Low, Ball & Lynch's

WEEKLY LAW RESUME

September 25, 2003 Issue By: Raymond Coates

Bad Faith

Emma Mercado v. Allstate Insurance Company

United States Court of Appeals, Ninth Circuit

(August 18, 2003)

This is one of the first cases to deal with Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, which concerned the assignment of bad faith causes of action.

Emma Mercado was struck by a vehicle driven by Brenda Brannon. She filed a state court action against Brannon. Brannon's insurer hired an attorney to defend the case. Settlement discussions ensued. Allstate offered to pay Mercado its policy limit of $15,000 provided it included the lien of Los Angeles County, which provided medical services, and the lien of Mercado's former attorney, who claimed a lien on any settlement proceeds. Brannon offered $5,000 of her own money to settle the case. Mercado rejected the settlement offers.

Mercado and Brannon then entered into a stipulated judgment for $150,000. Mercado agreed not to enforce the settlement, and Brannon assigned to Mercado all claims for bad faith against Allstate.

Mercado then filed a complaint against Allstate. She sued for bad faith and for violation of Business & Professions Code section 17200. Allstate removed the case to federal district court. The district court refused to remand the case and determined summary judgment should be granted in favor of Allstate. Mercado appealed to the U.S. District Court of Appeals.

The decision was affirmed by the Ninth Circuit. Mercado argued that Hamilton v. Maryland Casualty Co., which held that a stipulated judgment prior to trial is not binding on the insurer which has not breached the insurance contract, was not applicable. Mercado contended that the case applied only to contractual claims for bad faith and not tort claims for bad faith. The Ninth Circuit disagreed. The Court noted that in Hamilton, the Supreme Court of California was concerned only with liability for breach of contract, which had been assigned. In this case, the claim assigned was breach of the tort duty of good faith and fair dealing. The Ninth Circuit found that distinction irrelevant. The key issue in question in each case was whether the insurer rejected a settlement offer in good faith, not whether the form of the claim was in contract or in tort. The Court felt the Hamilton rule applies to the tort claim asserted.

The Court stated the Hamilton rule applied. This rule provides that an insurer is not obligated by the duty imposed upon it through the covenant of good faith and fair dealing to pay a stipulated judgment between its insured and the plaintiff where the insurer is providing a defense. This is because the insured suffers no damage under the stipulated judgment. The Court indicated that as long as the insurer is providing a defense, the insurer is allowed to proceed through trial to judgment. An insured may not sue the insurer for alleged bad faith refusal to settle until an excess judgment has been rendered after a trial in the case. The insured is not harmed until a judgment is rendered in excess of the policy limits. It is only at that time that the insured may assign to the plaintiff a cause of action in exchange for a covenant not to enforce the judgment. Thus, the trial court did not err in granting summary judgment in favor of Allstate on the bad faith tort claim of action.

On the California Business & Professions Code section 17200 claim, Mercado contended that it was unfair to offer a settlement check, including payment of the liens, but not including the medical payment of $1,000. The Court noted there was nothing improper in including the lienholders on the settlement draft, since Allstate was required to do so under law. Further, by doing so, Allstate was protecting its insured from any further claim against her by the county and by the claimant's attorney. Further, the medical payment provision did not apply since the claimant did not qualify as an insured under the Allstate policy. Judgment was thus affirmed.

COMMENT

This decision reinforces the Hamilton rule that there is no bad faith in refusing to settle a case prior to judgment. This rule allows the insurer the freedom to decide which cases to settle. ____ To order a printed version of this analysis, or change your subscription information, reply to this transmission. Information regarding this and other WEEKLY LAW RESUME TM articles is available from Raymond Coates at

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