and anyone else included in the policy's definition of ‘insured.’” Am. States Ins. Co., 180 Cal. App. 4th at 26, 102 Cal. Rptr. 3d 591. This meant that GEICO could not in good faith have accepted plaintiffs’ settlement offer, because doing so would have meant placing the interest of one insured above the other. Failure to communicate an offer to Herrera that GEICO could not accept did not constitute bad faith. Additionally, the court found that an insurer’s duty to investigate a claim is relevant only where coverage is denied, not where an insurer agrees to extend coverage to an additional insured. The Ninth Circuit affirmed the lower court’s judgment and reasoning.

Takeaways

While an insurer can’t always prevent a third-party bad faith lawsuit from being filed, the case illustrates steps to consider when handling settlement demands.

• Create a clear written record of communication with the insured. This is especially the case when it comes to talking about the risk of an excess verdict, the ability to hire independent counsel, and any settlement offers. Carriers should not assume that defense counsel is creating this record.
• Avoid undocumented phone calls with opposing counsel. Wherever possible, the goal is to prevent a ‘he-said-she-said’ situation. If a phone call goes undocumented, opposing counsel might try to claim a settlement offer was made, or that it was refused during the phone call without the insured’s knowledge. To prevent this, carriers should ensure all calls are memorialized.
• Ensure all settlement offers are made in writing. This should remove any ambiguity about what was offered and ensure the insured has a verbatim copy of the deal on the table.
• Appropriately document the claims file. The claims file will be subject to discovery during a third-party bad faith case. Limit documentation to the facts, not opinions or innuendo.
• Have an attorney who specializes in bad faith independently review the file. Separate counsel may help inform an insurer’s next steps and limit excess exposure.